The new UK Securitisation Regulation Framework comes into effect on 1 November 2024

At the end of April 2024, HM Treasury published its Draft Securitisation (Amendment) Regulations 2024 (the ‘Amending SI’) setting out changes to the existing statutory instrument from 29 January 2024, and the FCA and PRA published their final Rules relating to Securitisation. All will come into effect on 1 November 2024, repealing the current onshored EU Securitisation Regulations.

The HMT Draft SI mostly focuses on closing gaps in the regulation for occupational pension schemes whilst the final FCA and PRA Rules have applied a number of changes following the consultation phase. The second FCA consultation which plans to assess amendments to the templates as well as the definition of public versus private securitisations among others, is timetabled for Q4 2024 – Q1 2025.

Following the feedback to the FCA’s consultation (CP23/17) on their proposed Rules relating to Securitisation, a number of changes have been applied to the final Rules. The FCA’s Policy Statement (PS24/4) lists the following material changes, stating that they have:

• “allowed for a 6-month period between publication of this policy statement and the implementation date for the new rules;
• added transitional provisions for pre-implementation securitisations which broadly preserve their treatment under the pre-SRF framework;
• broadly aligned FCA and PRA rule drafting;
• clarified the meaning of “before pricing” in the due diligence, transparency, and STS requirements;
• adjusted the due diligence requirements for secondary market investors in relation to disclosures made by manufacturers;
• clarified that it is possible for a UK institutional investor to delegate its due diligence to another investor, which is not a “managing party” as defined for purposes of SECN so long as the institutional investor retains the responsibility for compliance with the due diligence requirements as specified in our rules;
• clarified the prohibition on hedging of the material net interest required to be retained under the risk retention requirements;
• clarified that there is no need for risk retention in relation to securitisations of own liabilities (e.g., own issued covered bonds); and
• incorporated a new rule which is similar to the cooperation requirement outlined in PRIN 11 (Relations with regulators).”

DUE DILIGENCE REQUIREMENTS FOR INSTITUTIONAL INVESTORS

The FCA Rules replace Article 5(1)(e) on verifying disclosure by UK manufacturers and Article 5(1)(f) on verifying disclosure by overseas manufacturers with “a single approach which requires institutional investors to verify:

• the sufficiency of the information a manufacturer has made available to institutional investors to enable them to independently assess the risk of holding the securitisation position;
• they have received at least the information listed in the rules; and
• there is a commitment from the manufacturers to make further information continually available, as appropriate”.

CLARIFICATION AROUND THE DELEGATION OF DUE DILIGENCE

To clarify the Article 5.5 due diligence obligations for institutional investors delegating to a managing party, the FCA Rules introduced a mechanism for a delegating party to delegate the regulatory due diligence obligations to the managing party, provided the managing party is also an institutional investor.

Occupational Pension Schemes acting as managing parties are excluded from this mechanism and in these cases the due diligence obligations would remain with the delegating party.

The FCA recognise in their Policy Statement (PS24/4) that the new Rules exclude delegation of the due diligence obligations to AIFMs who are not authorised in the UK, “as they will no longer fall within the definition of an ‘institutional investor’”.

GEOGRAPHICAL SCOPE

The FCA sought to bring clarity to the geographical scope of their rules, particularly in “geographically mixed” scenarios where some but not all manufacturers of a securitisation are established in the UK.

The FCA Rules will be limited to entities, including manufacturers, established in the UK, and text has been added to clarify this. The exception is for institutional investor as they are regarded as authorised persons.

CURRENCY ADJUSTMENTS

The final Rules will include currency adjustments replacing references to Euros with references to Sterling changing the currency but not the notational amounts. Changes to the currency will not yet be extended to the templates as amendments to these will be considered in the second consultation.

REFERENCES TO ESTABLISHED IN THE UK

References to “established in the United kingdom” were added when the EU SR became the UK SR (“REUL”). These are now defined in the final Rules so that “established” means “an entity which is constituted under UK law with a head office, or, if it has a registered office, that office is in the UK”.

STS NOTIFICATION

The final Rules clarify that a securitisation that meets all STS criteria only needs to be notified to the FCA if the originator/sponsor wishes to obtain the STS label.

The upcoming UK Securitisation Regulation Framework overhaul presents a pivotal moment for stakeholders in the financial sector. With changes aimed at enhancing transparency and compliance, it’s imperative for all involved to familiarize themselves with the new regulations and adapt accordingly.

If you have any questions or require further guidance on navigating these regulatory changes, please reach out to enquiries@eurodw.co.uk