UK Treasury Proposes Changes to UK Securitisation Framework as Part of Financial Services Reforms | Morgan Lewis

Recently announced UK financial services reforms include proposals to make significant changes to the framework under which securitisations are regulated in the United Kingdom. An illustrative draft statutory instrument and explanatory guidance indicate that many requirements applicable to securitisations are expected be administered, not through regulation, but through the rulebooks of the UK financial services regulators.

BACKGROUND

On 9 December 2022, the UK Chancellor of the Exchequer announced a set of reforms, known as the Edinburgh Reforms, which are intended to drive growth and competitiveness in the UK financial services sector. The aim is to put in place a more agile and responsive regulatory framework for the United Kingdom, following Brexit. The Edinburgh Reforms include a reform of banks’ ring-fencing requirements, the repeal and replacement of the Solvency II regime for insurance companies, and an overhaul of the UK prospectus regime. The Financial Conduct Authority (the FCA) and the Prudential Regulation Authority (the PRA)—the primary UK financial services regulators—are given a secondary objective of encouraging growth and bolstering the United Kingdom’s international competitiveness.

The announcement of the Edinburgh Reforms follows the Financial Services and Markets Bill (the FSM Bill), which is making its way through the UK Houses of Parliament (it is currently in its second reading in the House of Lords, having passed through the House of Commons, and is expected to receive Royal Assent by Spring 2023). Under the FSM Bill, retained EU law relating to financial services and markets will be revoked. In addition, a new designated activities regime will be put in place, under which the regulators will be able to make certain rules with respect to certain designated activities relating to UK financial markets and exchanges, and financial instruments, products, and investments that are issued or sold to, or by, persons in the United Kingdom.

Following the end of the Brexit transition period on 31 December 2020, the EU Securitisation Regulation (Regulation (EU) 2017/2402) was adopted into UK law and was then amended by way of UK regulations to ensure that it would operate effectively in the United Kingdom. Regulation (EU) 2017/2402, as incorporated into UK law, and as amended, including by the Securitisation (Amendment) (EU Exit) Regulations 2019, is often referred to as the UK Securitisation Regulation. Under the FSM Bill, the UK Securitisation Regulation, and other related legislation, will be revoked.

PROPOSED AMENDMENTS TO THE UK SECURITISATION FRAMEWORK

As part of the Edinburgh Reforms, HM Treasury (the Treasury) has published an illustrative draft statutory instrument, the Securitisation Regulations 2023 (the Draft SI), as well as an explanatory Policy Note (the Policy Note).

The Policy Note states that the Treasury is committed to working with the FCA and the PRA to bring forward the various reforms identified in the Treasury’s report in December 2021 (Review of the Securitisation Regulation: Report and call for evidence response) (the HMT Report). These include reforms in the following areas:

• Amending certain risk retention provisions, including in relation to the replacement of CLO managers which are holding the risk retention, and with respect to securitisations of non-performing exposures similar to changes made under the EU Securitisation Regulation
• Considering the definitions of public and private securitisation, and the disclosure requirements for private securitisations
• Clarifying the due diligence requirements for UK institutional investors investing in non-UK securitisations
• Amending the definition of institutional investor as it relates to certain unauthorised non-UK Alternative Investment Fund Managers (AIFMs) in order to take them out of scope of the due diligence requirements

The HMT Report also included a proposal to introduce a regime to recognise securitisations issued by non-UK entities as equivalent for the purposes of the United Kingdom’s simple, transparent and standardised (STS) regime. This is expected to be implemented under the FSM Bill. In the meantime, the temporary recognition of EU STS securitisations has been extended to the end of 2024.

The Draft SI contains certain provisions from the UK Securitisation Regulation, in some cases in an amended form. These include a number of definitions, restrictions on establishing securitisation special purpose entities in high-risk jurisdictions, investor due diligence obligations for occupational pension schemes, provisions relating to securitisation repositories, provisions relating to STS equivalence, requirements for certain parties to be established in the United Kingdom for STS securitisations, and provisions relating to third-party verification agents.

However, the intention is that other key requirements which currently apply under the UK Securitisation Regulation, such as due diligence obligations for other institutional investors who are regulated by the FCA or the PRA, risk retention requirements, and transparency requirements, will no longer be dealt with by way of regulation but will instead be set out in rules to be made by the FCA and the PRA. Similarly, the UK STS criteria will be set out in rules to be made by the FCA.

The Policy Note indicates that the majority of the requirements are expected to be maintained in the FCA and PRA rules. The FCA and the PRA are also expected to consider the various reforms which were identified in the HMT Report.

The Policy Note makes it clear that the exact drafting, design, and format of the Draft SI is not final and will continue to evolve following the entry into force of the FSM Bill.

The Policy Note also states that, over time, the powers of the FCA and the PRA to make technical standards will be repealed, as this form of legal instrument derives from EU law. The content of the technical standards will instead by dealt with in the FCA and PRA rules.

Separately, the PRA is also expected to consider the capital and liquidity treatment of securitisations.

NEXT STEPS

The Policy Note indicates that the final version of the Draft SI is expected to come into force in 2023 at the earliest. It also states that the PRA and the FCA intend to set out their detailed approach to the replacement rules, including any reforms, in consultations beginning in 2023.

CONCLUSION

It is likely that there will be further regulatory divergence between the EU and UK securitisation regimes, although the extent to which the content of some of the key requirements will change remains to be seen. Market participants are likely to welcome the increased flexibility and responsiveness that is expected to result from the revised approach to the UK securitisation rules.

For those active in the UK securitisation market, it will be important to monitor further developments and consider any consultations concerning more detailed proposals.

Morgan Lewis will follow this topic closely in the months ahead.

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