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The Edinburgh Reforms to financial services regulation announcedby the UK Government on 9 December 2022 include proposals forreform of the UK securitisation framework. These proposals take theform of an illustrative statutory instrument (the"SI")1 and an associatedpolicy note (the "PolicyNote")2.
The draft SI and the Policy Note are intended to illustrate howthe powers in the Financial Services and Markets Bill will be usedto implement reform of the UK Securitisation Regulation.
The main effect of the proposals will be to shift most of thesubstantive rules on UK securitisation regulation from legislationto the Financial Conduct Authority("FCA") and Prudential RegulationAuthority ("PRA") rulebooks.
What is being proposed?
The Financial Services and Markets Bill (the "FSMBill"), which was introduced into Parliament in July2022, provides for retained EU financial services law to be revokedand replaced by UK domestic law. The FSM Bill also creates a'designated activities regime' which allows the FCA to makerules that bind anyone engaging in financial markets activity,including those it does not authorise.
Reform of the UK securitisation rules is being prioritisedbecause HM Treasury wishes to ensure the delivery of the reforms towhich it committed in its December 2021 review3 of theUK Securitisation Regulation (i.e. the retained version of the EUSecuritisation Regulation) (the"UKSR").
HM Treasury intends to use powers introduced in the FSM Bill tomove to a "comprehensive FSMA model for the regulation ofsecuritisation", by applying the regulatory model principallyset out in Financial Services And Markets Act 2000, under whichfinancial regulators make the detailed regulatory requirementswithin a wider legislative framework.
The FSM Bill will repeal the UKSR. Most of the specificregulatory requirements currently in the UKSR will not be restatedin legislation, but will be replaced (with potential changes) byFCA and PRA rules. Technical standards (a type of instrument whichis derived from EU law) will also be repealed and their contentreplaced by FCA and PRA rules.
What will be in the SI?
The draft SI contains provisions which mainly relate to theoverall securitisation framework, such as provisions for theauthorisation and regulation of securitisation repositories andthird party verifiers. The draft SI grants powers to the FCA andthe PRA to make most of the substantive rules relating tosecuritisation activities through their rulebooks, including inrelation to key aspects such as due diligence, risk retention andtransparency requirements.
The draft SI also restates certain requirements of the UKSR thatare regarded as being more appropriate to retain in legislativeform, such as a ban on securitisation special purpose entitiesbeing established in certain high-risk jurisdictions and otherinternational issues which are within the government's remit.The draft SI also sets out due diligence requirements foroccupational pension schemes ("OPS")investing in securitisations.
The Policy Note makes clear that important points of details,such as enforcement and transitional provisions, have not beenincluded in the draft SI and that the drafting, design and formatof the draft SI will continue to develop before the finallegislation is laid before Parliament following Royal assent to theFSM Bill.
What will stay the same?
The proposed approach in the draft SI is intended to maintainthe status quo for:
- regulator responsibilities (except for the change from thePensions Regulator to the FCA for some requirements for OPS);
- the entities subject to securitisation regulatory requirements;and
- the definitions for what constitutes a'securitisation'.
Although the regulators' exact rulemaking approach is stillunder development, the majority of the rules currently in the UKSRare expected to be maintained in the FCA and PRA rules.
The simple, transparent and standardised("STS") securitisation regime willremain in place, but the STS criteria will be delegated to the FCA.This opens the door to the possibility of STS syntheticsecuritisations, if the FCA considers this appropriate.
An equivalence regime for STS is set out in the FSM Bill and HMTreasury is responsible for deciding which jurisdictions qualify.By contrast, an equivalence regime was rejected by the EuropeanCommission in its recent report4 on the functioning ofthe European Securitisation Regulation.
The third-party verification and data repositories regimes willbe broadly unchanged.
What will change?
The FCA and PRA are expected to implement the reform areasidentified in HM Treasury's Report of December 2021,namely:
- certain risk retention provisions, for example in relation to(i) transferring the risk retainer where there is a change of CLOmanager and (ii) risk retention in securitisation of non-performingexposures ;
- the definitions of public and private securitisation, as wellas the disclosure requirements for certain securitisations;
- due diligence requirements for institutional investors wheninvesting in non-UK securitisations, "to provide greaterclarity on what is required"; and
- the definition of institutional investor as it relates tocertain unauthorised non-UK AIFMs who are currently in scope of duediligence requirements.
The draft SI allows for re-securitisations. However, anyre-securitisation transaction will need to be pre-approved by theregulatory authorities on a case-by-case basis.
The draft SI grants powers to the FCA to dispense with its rulesin certain circumstances, which may be intended to establish amechanism equivalent to the Securities and Exchange Commission'no action' letter regime in the US.
Separately, the PRA is also expected to examine the capital andliquidity treatment of securitisations, including as part of thePRA's implementation of Basel IV and reforms to SolvencyII.
What is the timing?
The FCA and the PRA intend to set out the detailed replacementrules "including any appropriate reforms" inconsultations beginning early next year. It is expected that thesecuritisation reforms will come into force in 2023 at theearliest.
The proposed reforms to the UK securitisation rules mayintroduce welcome additional flexibility into UK securitisationregulation, for example in relation to issues such as the duediligence requirements for investing in non-UK securitisations, theability to carry out re-securitisations on a case-by-case basis andthe potential for a no action letter regime.
However the flip side of this potential increased flexibility isa likely increase in regulatory divergence between the UKsecuritisation rules and the EU securitisation rules. The extent towhich the proposed new UK securitisation rules will diverge fromthe EU rules will only become clear once the FCA and PRA havepublished the detail of the replacement rules early next year.
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