Earlier this year, the UK Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) published their final rules relating to securitisation. Together with certain provisions under the Securitisation Regulations 2024 (as amended), the PRA and FCA rules are expected to come into force on November 1, 2024 and replace the UK’s existing securitisation regulation regime. These new rules are relevant for securitization transactions involving UK originators, sponsors and/or special purpose vehicles, and/or certain UK investors and certain of their consolidated affiliates.

Background

The EU Securitisation Regulation (Regulation (EU) 2017/2402 (as amended) originally applied in the UK as part of EU law. Following the end of the Brexit transition period on 31 December 2020, the EU Securitisation Regulation was adopted into UK law in its then existing form and amended by way of the Securitisation (Amendment) (EU Exit) Regulations 2019 to ensure that it would operate effectively in the UK (as amended thereby and subsequently, the “UK Securitisation Regulation”).

However, this was only a short term arrangement and a new regime is now going to be put in place, which will be more tailored to the UK.

The Securitisation Regulations 2024

Following a period of consultation, the Securitisation Regulations 2024 were published on January 29, 2024. Certain aspects came into effect the following day, with the remaining provisions expected to come into effect on the date the UK Securitisation Regulation is revoked.

The Securitisation Regulations 2024 include the following:

• An amendment to the previous definition of “institutional investor” in the UK Securitisation Regulation, with respect to alternative investment fund managers (AIFMs), so that only AIFMs that are authorized in the UK will be subject to securitisation due diligence requirements;
• Powers to allow the FCA to make rules in relation to certain designated activities carried out by both authorized and unauthorized persons, including acting as an originator, a sponsor, an original lender or a securitisation special purpose entity (SSPE) in a securitization;
• A power of direction which may be used by the FCA in the event of failure or likely failure to comply with any relevant rule by an entity which is subject to the designated activities regime;
• Requirements in relation to the notification of STS (simple, transparent and standardised) securitisations and the removal from the FCA list of any securitizations that no longer meet the STS requirements;
• Requirements in relation to the use of the STS designation;
• A provision allowing HM Treasury to designate countries or territories as having a regime that has equivalent effect to the UK STS requirements;
• Provisions in relation to securitization repositories;
• Provisions in relation to third-party verifiers of the STS criteria;
• Provisions in relation to monitoring and disciplinary measures; and
• Transitional provisions in relation to pre-2019 securitizations.

A statutory instrument (the Securitisation (Amendment) Regulations 2024) was made on May 22, 2024, effecting certain amendments to the Securitisation Regulations 2024. The amendments include the following:

• A commencement date of November 1, 2024 for most of the provisions;
• Restrictions on SSPE jurisdictions; and
• Due diligence requirements for occupational pension schemes.

PRA and FCA Rules

Other than the areas covered in the Securitisation Regulations 2024, as amended, the various requirements which were previously set out in the UK Securitisation Regulation and the related technical standards will be included in the PRA and FCA rulebooks. This marks a significant change in approach to the regulation of securitisation in the UK.

Consultations

The PRA published a consultation paper on July 27, 2023 (PRA Consultation Paper) setting out its proposals for rules that will replace certain requirements in the UK Securitisation Regulation regime for PRA-authorised persons, and attaching a draft Securitisation Rules instrument (Draft PRA Rules).

This was followed by the FCA’s publication of a consultation paper on Rules relating to securitization on August 7, 2023 (FCA Consultation Paper) with the draft Handbook text (Draft FCA Rules, and together with the Draft PRA Rules, Draft PRA and FCA Rules). See FCA publishes consultation paper on rules relating to securitization.

Following responses by market participants, the PRA and the FCA each published the final version of their rules on April 30, 2024 (PRA and FCA Rules) together with policy statements.

General Approach

Implementation Date

The PRA and FCA Rules are expected to come into effect on November 1, 2024. This means that market participants will have had six months to adjust to the new regime. On that date the Securitisation Regulations 2024 (as amended) and the PRA and FCA Rules will replace the UK Securitisation Regulation and the applicable technical standards, including the current technical standards in relation to risk retention and reporting.

Transitional Provisions

Following industry comments, provisions were included ensuring that, for the most part, the previous UK Securitisation Regulation regime will continue to apply to securitizations where the securities were issued or, in the case of securitisations which do not involve the issuance of securities, new securitisation positions were created, on or after January 1, 2019 and before November 1, 2024 (Pre-Revocation Securitizations).

Pre-existing EU Guidance

The regulators intend to maintain their existing approach to EU guidance published before the end of the Brexit transition period; and, consequently, such EU guidance will continue to be useful and should still be complied with, to the extent it remains relevant.

