PRA and FCA publish new UK securitisation rules

Last month, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) published policy statements and the new securitisation rules. Together, both UK regulators have triggered the countdown to 1 November 2024 when the new UK securitisation framework will come into force.

Structurally, both policy statements thoroughly acknowledge industry feedback (following consultation processes that occurred last year) and meticulously go through points and observations raised by market participants. In terms of legislative architecture, the FCA set out its proposals for firm-facing rules on securitisations to be effectively transferred into the FCA’s rulebooks.

Such approach to the initial consultations is praised by Harjeet Lall, partner at Pinsent Masons. She notes: “Both regulators have listened to market participants and given a six-month window to adapt to the transition and given clarity to the market with grandfathering provisions, which is really helpful.  In terms of the dynamic of the regulation, moving these rules to the regulators’ rulebooks clearly allows the regulators to employ a much more dynamic and agile framework.”

Discussing the regulators’ apparent pragmatism and granular feedback, Lall underlines a desire to engage with the market. She says: “With respect to certain points, the regulators have noted that they will consider feedback for future rounds of policy change. For example, a respondent to the earlier consultation requested a change to permit L-shaped risk retention, which is a permitted approach on US transactions.  And similarly, for other areas, there are various future policy points for us to monitor.”

Commenting on the notable changes, Lall highlights risk retention for NPE securitisations (when calculating the retention requirements for securitisations of non-performing exposures, the new UK securitisation rules will permit this to be based on the net value, rather than the nominal value of exposures) as a key point (and is no change from the 2023 draft rules). She notes: “Such alignment with the current EU rules will likely be welcomed by the market. However, there is a key distinction, whereby the servicer is not entitled to be the risk retention holder under UK rules (as compared with the EU rules).”

She continues: “There are also some slight differences in terms of the flexibility around the replacement of the risk retention holder. In the EU position, it can be on the basis of exceptional circumstances and there are some further clarifications beyond insolvency in the EU risk-retention RTS such as where the retainer, for legal reasons beyond its control and beyond the control of its shareholders, is unable to continue acting as a retainer. However, not all those exceptions have been followed through in the UK position. I also think there is going to be potentially some further discussion around the sole-purpose test that may get revisited.”

Regarding due-diligence, the regulators clarified the meaning of “before pricing” in the due diligence and disclosure requirements. On this point, Lall says: “On due diligence, I think there were no surprises.  An investor investing in third-country originated transactions will have to verify that “sufficient information” has been made available to enable the investor independently assess the risks of holding the securitisation position. It shows a pragmatic approach, and a further review of templates is going to be subject to the outcome of deciding what's a public securitisation versus a private securitisation, which they're going to consult on later this year or early Q1 2025.”

She continues: “The disclosure requirements may be contingent on where they land on that definition. This is definitely one to watch because I think that might mark a departure from where the EU currently is.”

Lall additionally points to the definition of securitisation as a  point worth noting. She says: “While one may think this is not such a big point, it actually is an important point on transactions to determine what is within scope. Up till now, we've the definition contained a cross-reference to the CRR with respect to specialised lending exposures. With the new UK rules we've now got in the proposed UK framework, there is a hardwiring of the definition. Given the UK CRR is now under consultation and we don't have the finalised rules yet we anticipate this will not diverge.”

Regarding synthetic securitisations however, there is still a sense of things not entirely adding up just yet. Nevertheless, the new rules extend the ability to hold retention on an unfunded basis (i.e. synthetically) or on a contingent basis such as in the form of a guarantee – and without having to cash collateralise the exposure – beyond credit institutions to certain investment firms subject to prudential regulation (and also insurers and reinsurers).

Finally, reflecting on the overall market reactions to the policy statements, Lall highlights a positive atmosphere, noting that: “Broadly speaking, the UK regulators have demonstrated a market-friendly approach.”

She concludes: “Greater consideration is needed now when we structure deals and post-Brexit, everything was still aligned, but now we are seeing key differences. Furthermore, we have to think a little more carefully about future-proofing transactions and how that's going to play out. However the regulators have clearly shown a commercial responsiveness in their proposals and I anticipate we will see a pragmatic approach taken on the disclosure templates from both the UK and EU regulators.”

Vincent Nadeau