European Commission Adopts The Final Draft Regulatory Technical Standards Relating To Risk Retention – Financial Services

Other Author Serena Brent, trainee
solicitor

On 7 July 2023, the European Commission adopted and published
the final draft Regulatory Technical Standards relating to Risk
Retention (the “Final Draft RTS”). The
European Parliament and Council will now review the Final Draft RTS
and, if there are no objections, the final text is expected to be
published in the Official Journal of the European Union and enter
into force in Q4 2023 or Q1 2024. This will mark the end of the
transitional period during which the CRR RTS, deriving from
Commission Delegated Regulation (EU) No 625/2014, have applied.

The Final Draft RTS largely replicates, with minor changes, the
draft RTS published by the European Banking Authority in April 2022
(the “2022 Draft RTS”) – see our
legal update from last year for more
information. In addition, the Final Draft RTS increases the
certainty of the “sole purpose” test set out in Article
6(1) of the Securitisation Regulation ((Regulation EU) 2017/2402)
which provides that “an entity shall not be considered to
be an originator where the entity has been established or operates
for the sole purpose of securitising exposures“. The
Final Draft RTS now clarifies that an entity shall not be
considered to have been established or to operate for the sole
purpose of securitising exposures if it meets the criteria set out
in Article 2(7) of the Final Draft RTS (i.e. if its sole or
predominant source of revenue does not rely on the securitised
exposures and if the members of its management have the necessary
experience to pursue its business strategy). This differs from the
2022 Draft RTS which required these conditions to be “taken
into account”.

It remains uncertain whether or to what extent the Final Draft
RTS will be adopted in the UK under the new UK securitisation
rules, discussed further in our recent legal update. We await the
consultation of the draft FCA and PRA rules on substantive matters
such as risk retention and transparency, which we understand is due
to be published “over summer” in 2023, for clarity on the
issue.

Originally published 26 July 2023.

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