Recitals

The regulators included some wording in the PRA and FCA Rules to reflect certain key recitals in the previous legislation which they consider were in practice treated as if they were operative provisions or are essential to the interpretation of operative provisions.

Alignment Between the PRA and FCA Rules

The wording of the PRA Rules and the FCA Rules is quite closely aligned, although there remain some areas of inconsistency.

Industry Feedback on the Draft PRA and FCA Rules

The PRA and FCA provided detailed responses to the feedback received on the Draft PRA and FCA Rules. Some key points were taken into account and some clarifications were made. However, in many cases the regulators opted to maintain the status quo for the time being, although they indicated that the feedback on certain issues may inform their policy in the future.

Definition of “Non-ABCP Securitization”

The FCA Rules previously included a definition of “non-ABCP securitization” but, following feedback that the way it was defined could result in unintended consequences, the definition has been removed.

Due diligence and monitoring requirements

The PRA and FCA Rules include due diligence and monitoring requirements for institutional investors based on those in Article 5 of the UK Securitisation Regulation. These allow for a more principles-based approach to due diligence obligations with respect to the information to be obtained from originators, sponsors and SSPEs.

Due diligence

The UK Securitisation Regulation includes a requirement that investors, before holding a securitisation position, verify:

• a. that certain requirements in relation to credit-granting are complied with;
• b. that risk retention requirements are complied with; and
• c(i). in the case of securitisations where the originator, sponsor or SSPE is established in the UK, that the relevant entity has made available the information required under Article 7, which sets out transparency requirements (Article 5(1)(e)); or
• c(ii). in the case of securitisations where such entity is not established in the UK, that such entity has provided “substantially the same” information as if it had been so established (Article 5(1)(f)).

With respect to the requirement described in point (c)(ii) above, the meaning of the words “substantially the same” is unclear, and consequently institutional investors that are subject to the UK Securitisation Regulation have found it difficult to know how to comply with Article 5(1)(f).

Under the PRA and FCA Rules, the wording described in points c(i )and c(ii) above has been replaced and instead investors will be required to verify that the originator, sponsor or SSPE “has made available sufficient information to enable the institutional investor independently to assess the risks of holding the securitisation position”.

The investor is also required to verify that the originator, sponsor or SSPE “has committed to make further information available on an ongoing basis”.

Principles-based approach advantageous to investors

The principles-based approach requiring “sufficient information to enable the institutional investor independently to assess the risks of holding the securitisation position” has been welcomed by market participants. It contrasts with the conclusions of the European Commission in its report on the functioning of the EU Securitisation Regulation, published in October 2022, which indicated that EU investors would need to obtain all the information required by Article 7 of the EU Securitisation Regulation, including reporting in accordance with the mandated templates, in securitisations with non-EU sell-side parties. This outcome continues to pose challenges for EU investors in transactions with non-EU sell-side parties.

“Commitment to invest”

References to “a commitment to invest” have been added in various places in connection with the timing for provision of certain information by investors in private transactions. The corresponding references to “before pricing” in the UK Securitisation Regulation are difficult to interpret in the context of private deals. Similar references to “a commitment to invest” have been included with respect to secondary market investors, who will only be obliged to verify information from the time of their involvement in the transaction.

Trade receivables

There is an explicit statement in the PRA and FCA Rules (as in the Draft PRA and FCA Rules) that an institutional investor’s obligation to verify compliance with the credit-granting requirements does not apply with respect to trade receivables (provided they are not originated in the form of a loan).

ABCP transactions

The PRA and the FCA declined to align the wording in relation to due diligence for ABCP transactions more closely with the disclosure obligations. While the regulators indicated that they see the due diligence wording as a separate provision with its own requirements, it would be helpful to receive confirmation that investors are required to obtain only aggregate data (as opposed to asset-level data) for ABCP transactions, in line with the market understanding.

Delegation

The PRA and FCA Rules clarify that where compliance with the due diligence requirements is delegated by an institutional investor (delegating investor) to another institutional investor (managing party), the managing party is responsible for any failure to comply where it is also subject to due diligence obligations under the PRA Rules or the FCA Rules (and otherwise the delegating investor will remain liable).

Risk retention requirements

The PRA and FCA Rules include risk retention requirements based on Article 6 of the UK Securitisation Regulation. They also include further details regarding how to comply with the risk retention requirements. There are a number of changes from the previous regime, which in some cases bring the UK rules into closer alignment with the new EU risk retention regulatory technical standards which came into force in November 2023 (EU Risk Retention RTS), although there remain areas of divergence.

The changes from the UK Securitisation Regulation and related technical standards include the following:

Sole purpose test

As in the UK Securitisation Regulation, an entity will not be considered to be an originator (and will therefore not be an eligible risk retainer) if it has been established or operates for the sole purpose of securitizing exposures.

