HM Treasury has recently published a call for evidence (the "Call for Evidence"),1 in order to assist with the review which it is required to carry out with respect to the UK Securitisation Regulation (as defined below) and its preparation of a report to be laid before Parliament by 1 January 2022.
The EU Securitisation Regulation2 became applicable in the European Union (the "EU") from 1 January 2019 to new securitisations and to existing securitisations entered into before that date where a new securitisation position is created on or after that date. The EU Securitisation Regulation includes requirements relating to investor due diligence, risk retention, disclosure and credit granting, as well as a ban on resecuritisation. In addition, it established a new regime for "simple, transparent and standardised", or "STS", securitisations, allowing certain investors in securitisations that meet the applicable requirements to benefit from lower regulatory capital requirements and other favourable regulatory treatment. A number of technical standards have also been published in order to set out certain aspects of the EU Securitisation Regulation in more detail.
The United Kingdom (the "UK") left the EU at 11:00 pm UK time on 31 January 2020 but continued to be treated as if it were an EU member state during the period from such time until 11:00 pm on 31 December 2020 (the "Brexit Transition Period"). At the end of the Brexit Transition Period, EU legislation that was directly applicable in the UK up to that date was adopted in the UK as part of "retained EU law" by virtue of the European Union (Withdrawal) Act 2018, as amended by the European Union (Withdrawal Agreement) Act 2020. In a process known as "onshoring", this body of "retained EU law" was then amended by hundreds of pieces of secondary legislation, with the aim of ensuring that such retained EU law operates effectively in the UK and of remedying any deficiency in such retained law.
In the case of the EU Securitisation Regulation, it was adopted in the form that it applied in the UK at the end of the Brexit Transition Period, and was amended including by the Securitisation (Amendment) (EU Exit) Regulations 2019 (as so amended, the "UK Securitisation Regulation"). As a result, there is now a parallel regime for securitisation in the UK, which is very similar but not identical to the EU Securitisation Regulation regime.
Article 46 of the UK Securitisation Regulation places a legal obligation on HM Treasury to review the functioning of the UK Securitisation Regulation and lay a report in Parliament by 1 January 2022. HM Treasury is required to assess the following areas:
- the overall effects of the UK Securitisation Regulation, including the introduction of the STS designation, on the functioning of the securitisation market, the contribution of securitisation to the real economy, in particular with respect to access to credit for SMEs, and interconnectedness between financial institutions and the stability of the financial sector;
- the use of the different modalities of risk retention;
- whether there has been a disproportionate rise in "private" securitisations3 and whether market participants have structured transactions in a way to circumvent the obligation under Article 7 to make available information through securitisation repositories which applies to "public" securitisations;
- whether there is a need to extend disclosure requirements with respect to "private" securitisations;
- whether an STS equivalence regime should be introduced for third-country originators, sponsors and securitisation special purpose entities ("SSPEs"), taking into account international developments in relation to securitisation;
- the implementation of the environmental disclosure requirements, which are currently applicable with respect to residential loans and auto loans and leases, and whether they should be extended to other asset classes in order to make environmental, social and governance ("ESG") disclosure more mainstream;
- the appropriateness of the third party verification regime with respect to STS securitisations, whether the authorisation regime fosters sufficient competition and whether changes in the supervisory framework are required; and
- whether a system of limited licensed banks should be established to perform the functions of SSPEs.
Call for Evidence
HM Treasury’s stated overarching aims for the review of the UK Securitisation Regulation are: (a) to bolster securitisation standards in the UK, in order to enhance investor protection and promote market transparency, and (b) to support and develop the UK securitisation market, including through the increased issuance of STS securitisations, in order to ultimately increase their contribution to the real economy. The Call for Evidence also notes that the review is a timely opportunity to consider the UK Securitisation Regulation in the context of the UK financial market and economy.
Importantly, the Call for Evidence states that: "Securitisation is an important part of well-functioning markets and a useful source of finance for UK businesses". HM Treasury notes that it can aid capital, liquidity and risk management, diversify funding sources and distribute risk more broadly in the financial sector, as well as allowing for further lending by freeing up originators’ balance sheets. It is also recognised by HM Treasury that securitisation can play a role in supporting economic recovery, particularly following the Covid-19 pandemic.
Although the Call for Evidence is focused on the UK Securitisation Regulation, it is noted that HM Treasury is also in the process of conducting a wider review examining how the overall framework for financial services will need to adapt to the UK’s position outside the EU. It is also noted that other regulatory initiatives are underway in relation to securitisation, such as the recent consultation on the reform of taxation of securitisation companies, and the consultation by the Prudential Regulation Authority on the securitisation of non-performing loans ("NPLs").
The Call for Evidence invites market participants to respond to a number of questions, based on the areas mandated by Article 46 of the UK Securitisation Regulation. It also raises some additional points. The questions include the following:
Overall effects: One significant question which has been included is whether any ambiguity around the geographical scope of the UK Securitisation Regulation has impeded securitisation transactions and whether any clarifications could be helpful in this respect. We anticipate that market participants will be keen to respond on this point, particularly with respect to the very important issue of how the investor due diligence requirements with respect to reporting requirements should be interpreted in the case of securitisations where the originator and SSPE are located outside the UK. Additional questions are raised as to the impact of measures put in place with respect to Covid-19 pandemic and the effect of Brexit.
Risk retention: Questions are raised as to the impact of the risk retention requirements on securitisations of NPLs, and whether it would be helpful to allow the servicer to fulfil the risk retention requirements for NPL securitisations. We note that this has recently become possible under the EU Securitisation Regulation pursuant to a recent amendment.4
Disclosure: There are a number of questions relating to the requirements as they apply to private securitisations, and we would expect that market participants will want to express their views on these issues.
STS: There is a detailed discussion on considerations for assessing STS equivalence and some questions on this. At the moment, transactions which meet the requirements for STS under the EU regime can also be considered to be STS for UK purposes, but transactions which meet the UK STS requirements are not recognised as STS in the EU.
ESG disclosures, third party verification and SSPEs: Detailed questions are also asked with respect to ESG disclosure requirements, the third party verification regime for STS securitisations and the role of SSPEs.
AIFMs – extraterritoriality: In addition, the Call for Evidence invites views on the definition of "institutional investor" as it relates to Alternative Investment Fund Managers ("AIFMs"). As currently drafted, the definition could apply to non-UK AIFMs which are not authorised in the UK, and which market or manage alternative investment funds in the UK, and HM Treasury raises the question of whether certain unauthorised, non-UK AIFMs should be excluded from the scope of the due diligence requirements.
We anticipate that market participants will appreciate the thoughtful approach set out in the Call for Evidence and will welcome the support for securitisation and the recognition of the role it can play in supporting the UK economy. The Call for Evidence represents a key opportunity for market participants to express their views on the UK Securitisation Regulation and to identify aspects which could be improved.
Responses (including supporting evidence) will need to be provided to HM Treasury by 2 September 2021.
Please feel free to get in touch with your Mayer Brown contact if you would like to discuss any of the issues covered in this Legal Update.
1 Review of the Securitisation Regulation: Call for evidence, HM Treasury, June 2021, available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/
2 Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, and amending Directives 2009/65/EC, 2009/138/EC and 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012, as amended.
3 A "private" securitisation is a securitisation where no prospectus is required to be drawn up in accordance with the Financial Services and Markets Act 2000 and the rules made by the Financial Conduct Authority.
4 See our recent Legal Update "Amendments to the EU Securitisation Regulation – the new synthetic STS framework and adjustments in relation to non-performing exposures" for details.