UK Treasury publishes draft securitisation statutory instrument 

Earlier this week, the UK Treasury published a draft statutory instrument on securitisation.  For our readers less well versed in the British constitutional arrangements, a statutory instrument is a secondary piece of legislation passed by the government pursuant to an Act of Parliament (pace my British legal friend, I know but we are summarising here…).  In Brussels it would be known as Level 2 and in many European jurisdictions as a “decree”.

This draft is designed to fill in gaps left by the post-Brexit repeal of EU legislation, including the Securitisation Regulation.  As assidous followers of PCS’ news items know, the key change made by the UK in its approach to the regulation of securitisation is to push down most of what appears in the Brussels’ levels 1 and 2 rules to the PRA and the FCA rulebooks.  

For reasons too technical to set out here, this delegation to regulatory authorities still left a few gaps which this statutory instrument is designed to fill.

Unless you are a British lawyer, there is little here to get your blood flowing and certainly no dramatic surprises or changes of direction.

Interesting titbits are the proposed due diligence rules for pension funds. These are the result of a highly technical legislative issue that neither the PRA nor the FCA are mandated and therefore allowed to make rules for pension funds.  So, if a pension fund is an investor, it is not bound by the PRA or FCA rule books and therefore would, absent any other rules, not have any obligations qua investor.  To plug that gap, the draft statutory instrument lays down the "Article 5" obligations of UK pension funds.  Now, assuming HMT, the PRA and the FCA are on speaking terms, these rules for pension fund due diligence should be either identical or very close to those scheduled to appear in the PRA and FCA rules books. So this might be a good preview. But, then again....

Another interesting point is that the statutory instrument (still in draft) is supposed to come into force on November  1st.  Since it repeals the EU rules and it is pretty inconceivable that the Treasury would leave securitisation with no regulatory regime, we can deduce that the “drop dead” date for the PRA and FCA to publish their securitisation rulebooks is end of September.  But then again…

UK Treasury publishes near-final draft of the rules replacing the EU Securitisation Regulation

The UK Treasury has published a near final draft of the statutory instrument that will, in due course, fully replace the European Union Securitisation Regulation for the UK market. This draft updates the December 2022 draft on which we commented back then. It comes with a handy and helpful policy note.

This new draft does not substantially alter the December version. To summarise the key points:

The approach, in line with other changes to the legal and regulatory landscape of UK finance, is to remove large parts of the rules from primary law making and the UK Parliament to vest them in the regulatory authorities. As an example, the draft retains the STS category. But, in contrast to the EU Securitisation Regulation, has no STS criteria - leaving those to the FCA to draft at a later stage.

Maybe a relief to UK market participants but the potential huge fines provided for under the EU rules (eg 10% of worldwide turnover) have been replaced by fines to be set by the FCA, subject to FCA policy to be published later.

The SI carves out a set of due diligence rules specifically for small UK alternative fund managers. These rules are, once more, yet to be written by the FCA. But the direction of travel - lightening the due diligence burden on small investors - seems clear.

On STS, the new proposed rules confirms that the special purpose vehicle of an STS securitisation need not be in the UK, although the originator and sponsor still do.

Potentially more interesting for overseas issuers, the draft provides the UK Treasury with the power to designate other jurisdictions as "equivalent" to the UK when it comes to STS. Once designated, securitisations meeting the STS rules from those jurisdictions will be able to be treated as STS by UK investors. The text deliberately uses the expression "simple, transparent and comparable" derived from the Basel rules so one assumes that equivalence may be available to those countries that have adopted STC. How this will work in practice is another issue.

The Treasury has indicated that it intends to bring this statutory instrument into law by year end and that this is a very much a final draft. They will entertain comments until 21st August though.

Overall, this seems a decent attempt at onshoring the European rules but, with so much rule making now delegated to the FCA and the PRA, the final state of the post Brexit UK securitisation landscape remains very much to be defined.

UK publishes proposed amendments to the Securitisation Regulation

At the end of last week, the Chancellor of the Exchequer unveiled the government’s roadmap to a new regulatory framework for British finance.

Although overlooked by most commentators, the announcement contained detailed proposals to revise the Securitisation Regulation inherited from the EU.  These proposals may be found in a draft statutory instrument.

There are quite a few highly technical drafting changes the implications of which are still somewhat unclear.  But here are the highlights.

The definition of “securitisation” remains unchanged.

The STS regime remains in place.   However, the STS criteria have disappeared from the legislative text altogether and are now entirely delegated to the FCA.  Presumably, the FCA will have a consultation to determine what these should be.

Intriguingly enough, with the criteria for STS having disappeared from the draft legislation and, in the absence of a definition of “non-ABCP securitisation”, the proposed text appears to leave open the possibility of synthetic securitisations being STS.  This seems now to be in the gift of the FCA.

The third-party verification and data repositories regimes are kept broadly unchanged.

In line with the free-trade approach of the Treasury, an equivalence regime for STS is set out, with the Treasury to decide which jurisdictions will be so treated.  This was explicitly rejected by the European Commission in their recent report.

In a similar vein, the removal of the requirement for the special purpose vehicle having to be in the UK is maintained.  The originator and sponsor though need to be UK located.  (However, the concession that allows EU STS to be treated as STS in the UK until December 2024 remains in place.)

The text allows for re-securitisations – which are banned in the EU.  However, any re-securitisation transaction will need to be pre-approved by the regulatory authorities on a deal-by-deal basis.

Retention and disclosure requirements are still in place but the text seems to allow non-UK issuers to sell to UK investors provided they comply with substantially the same standards.  The total identity of standards required by the EU has been abandoned.

This is merely a summary of the high points and it should be noted the document is still only a draft.