The FCA and PRA Rules include provisions as to how this “sole purpose test” should be interpreted, which are similar to, but not the same as, those in the EU Risk Retention RTS.

Transfer of the retained interest

As in the EU Risk Retention RTS, the PRA and FCA Rules allow the retained interest to be transferred in the event of the insolvency of the risk retainer. The wording is more limited than that in the EU Risk Retention RTS.

Prohibition on “cherry picking”

As in the UK Securitisation Regulation, the PRA and FCA Rules provide that originators must not select assets to be transferred to the SSPE with the aim of rendering losses on those assets (measured over the life of the transaction or over four years if the transaction is longer than four years) higher than the losses over the same period on comparable assets held on the balance sheet of the originator. An exception allows originators to select assets for the securitisation that ex ante have a higher than average risk profile than comparable assets remaining on the originator’s balance sheet as long as that is clearly communicated to investors or potential investors.

Guidance is also included on how to assess whether retained assets and securitised assets are comparable and deeming the requirements to be complied with where no comparable assets are left on the originator’s balance sheet, provided that the latter fact has been clearly communicated to investors.

Resecuritizations

The regulators did not include any specific clarification that there is no need for risk retention to be held at both transaction and programme level in an ABCP transaction. However, as discussed below, fully supported ABCP programmes are specifically carved out from being resecuritizations (which would require retention at both levels of the transaction).

Amendments with respect to securitisations of non-performing exposures

Similar to the EU Securitisation Regulation regime, the PRA and FCA Rules include certain amendments to facilitate the securitisation of non-performing exposures (NPEs). These allow the net value of the NPEs to be used instead of nominal value in calculating the 5% material net economic interest to be retained. However, in contrast to the EU Securitisation Regulation regime, there are no provisions to allow the servicer in an NPE securitisation to act as risk retainer.

Disclosure requirements

The PRA and FCA Rules contain provisions in relation to transparency, based on those in Article 7 of the UK Securitisation Regulation, and set out the requirements for disclosure of certain information by the originator, sponsor or SSPE.

Ban on resecuritizations

As in Article 8 of the UK Securitisation Regulation, resecuritizations are generally prohibited.

A fully supported ABCP programme will not be a resecuritization provided that none of the underlying ABCP transactions is a resecuritization and there is not a second layer of tranching at the programme level as a result of the credit enhancement.

Credit-granting criteria

The PRA and FCA Rules include credit-granting criteria based on Article 9 of the UK Securitisation Regulation. The PRA and FCA Rules clarify that the credit-granting requirements do not apply with respect to trade receivables (provided that they are not originated in the form of a loan).

STS

The FCA Rules include the criteria for a non-ABCP securitisation, an ABCP securitisation or an ABCP programme to be considered STS , based on the requirements in the UK Securitisation Regulation, with some amendments.

The FCA Rules include requirements for determining whether the underlying exposures in the pool are homogeneous, including some provisions similar to those in the relevant EU regulatory technical standards.

Unlike in the EU, it is not possible for a synthetic securitisation to be STS.

Other provisions

The FCA Rules also include provisions in relation to securitization repositories and third-party verification agents, the sale of securitisation positions to retail clients and geographical scope.

Further Consultation

A further consultation is expected to be held in the near future in relation to the distinction between public securitizations and private securitizations, and the disclosure requirements for private securitizations.

Comment

Market participants for whom the UK Securitisation Regulation is relevant are likely to appreciate the fact that the new UK Securitisation Regulation Regime is not too far removed from the previous one, and not hugely different from the EU Securitisation Regulation regime, since this will facilitate the process of adjusting to the new rules and arranging for transactions to be compliant under both the UK and EU regimes. At the same time, market participants are likely to welcome the amendments and clarifications to the previous UK regime, in particular the more principles-based approach to investor due diligence.

The industry is also keenly awaiting the further consultation referred to above. It is anticipated that this will mean that the UK regime will become less onerous in certain respects, although it is likely to diverge further from the EU regime as a result.

In the future, it is likely that it will be easier for changes to be made to the UK rules than under the previous regime and in the EU, and there will perhaps be opportunities to amend the UK securitization framework further.

It will be important for those involved in securitization transactions involving UK parties to pay close attention to the new wording and review carefully the impact of the changes from the previous regime. In addition, it would be advisable to consider carefully whether there are any practical implications of the differences in wording between the various new rules, where relevant.

Furthermore, there are likely to be many transactions where there are parties that are subject to the EU Securitisation Regulation regime and/or other regulatory regimes, as well as parties that are subject to the new UK Securitisation Regime, and this will require detailed analysis of the various rules as they apply to the relevant parties.