Breaking the mould: changes to the UK securitisation framework under consultation

Following the transfer of the UK securitisation rules into the PRA and FCA rulebooks in November 2024, the FCA and PRA launched consultations on further changes to their respective rulebooks.[1]

While the November 2024 reforms focused on the format of the rules (essentially integrating EU rules into the FCA and PRA rulebooks with a few slight modifications), this consultation is fundamentally different, as it presents proposals which seek to significantly modify the substance of the existing rules. The proposed changes signal a clear and intentional departure from the EU regime, and, if enacted, will introduce deliberate divergence between EU and UK securitisation frameworks.

In response to industry feedback on aspects of the securitisation framework that are seen as highly prescriptive and as creating a material burden for market participants involved in issuing securitisations without necessarily achieving material benefits, the FCA and PRA proposed changes, which, if introduced in the form presented in the consultations, would operate a dramatic simplification and modernisation of the FCA and PRA rules, particularly with regard to investor due diligence, transparency and disclosure, and risk retention.

Simplification of due diligence requirements

The current prescriptive rules are proposed to be replaced by more flexible and proportional requirements on UK investors to ensure that they receive sufficient information to assess risks arising from investments in securitisation positions and to monitor their performance.

Among others, the following key changes have been proposed:

• Adoption of a principles-based approach:
  • Building on previous efforts and on continuous market feedback, prescriptive rules give way to a guidance-driven principles-based approach (rather than requiring investors to perform a “tick-box” exercise of verifying a set list of items), with investors having the flexibility to exercise their judgement as to whether an investment is appropriate, based on their assessment and in the context of their mandate and risk appetite.
• Proportionality as the guiding principle:
  • Ensuring that proportionality is built into the regime by indicating that the level and nature of investor due diligence should be proportionate to the risk profile of the relevant securitisation position (although the PRA has noted that this should always result in the investor having a comprehensive and thorough understanding of the securitisation position and its underlying exposures).
• A bonfire of prescriptive requirements:
  • The following requirements are set to be eliminated:
    • the requirement to verify compliance with credit-granting standards (to be replaced with a requirement by UK investors to consider, as part of their due diligence assessment, whether the credit-granting standards employed are appropriate for the risk profile of the securitisation position and the risk appetite of the investor);
    • STS status verification (unless investors determine that it could have a material impact on the performance of the investment);
    • the requirement for investors to establish written procedures for the ongoing monitoring of a securitisation position and its underlying exposures, as well as requirements for investors to conduct stress tests of cash flows and underlying exposures, and/or solvency and liquidity of an ABCP sponsor (although the proposed changes contemplate a more general requirement that investors monitor performance in a proportionate manner);
    • internal management body reporting requirements and the requirement for institutional investors to be able to demonstrate to the FCA or the PRA (as the case may be) that they have a comprehensive and thorough understanding of their securitisation investment (a topic generally covered in FCA rules for senior management arrangements, systems and control); and
    • the requirement to verify that, in relation to non-UK originators, sponsor or original lenders, risk retention arrangements comply with UK risk retention requirements. This requirement is proposed to be replaced by verification that the relevant non-UK originator, sponsor or original lender maintains, on an ongoing basis, a sufficient and appropriate alignment of commercial interest in the performance of the securitisation, noting that this can be achieved either through risk retention or through alternative means, such as management fees linked to the performance of the securitisation due to the originator, sponsor or original lender under the terms of the transaction documents.

Streamlining of disclosure and transparency requirements 

Taking into account industry feedback on disclosure and transparency requirements, which indicated that the existing requirements were far too costly and burdensome for sell-side parties and not always considered useful by buy-side parties, the elimination of all templates was considered. However, investor feedback revealed that some templates were actually helpful and used. The FCA and the PRA have therefore proposed a compromise approach to disclosure and transparency requirements which seeks to accommodate investor preferences depending on asset class and context.

