Introducing the new UK securitisation rules

On 30 April 2024, the FCA and PRA published their new UK securitisation rules. Together with the Securitisation Regulations 2024, these new rules will replace assimilated Regulation 2017/2402, the UK’s “onshored” version of the EU Securitisation Regulation, from 1 November 2024. 

In this blog, we answer five questions about these new UK securitisation rules. We also look to what future changes are on the horizon. 

1.  What are the new UK securitisation rules? 

Under the UK government’s ‘Smarter Regulatory Framework’ initiative, ‘assimilated’ (previously ‘retained’) EU law for financial services is being replaced by rules set by the UK’s financial services regulators, the FCA and PRA, operating within a legislative framework set by government and parliament. Securitisation is one of the first areas going through this process. 

The new UK securitisation framework will comprise the Securitisation Regulations 2024 statutory instrument, as amended by a further statutory instrument expected to be made later this year (the Securitisation Regulations), firm-facing rules contained in the FCA’s rulebooks (the FCA rules) and firm-facing rules contained in the PRA’s rulebooks (the PRA rules). 

The Securitisation Regulations will provide the legislative framework for the new UK securitisation rules. This will include specifying acting as an original lender, originator, sponsor or securitisation special purpose entity (SSPE) of a securitisation (each a manufacturer of a securitisation), or selling a securitisation position to a retail client in the UK, as designated activities under the new designated activities regime so that the FCA’s rules will apply to unauthorised manufacturers of securitisations. The Securitisation Regulations will also set out certain requirements that will not be contained in the FCA rules or PRA rules, including due diligence requirements for occupational pension schemes investing in securitisations and jurisdictional requirements for SSPEs. 

EU non-legislative materials, such as guidelines and Q&A, have not been included in the new UK securitisation rules, given they were not assimilated into UK law after Brexit. However, both the FCA and PRA have confirmed that market participants may continue to refer to relevant pre-Brexit EU guidance to help interpret the new UK securitisation rules, unless that guidance has been withdrawn or superseded.  

Recitals (commentary that appears before the operative provisions in the current rules) which the authorities considered instructive have been transferred into operative FCA or PRA rules. 

2. When will the new UK securitisation rules start to apply?

Provided HM Treasury makes the required commencement legislation in time, the new rules will begin to apply on 1 November 2024. This gives the market 6 months to prepare. 

Transitional provisions have been included so that, in general and subject to limited exceptions, securitisations which close before the new UK securitisation rules take effect will continue to be subject to the current rules after that time. Pre-2019 securitisations will continue to be subject to pre-2019 rules. Therefore, some benefits of the new rules may not apply to all legacy transactions. 

3. Where can I find the new UK securitisation rules?

The FCA rules are set out annexes to the FCA’s Policy Statement PS24/4. The PRA rules are set out in appendices to the PRA’s Policy Statement PS7/24. The Securitisation Regulations 2024 can be found here and the draft Securitisation (Amendment) Regulations 2024 can be found here.

4. Which rules apply to me?

This depends on who you are and where you are established. 

Relevant FCA rules will apply to entities established in the UK (which for these purposes means constituted under UK law with a registered office or head office in the UK) who are: 

• FCA-authorised firms involved in securitisation markets either as institutional investors or as manufacturers of securitisations;
• small registered UK AIFMs investing in securitisation positions;
• unauthorised manufacturers of securitisations, including occupational pension schemes acting as a manufacturer, but excluding any PRA-authorised manufacturer;
• sellers of securitisation positions to retail clients; 
• third party verifiers of simple, transparent and standardised (STS) securitisations; and/or
• securitisation repositories. 

Additionally, criteria for STS transactions are set out in the FCA rules. These will be relevant for any party involved in manufacturing, investing in or verifying STS securitisations. 

Relevant PRA rules will apply to PRA-authorised persons who are established in the UK and involved in securitisation markets either as institutional investors or manufacturers. The PRA has stated that its rules will not apply to non-UK firms with branches in the UK. 

Trustees or managers of UK occupational pension schemes which are investing in securitisation positions will need to refer to the Securitisation Regulations themselves for their due diligence obligations. These will be monitored and enforced by the Pensions Regulator. 

