UK Nears Final Securitisation Regulations

On 11 July 2023, HM Treasury published an updated, near-final draft of the regulations (the Securitisation Regulations) that will, when adopted, replace the retained EU Securitisation Regulation that has been in force in the UK since the end of the Brexit transition period (the Retained Securitisation Regulation). 

The updated draft Securitisation Regulations include a number of changes from the previous version, including:

• Excluding non-UK alternative investment fund managers from the due diligence requirements that apply to institutional investors and authorising the Financial Conduct Authority (FCA) to establish specific due diligence requirements for small UK alternative investment fund managers.
• Empowering the FCA to give directions to entities carrying on designated activities in relation to a securitisation. Such directions may impose requirements with respect to due diligence, risk retention, asset selection, the provision of information, re-securitisations and/or arrangements concerning credit granting in relation to securitised exposures.
• Specifying that the SSPE in a “simple, transparent and standardised” securitisation does not have to be established in the UK.
• Clarifying that the provision banning the establishment of SSPEs in certain overseas jurisdictions applies to originators and sponsors of securitisations, as well as prohibiting institutional investors from investing in securitisations established in such jurisdictions.
• Replacing sanctions established under the EU Securitisation Regulation. New provisions authorise the FCA and Prudential Regulation Authority (PRA) to enforce the Securitisations Regulations by prohibiting individuals from holding an office or position involving responsibility for decisions about the management of an originator, sponsor or SSPE, publishing a public statement of censure and/or imposing a financial penalty.

The Securtisation Regulations are part of Edinburg Reforms, a broader UK regulatory initiative to reform the regulation of financial services in the UK, and bring the regulation of securitisations in line with the UK's general approach to financial regulation, which is to establish a perimeter of regulatory oversight in primary and secondary legislation and allow regulators to develop rules designed to achieve specific outcomes.

As such, many provisions of the Retained Securitisation Regulation are not specified in the Securitisation Regulations, such as the requirement for certain entities to retain a material net economic interest in securitisation transactions and applicable transparency and reporting requirements.  The FCA and/or the PRA will instead issue rules on those topics (the SR Rules)

Authorities have not released drafts of the SR Rules, but a policy note accompanying the Securitisation Regulations suggests that the SR Rules will implement recommendations of a report published by HM Treasury in December 2021. That report concluded that regulators should consider reforms in areas that include:

• Risk retention in securitisations of non-performing exposures.
• Whether the transfer of risk retention should be permitted in certain circumstances.
• Definitions of public and private securitisation and disclosure requirements applicable to each.
• Due diligence requirements for institutional investors when investing in non-UK securitisations.

The Securitisation Regulations are expected to come into force before the end of 2023. While the changes introduced thus far are for the most part not substantive, we expect regulators to address some long-standing concerns expressed by market participants when formulating the SR Rules. However, any such changes are likely to increase the regulatory divergence between the UK and the EU and could increase the compliance burden for issuers and investors.