On 11 July 2023, HM Treasury published a near-final version of the Securitisation Regulations 2023 (the "SR 2023") along with an explanatory policy note. The SR 2023, along with the Financial Services and Markets Act 2023 ("FSMA 2023"), will create a new framework for the regulation of securitisation in the UK, replacing the existing UK Securitisation Regulation (on-shored from the EU version) and related legislation.
Most of the firm-facing requirements (including key provisions like risk retention and disclosure) will not be included in primary legislation or in the SR 2023 but will instead be replaced by rules made by the Financial Conduct Authority ("FCA") and the Prudential Regulation Authority ("PRA"). This is a significant shift in the way securitisation is regulated in the UK, placing the power to make and adjust the rules in the hands of the regulator rather than the Treasury. It gives the FCA and PRA considerable power, but also flexibility – by contrast to the EU legislative framework where ESMA cannot deviate from positions taken in the "level 1" text. If the FCA or PRA were to consider that a rule requires revising it would be able to do so (subject to its own due process requirements in relation to consultation and impact assessment). For example, if the regulators considered that the disclosure framework should be streamlined, or the rules on credit granting or re-securitisation should be adjusted, that could be implemented through a consultation and revision to the rules.
The PRA and FCA have now published their consultation papers and draft rules1 – we will cover these topics in a separate briefing note.
The Financial Services and Markets Act 2023
The FSMA 2023, which received Royal Assent on 29 June 2023, is the product of the so-called "Edinburgh Reforms" introduced by the Chancellor of the Exchequer on 9 December 2022. One of the key aims of the Edinburgh Reforms is to repeal the body of EU retained laws governing financial services (including the UK Securitisation Regulation) and replace it with a new regulatory framework for the UK comprising of primary legislation (the FSMA 2023) and secondary legislation in the form of statutory instruments which will work alongside rules made by the regulators. The new framework draws on existing powers of the FCA and PRA under UK financial services legislation, in particular in relation to sanctions.
Only a few of the sections of the FSMA 2023 have come into force so far, with several more sections coming into force two months after Royal Assent (received on 29 June 2023). The rest of the sections, including the sections revoking retained EU law and providing for the new regulatory regime including transitional provisions, will come into force on the relevant day as HM Treasury may specify in regulations.
Designated Activities Regime
The FSMA 2023 will introduce a new Designated Activities Regime ("DAR") which is designed to enable the FCA to make rules in respect of activities, products or conduct which may not otherwise be regulated activities, and which apply to a broader range of entities than existing authorised persons. As originators and SSPEs of securitisations may well not otherwise be subject to supervision, the intention is for the new DAR to be the primary framework regulating participation in securitisation transactions in the UK for this category of person. Banks and financial services businesses which are already authorised and subject to supervision will continue to be supervised by their existing regulator, and the PRA will separately make rules for PRA-authorised persons.
Pursuant to the SR 2023, the following will be designated activities under the DAR:
- acting as an originator to a securitisation;
- acting as a sponsor of a securitisation; •acting as an original lender of a securitisation;
- acting as the securitisation special purpose entity (SSPE); and
- selling a securitisation position to a retail client located in the UK.
The FCA will have the power under the SR 2023 to make rules relating to the designated activities although it must consult with the PRA before making rules imposing a requirement on a PRA-authorised person.
The SR 2023 also introduces a new power of direction for the FCA in relation to authorised and unauthorised firms which are subject to the DAR. The FCA will be able to make specific directions to firms if rules are breached or likely to be breached.
It remains to be seen how FCA and PRA rule making and supervision will play out in practice. The DAR could also impose over-arching obligations on securitisation market participants which are more similar to those imposed on regulated entities, such as a general obligation of transparency with the regulator, and the requirement to be able to demonstrate appropriate systems and controls in relation to compliance obligations.
STS and STS equivalence
The existing UK Securitisation Regulation provides that the originator or sponsor of an STS securitisation must be established in the United Kingdom. The FSMA 2023 and SR 2023 will permit the Treasury to designate a country or territory which can achieve equivalence status for non-UK securitisations. The Treasury will only be permitted to designate equivalence to such non-UK jurisdiction if it is satisfied that the law and practice which applies to such STS securitisations in such jurisdiction has equivalent effect to applicable UK law.
The requirements for a securitisation to be STS, which are currently contained in retained EU law, will be replaced by the SR 2023 and rules made by the regulators under the DAR regime. The SR 2023 will also amend the relevant definitions in the Capital Requirements Regulation, Solvency II and Money Market Funds Regulation to enact the capital, liquidity and other benefits for relevant entities of recognising STS-equivalent non-UK securitisations.
The SR 2023 will also extend the temporary recognition of EU STS securitisations by another two years, to the end of 2024.