In the draft rules which were consulted on in 2023, there were significant drafting differences between the FCA rules and the PRA rules. Feedback to the consultations noted that this would be unhelpful, and so the drafting of shared rules across the FCA rules, the PRA rules and the Securitisation Regulations 2024 is much more closely aligned. 

5. I’ve seen this referred to as a ‘lift and shift’ of the rules – are the requirements actually changing? 

While the current UK rules are largely being preserved, there have been several targeted policy changes. Some key examples of the policy changes are set out below.

Sole purpose test. The new UK securitisation rules specify the factors which should be considered when determining whether an originator operates for the sole purpose of securitising exposures (and therefore is not permitted to act as the risk retainer). These factors are whether the entity has a business strategy and payment capacity consistent with a broader business enterprise and whether the management body has the necessary experience and the entity has adequate corporate governance arrangements. The new UK rules set out characteristics which should be taken into account, rather than stating that all characteristics must apply, as in the current EU rules. While the UK rules are more pragmatic here, in practice we do not expect a huge divergence in approach to compliance between the UK and the EU rules. 

Risk retention for NPE securitisations. When calculating the retention requirements for securitisations of non-performing exposures, the new UK securitisation rules will permit this to be based on the purchase price (taking into account non-refundable discounts) rather than the nominal value of exposures. This brings the new UK rules in line with the current EU rules on this point.

Change of retainer. The new rules will allow the retained risk to be transferred to a new retainer in the event of the retainer’s insolvency. This exception does not extend to other circumstances where the retainer, for legal reasons beyond its control, is unable to continue acting as a retainer, as found in the EU rules.

Hedging against retained risk. An exception to the rule that the retained risk may not be subject to any credit risk mitigation or hedging has been included. Hedging the credit risk of the retained exposures will be permitted if it is undertaken prior to the securitisation as a prudent element of credit granting or risk management and it does not create a differentiation for the retainer’s benefit between the credit risk of the retained securitisation positions and the positions transferred to investors.    

Due diligence for institutional investors. A more principles-based approach has been applied to the disclosure institutional investors must obtain from manufacturers of securitisations. UK institutional investors will no longer need to be concerned about what format reporting takes, provided they receive information sufficient to assess the risks of holding the securitisation position. The disclosure will need to include certain types of information as prescribed at a high level in the rules and be provided in the required timeframes but will not need to be provided in templated format. This should make it easier for UK institutional investors to invest in non-UK securitisations. Note that UK manufacturers will still need to complete UK standardised disclosure templates to comply with the new UK securitisation rules. They may also need to provide EU standardised disclosure templates to any EU institutional investors investing in their securitisation (in line with the current EU rules). 

Delegation of due diligence. It has been clarified that a UK institutional investor may delegate its due diligence obligations to any other party. If that other party is also a UK institutional investor, then that other party would take on responsibility for any compliance failure. If the other party is not a UK institutional investor, the responsibility for compliance stays with the delegating investor. 

Disclosure timing. According to the new rules, transaction documents, transaction summaries and STS notifications should be made available in draft form before pricing or initial commitment to invest, and final versions should be made available within 15 days of closing. It has been clarified that secondary market investors do not need to check that this was done at the closing of the transaction, they just need to have the relevant documents before committing to invest. 

Looking forward – should we expect more changes to the UK securitisation rules?

The FCA and PRA have made no changes to the distinction between ‘private’ and ‘public’ securitisations or reporting requirements yet. They have reserved this topic for future change, to be consulted on in Q4 2024 or Q1 2025. The FCA did set out their preference for widening the scope of ‘public’ securitisations in its consultation paper published in August 2023. It is hoped that this will allow significantly streamlined disclosure requirements for the remaining ‘private’ securitisations.  

In PS24/4 and PS7/24, the FCA and PRA acknowledged feedback provided on their initial consultations. With respect to certain points, while they have not made changes to the rules at this stage, they have noted that they will consider this feedback for future rounds of policy change (this includes, for example, the possibility of “L-shaped” risk retention). One advantage of moving these rules to the regulators’ rulebooks is that policy change should be quicker and easier in the UK in the future. However, UK manufacturers will need to continue to be mindful of the regulatory requirements of their non-UK investors, potentially limiting the benefit of policy improvements in the UK. 

Please reach out to us if you would like to discuss any of the points raised in this blog.