Other Author Serena Brent, trainee solicitor
On 11 July 2023 HM Treasury published a near-final version of a draft statutory instrument - ‘The Securitisation Regulations 2023’ (the “SI”) - and an associated Policy Note (the “Policy Note”).1 The SI updates the illustrative draft statutory instrument published on 9 December 2022 as part of the Edinburgh reforms.2
Among other things, the SI and Policy Note indicate that a more “principle-based approach” will be adopted to the due diligence requirements for UK institutional investors investing in UK or overseas securitisations.
Summary of the SI
The SI creates a new UK framework for the regulation of securitisation. It will replace the UK Securitisation Regulation3 and related EU-derived secondary legislation, which will be repealed by the Financial Services and Markets Act 2023 (“FSMA 2023”).
The SI enables the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority (“PRA”) to make most of the detailed rules regulating the UK securitisation market through revisions to their rulebooks. This is intended to bring the regulation of securitisation in line with other UK financial services regulation and to permit the rules to “adapt over time in an agile manner”.
The SI will also enable the reforms identified in HM Treasury’s 2021 review4 of the UK Securitisation Regulation to be implemented.
Acting as originator, sponsor, original lender or securitisation special purpose entity (“SSPE”), as well as selling securitisation positions to UK retail clients, will be designated activities under the Designated Activities Regime (the “DAR”).5 The SI provides the FCA with rule-making powers in relation to these designated activities, and the rules will apply to both authorised and unauthorised persons. The SI also introduces obligations on the FCA and the PRA to make due diligence rules for institutional investors when investing in a securitisation, and defines “institutional investor” for this purpose.
Much of the SI is given over to providing for the "infrastructure" of the securitisation market, including the framework for authorising and regulating securitisation repositories (“SRs”) and third party verifiers (“TPVs”) of STS6 securitisations.
The SI also (i) gives directions to the FCA and PRA on how to regulate securitisation; (ii) grants powers to the FCA to dispense with its rules in some circumstances; (iii) requires the FCA and the PRA to have regard to the coherence of the overall framework for the regulation of securitisation when making rules relating to securitisation; and (iv) specifies due diligence obligations for occupational pension schemes (“OPS”)7.
The SI restates certain requirements relating to the jurisdictional scope of the UK securitisation framework, as this is regarded as the responsibility of HM Treasury - such as the requirement for originators and/or sponsors of STS securitisations to be established in the UK in order for the securitisation to be designated as STS under the SI.
What are the changes from the previous illustrative SI?
Since the previous illustrative version of the SI was published, the government has finalised outstanding issues and refined the provisional drafting included in the SI.
The following changes from the first version of the SI should be noted:
• scope of institutional investor as relating to AIFMs: The SI narrows the scope of the definition of “institutional investor” as it relates to alternate investment fund managers (AIFMs), so that UK due diligence requirements for investing in securitisations only apply to UK authorised AIFMs. Currently the definition of “institutional investor” does not specify the jurisdiction in which the AIFM must be authorised or have its registered office and therefore AIFMs with a registered office outside the UK could be considered subject to due diligence requirements;
• FCA direction power for DAR activities: The SI gives the FCA a new power of direction for authorised and unauthorised firms who engage in designated activities related to securitisation. This direction power sets out the specific purposes for which the FCA will be able to direct firms if rules are breached, and an illustrative list of the likely ways in which firms may be directed;
• ban on the establishment of SSPEs in certain overseas jurisdictions: The UK Securitisation Regulation’s ban on establishing SSPEs in high-risk or non-cooperative jurisdictions is not explicit as to which entities it applies to. The SI clarifies this, by providing that (i) originators and sponsors are prohibited from setting up SSPEs in such jurisdictions, and (ii) institutional investors are prohibited from investing in securitisations which involve an SSPE established in one of these jurisdictions;
• framework for recognising STS-equivalent non-UK securitisations: The SI modifies the STS securitisation equivalence regime under which specified securitisations from another jurisdiction are treated the same as STS securitisations in the UK, including for the purpose of capital requirements. A jurisdiction may now be designated as STS-equivalent if its law and practice has equivalent effect to applicable UK domestic law relating to STS securitisations;
• TPV and SR Standardisation: The SI renames the process for TPV ‘authorisation’ as ‘registration’ in line with SR registration, to distinguish from authorisation under Part 4 of the Financial Services and Markets Act 2000;
• repeal of Article 30 of the UK Securitisation Regulation: The requirement in Article 30 for regulators to monitor risks is repealed, because the FCA and PRA maintain monitoring arrangements in line with their statutory objectives; and
• restatement and reforms to due diligence requirements for OPS: The SI restates the due diligence requirements which apply to OPS and makes reforms to make them clearer and “more principle-based”. As discussed further in the following section, these changes are an important development in clarifying the due diligence obligations of institutional investors investing in non-UK (or ‘third-country’) securitisations.
Due diligence requirements for third-country securitisations
The Policy Note explains that “the [due diligence] requirements no longer require OPS investing in an overseas securitisation to verify that the information required by originators, sponsors or SSPEs is substantially the same as if it were provided by Article 7 of the [UK Securitisation Regulation]”. Instead, OPS will need to verify that originators, sponsors or SSPEs, whether located in or outside the UK, have provided sufficient disclosures to enable OPS to assess risks, and that they have committed to make further information available. HM Treasury intends to include a list of minimum information to be provided, and how often. An indicative list is set out in the Policy Note, but this is to be updated after the publication of the FCA/ PRA draft rules.
The Policy Note indicates that HM Treasury intends to apply these reforms to all other institutional investors and that this change should help reduce barriers for investors investing in UK and overseas securitisations which may have arisen because of unclear regulatory requirements. This change seeks to address concerns raised in response to HM Treasury’s 2021 review.8
Timing and next steps
HM Treasury intends to lay the SI before Parliament by the end of 2023, subject to Parliamentary time allowing. The Policy Note expressly confirms that it is deemed a near-final version. Although still subject to technical comments to be provided by the 21 August 2023, it is unlikely that further material variations are made to this draft instrument. Some of this legislation will come into force immediately after it is made. The remainder will come into force at the same time as the repeal of the UK Securitisation Regulation and related retained EU law is commenced. This will also be at the same time as the FCA/PRA replacement rules start to apply.
The FCA and the PRA are expected to publish consultation papers on their new draft securitisation rules in Q3 2023.
Separately to these rules, the PRA is expected to examine the capital and liquidity treatment of securitisations.
2 Policy_Note_Securitisation_Regulation_Illustrative_Statutory_Instrument__1_.pdf, discussed in Proposed Reforms to the UK Securitisation Regulatory Framework | Perspectives & Events | Mayer Brown.
3 Regulation (EU) 2017/2402 as it forms part of UK domestic law as “retained EU law” by operation of the European Union (Withdrawal) Act 2018, as amended, and as amended by the Securitisation (Amendment) (EU Exit) Regulations 2019.
5 Introduced by FSMA 2023, the DAR is designed to enable the FCA to make rules in respect of activities, products, or conduct which may not be regulated activities under the Financial Services and Markets Act 2000.