There are currently no proposals to provide for an STS framework for synthetic transactions in the UK, and the Treasury Report from 2021 had indicated that HM Treasury and the regulators are not currently minded to pursue these suggestions.
Due diligence requirements
Due diligence requirements for most institutional investors will be set out in rules made by the FCA or PRA. However, the SR 2023 amends and sets out in full the due diligence requirements for occupational pension schemes (OPS) within the legislation.
The draft indicates that it is proposed to add a list of minimum information requirements for OPS which will be similar to the lists to be included in parallel in the FCA and PRA rules concerning due diligence requirements for institutional investors other than occupational pension schemes. The accompanying policy statement also sets out the policy intention for this list. HM Treasury intends to require OPS acting as institutional investors to verify the following minimum information:
- for non-ABCP securitisation, details of the underlying exposures to be provided on at least a quarterly basis;
- for ABCP securitisation, information on the underlying receivables or credit claims to be provided on at least a monthly basis;
- investor reporting on a quarterly basis for non-ABCP and monthly for ABCP, to include periodic updates on the credit quality and performance of the underlying exposures, any relevant financial or other triggers contained in the transaction documentation, including information on events which trigger changes to the priority of payments or a substitution of any counterparty to the transaction, data on the cash flows generated by the underlying exposures and by the liabilities of the securitisation, and the calculation and modality of retention of a material net economic interest in the transaction by the originator, sponsor or original lender;
- all information on the legal documentation needed to understand the transaction, to be provided in draft or initial form before pricing, in final form no later than 15 days after closing of the transaction, and updated as soon as practicable following any material change;
- information describing any changes or events materially affecting the transaction, including breaches of obligations under the transaction documents, to be provided as soon as practicable following the material change or event;
- any approved prospectus, or other offering or marketing document, prepared with the cooperation of the originator or sponsor, to be provided in draft or initial form before pricing and in final form no later than 15 days after closing of the transaction; and
- if there is an STS notification in respect of the transaction, that STS notification, to be provided in draft or initial form before pricing, in final form no later than 15 days after closing of the transaction, and updated as soon as practicable following any material change.
One point of detail which will be welcome in the funds industry is that the definition of "institutional investor" narrows the scope of the definition as relates to Alternative Investment Fund Managers ("AIFMs"), so that the UK due diligence requirements for investing in securitisations only apply to UK authorised AIFMs. Non-UK AIFMs (ie whose registered office is not in the UK) which invest in securitisations will no longer be subject to UK due diligence requirements. There is also provision for a lighter due diligence regime for small UK AIFMs.
The SR 2023 will replace the disclosure requirements set out in Article 7 of the Securitisation Regulation with rules made by the FCA and PRA.
The SR 2023 provides that an originator, sponsor or SSPE must make information available for a private securitisation available to the appropriate regulator in such manner as the regulator may direct. The definition of "private securitisation" in the SR 2023 currently specifies transactions where a prospectus under s85 of FSMA 2000 is not required, which will be a disappointment to advocates of a change to how the distinction between public and private securitisations is drawn. If the definition remains the same, securitisations listed in the EU will continue to be private securitisations for UK regulatory purposes.
However, the Treasury Report from 2021 indicated that distinguishing between public and private securitisations solely on the basis of whether a prospectus is required may not always be appropriate, and that there may be certain specific situations in which more flexibility as to the format and content of disclosures would be beneficial, provided there is still sufficient information disclosed. It remains to be seen what further clarifications will be introduced.
Prohibition on establishing SSPEs in high-risk jurisdictions
The SR 2023 restates the prohibition on establishing SSPEs in jurisdictions outside the UK which are considered to be high-risk or non-cooperative by the Financial Action Task Force, or those which have not signed an agreement with the UK to ensure an effective exchange of information on tax matters. Originators and sponsors are prohibited from setting up an SSPE in those jurisdictions and institutional investors are not permitted to invest in a securitisation which involves an SSPE in those jurisdictions.
Securitisation Repositories (SRs) and Third Party Verifiers (TPVs)
The regulatory regime will be maintained for SRs and TPVs. However, TPV authorisation will now be called a "registration" because TPVs are not authorised by the FCA under Part 4A of FSMA 2000.
The most recent draft of the SR 2023 is stated to be the near-final version of the statutory instrument, which is being published for technical checks. Technical comments are to be provided by 21 August 2023, and HM Treasury intends to lay the final SR 2023 by the end of 2023.
The PRA and FCA have now published their consultation papers and draft rules to replace the firm-facing requirements for the new UK Securitisation Regulation. Relevant powers for the regulators will come into force immediately after the SR 2023 are made, and the remainder of the legislation will come into force when the repeal of the existing UK Securitisation Regulation and related retained EU law takes place, which is expected to be at the same time as the FCA and PRA rules start to apply.