• An investor-driven approach to template disclosures:
  • The following templates are set to be eliminated:
    • templates relating to short-term highly granular exposures (e.g., credit cards and trade receivables, etc.) where aggregate information has been expressed as the industry preference;
    • templates relating to CRE exposures (relevant for CMBS), which can be dealt with through market-developed standards;
    • templates relating to non-CLO corporate exposures;
    • templates relating to esoteric exposures, as these are remarkably difficult to standardise; and
    • templates relating to inside information and significant event disclosure.
  • Template-form disclosure will continue to apply in relation to residential real estate, automobile, consumer, and leasing exposures, which are viewed as more standard and commoditised asset classes; however, the relevant prescribed templates will be significantly simplified and aligned with Bank of England loan-level templates for assessing eligible collateral for its lending facilities.
  • A specific CLO template will be introduced, although this template requirement may be disapplied in certain private transactions (e.g., CLO warehouse transactions) where parties will be able to agree on the information to be received.
  • No-data rules applicable to template disclosure will be simplified, to align with the Bank of England loan-level data templates.
  • There will be one set of templates available, set out in the FCA rules (PRA-regulated sell-side parties should use the FCA templates).
  • Provision of information in electronic and machine-readable format will be generally accepted (rather than the previously XML format required for template disclosure).
  • The use of securitisation repositories will no longer be mandatory, the FCA adding that required information should be reported by means that are accessible to investors and potential investors and managed with appropriate governance, systems and controls (including through unregulated securitisation repositories).
  • UK sell-side parties will be able to comply with UK requirements using EU templates and disclosure, save that for CLOs the new UK CLO template must be used.
• The difference between public and private transactions will lose relevance:
  • The delineation between public and private securitisations will now only be relevant in a few specific cases, such as in the context of notification of transactions for which a prospectus has not been drawn up in the UK and disclosure of details of STS notifications.
• Disclosure of transaction documents will be simplified:
  • The requirement to produce a transaction summary is eliminated, although sell-side parties are required to disclose the relevant offering document, prospectus or term sheet, together with all of the transaction documents (excluding legal opinions) to investors and, upon request, to potential investors and regulators.
  • Final transaction documents should be provided on the earlier of 30 days after closing or the first scheduled interest payment date (rather than within 15 days of closing).

Refining the framework 

• L-shaped risk retention will be allowed:
  • L-shaped risk retention (a method of risk retention which combines vertical and first-loss retention approaches) will become possible, providing market participants with more flexibility and allowing risk retention structures to align with international practices, namely in the US. This is expected to make risk retention in transactions subject to US and UK risk retention more efficient.
• Resecuritisation will remain prohibited, but the ban will be more nuanced:
  • Certain exceptions to the ban on resecuritisation are set to be introduced (along with the corresponding prudential relief). This would accommodate resecuritisations linked to exposures benefitting from credit protection (such as single loans securitisations under the Mortgage Guarantee Scheme) or of securitisation positions corresponding to the most senior tranche in a transaction, although the exemptions would only be available where the originator and sponsor are PRA authorised persons and would disqualify the transactions from obtaining STS designation. Although robust safeguards remain in place to avoid resecuritisation of exposures, the proposed changes signal that the draconian ban on resecuritisation imposed post-global financial crisis is now being reconsidered.
• Requirements around credit-granting criteria remain unchanged:
  • The application of the credit-granting criteria (with the aim of preventing the application of less stringent underwriting standards to securitised exposures compared to those remaining on the balance sheet) is clarified, but there have been no policy changes in this regard.
• No changes to the definition of securitisation and to the scope of application of conduct rules are proposed but future change may be in the cards:
  • While changes to the definition of “securitisation" and the corresponding scope of application of conduct rules are not intended to be made pursuant to the current batch of proposed changes, the FCA consultation paper provides some useful insights on the types of transactions which may be affected by future rule changes. These types of transactions include CLOs, whole business securitisations and correlation trading portfolios.

The FCA and the PRA have worked closely to ensure alignment and coherence of the overall UK securitisation framework. HMT is expected to present to Parliament a statutory instrument amending relevant parts of The Securitisation Regulations 2024 (SI 2024/102) (as amended) to enable the FCA and the PRA to make the rules proposed in their consultation papers and to deal with the required changes in relation to occupational pension schemes. 

The FCA and PRA consultations close on 18 May 2026. Final rules are expected in the second half of 2026 and should enter into force within 6 months of their publication (note that no transitional provisions were included as part of the proposed changes as the proposed delay in application of the new rules is considered by the FCA to be sufficient time for market participants to make preparations for their entry into force).

It is expected that the proposed changes will make a meaningful difference to the UK securitisation market. UK buy-side investors will now be able to invest in a wider range of transactions (including US securitisations), while all involved parties are also expected to face materially lower compliance costs and reduced barriers to entry. 

In a remarkable display of commercial awareness, the FCA and the PRA have decided to listen to the market, break the existing regulatory mould and invest in the development and deepening of the UK securitisation market as a truly global market. 

It remains to be seen whether the proposed changes actually succeed in bolstering UK securitisation and if (and for how long) the EU will afford to continue pursuing its current securitisation regulatory strategy.