It was a busy summer for developments in regulation of the EU and UK securitisation markets. This blog summarises the key developments and what to watch out for in Q4 2023.
EU Securitisation Regulation
Risk retention regulatory technical standards
On 7 July 2023, the European Commission adopted long-awaited risk retention regulatory technical standards under the EU Securitisation Regulation. These were published in the Official Journal of the EU on 18 October 2023 (the risk retention RTS). They will come into force on 7 November 2023.
Many of the changes made by the European Commission to the EBA’s final draft of the risk retention RTS, published in April 2022, were just clarificatory. However, one point to note was a change made to the drafting of the sole purpose test for originators.
Article 6 of the EU Securitisation Regulation states that an entity cannot be an originator for risk retention purposes if that entity has been established or operates for the sole purpose of securitising exposures. Article 2(7) of the risk retention RTS sets out characteristics which an entity should possess to pass this test. In the 2022 EBA draft of the risk retention RTS, characteristics were listed as factors to be considered in an assessment. In the Commission-adopted text, all the listed characteristics must apply to be sure the test is passed. This may result in a slightly trickier analysis in situations where it is harder to ascertain whether a particular characteristic applies.
ESMA review of disclosure templates
Further to the European Commission’s report on the functioning of the Securitisation Regulation, published in October 2022, ESMA was tasked with reviewing the standardised disclosure templates and simplifying these where possible. This should include a dedicated template or templates for private securitisations.
ESMA has undertaken a process of reviewing the templates and consulting with national competent authorities. ESMA is due to launch some form of public consultation on this before the end of 2023, but there is some way to go before we get revised templates.
EU green bond standard
In October 2023, the European Parliament and the Council approved the final text of the EU Green Bond Standard Regulation. This Regulation will set out rules to be followed to use the EU Green Bond label.
Requirements for an EU Green Bond include proceeds being invested in environmentally sustainable activities aligned with the EU Taxonomy, securities being listed on a regulated market as an EU Prospectus Regulation compliant prospectus is required, and compliance with enhanced disclosure requirements.
Specifically for securitisations, due to the limited existing stock of taxonomy-aligned securitisable assets, the use of proceeds requirement will be applied to the originator of the securitised assets, in relation to the use of proceeds from the sale of securitised exposures to the issuer.
However, securitisations of assets that finance certain harmful activities, such as fossil fuel-related activities, will not be permitted to use the EU Green Bond label.
The Regulation next needs to be published in the Official Journal of the EU. It will begin to apply in Q4 2024 or Q1 2025 (12 months after it enters into force). For more information on this, see this blog.
UK Securitisation Regulation
Changes to the UK legislative framework
As part of the UK Government’s programme to deliver a ‘smarter regulatory framework’ for financial services, retained EU law will be integrated into the UK financial services regulation framework governed by the Financial Services and Markets Act. This will involve transferring most of the financial services retained EU law into the UK financial regulators' rulebooks. The UK Securitisation Regulation is one of the first areas of legislation going through this process.
Final draft securitisation statutory instrument
On 11 July 2023, HM Treasury published a near-final version of The Securitisation Regulations 2023 (the SI) and an associated Policy Note. These update the illustrative versions published on 9 December 2022.
Policymakers have made it clear that they do not intend to make sweeping changes to the substance of the UK Securitisation Regulation regime during this process. Most of the substantive changes being made to the rules relate to those areas identified for reform in HM Treasury’s December 2021 review of the UK Securitisation Regulation.
Certain rules and key definitions are set out in the SI, but the SI provides for most of the regulatory requirements (taken from both the EU retained law Regulation and accompanying Technical Standards) to be transferred into the FCA’s and the PRA’s rulebooks. One key exception is due diligence requirements for Occupational Pensions Schemes which will be set out in the SI because The Pensions Regulator does not have rule-making powers.
A helpful policy change has been proposed to the due diligence requirement currently found in Articles 5(1)(e) and (f) of the UK Securitisation Regulation, to permit institutional investors to invest in any securitisation (including overseas securitisations) in relation to which the sell-side provide sufficient disclosure to meet certain specified requirements. This will not require the disclosure for overseas securitisations to be in the form of UK standardised disclosure templates (although the new rules will continue to directly require UK sell-side parties to complete UK standardised disclosure templates).
FCA consultation on securitisation rules
On 7 August 2023, the FCA published consultation paper CP23/17 on its proposed new Securitisation Sourcebook (SECN). A short addendum to CP23/17 was published on 16 October 2023. These rules will apply to FCA authorised persons and (under the new Designated Activities Regime) any UK established unauthorised person acting as a securitisation originator, sponsor or securitisation special purpose entity, or otherwise selling a securitisation position to a retail client located in the UK, other than PRA authorised persons (who will be subject to the PRA rules).
The drafting of the rules has been adapted to “handbook style drafting” so may look unfamiliar in places. Helpfully the FCA has provided a derivations and changes table to help navigate the rules and highlight where policy changes have been proposed.
Certain helpful policy changes have been proposed, in some cases following changes that have been made to the EU Securitisation Regulation since Brexit, such as permitting risk retention in securitisations of non-performing exposures to be based on the net value of the portfolio taking into account any non-refundable purchase price discount. However, permission for asset servicers to act as risk retainers for securitisations of non-performing exposures has not been included in the FCA proposals.
The FCA has included guidance on the originator sole purpose test in its proposed rules which largely follows the drafting suggested by the EBA in 2018 (with some differences). The FCA has not followed the European Commission’s change to the drafting of the sole purpose test; in the proposed FCA rules, characteristics are listed as relevant considerations for an assessment.
An area to watch is the distinction between “public” and “private” securitisations and the respective disclosure requirements. This was noted as an area for reform in HM Treasury’s December 2021 review. No changes to the rules on this or to disclosure templates are being proposed by the FCA immediately; a separate consultation on this will follow. However, the FCA did set out its initial views in CP23/17. The FCA’s preference is to largely maintain the current definition of public securitisations but expand it to cover additional securitisations that are public in substance, such as those listed on certain UK and non-UK multilateral trading facilities. The FCA suggests that disclosure templates for the resulting, narrower, class of private securitisations could then be made more proportionate or principles based.
PRA consultation on securitisation rules
On 27 July 2023, the PRA published consultation paper CP15/23 on its proposed new securitisation rules for PRA authorised persons. The proposed policy changes largely mirror those proposed by the FCA in substance. There are some differences in drafting as the PRA has not made changes to the current rules for “handbook style drafting”.
The FCA and PRA consultations are open for comment until 30 October 2023. The regulators will then consider feedback received and adjust the rules as appropriate before they are published. It has been suggested that these new rules could be in force by the end of Q2 2024, subject to the progress of the SI legislation.
Once the new rules are in place, the retained EU law UK Securitisation Regulation will be repealed pursuant to the Financial Services and Markets Act 2023.
Please reach out to your usual Freshfields contacts if you would like to discuss any of these developments.