The New UK Securitisation Rules

As part of the UK's post-Brexit "Smarter Regulatory Framework," the previous UK securitisation regulatory regime (the "UK SR") has been replaced with a new set of rules (the "New Rules"). The new regime, effective from 1 November 2024, marks a shift in the UK's approach to securitisation, aiming to create a more agile and efficient framework tailored specifically for the UK financial market.

The Prudential Regulation Authority (“PRA”) of the Bank of England and the Financial Conduct Authority (“FCA”), the primary financial regulators in the UK, have been vested with substantial rule-making authority under the New Rules. This delegation of power is intended to ensure that the regulatory framework remains responsive to market developments and aligned with the UK's broader financial stability objectives.

While the UK SR, originally based on EU law, is largely being preserved, several targeted policy changes have been enacted under the New Rules. These changes reflect the UK's commitment to maintaining robust regulatory standards while also addressing specific market needs and feedback from industry stakeholders.

One of the notable features of the New Rules is the introduction of grandfathering provisions for transactions that were established under the previous regime. This means that earlier transactions will continue to be governed by the old rules, providing a degree of continuity and stability for market participants. However, there is an important exception to this general grandfathering provision: if an institutional investor delegates due diligence obligations to a non-institutional investor who is not regulated by the FCA or PRA, the institutional investor remains responsible for ensuring regulatory compliance.

The New Rules are comprised of three key components:

• The Securitisation Regulations 2024 (as amended);

• The FCA Securitisation Sourcebook; and

• The Securitisation part of the PRA Rulebook.

In this article, our Chief Legal Officer, Máiréad Lyons, discusses the key changes introduced by the new framework.

Risk Retention Requirements

Conditions for Permitting Hedging of Retained Amounts

Under the new UK regulations, hedging of the retained amount, including credit risk, is explicitly allowed. This is applicable when the hedging arrangements were established before the securitisation process and were intended as a prudent measure for credit-granting or risk management. Additionally, the hedging must not distinguish between the originator's securitised and non-securitised credit risk.

Non-Performing Loan (NPL) Securitisation – Use of Purchase Price Permitted

The new UK regulations, aligning with the EU stance, confirm that the purchase price (instead of the nominal value) can be used when calculating the 5% required retention amount for NPLs. This concession is applicable only if the securitisation qualifies as an "NPL securitisation," meaning that at least 90% of the portfolio involved in the securitisation consists of NPLs.

Differences in the Formulation of the Sole Purpose Test for Originators

The new UK regulations outline specific factors that must be "taken into account" when determining if an originator has been established and is operating solely for the purpose of securitising exposures, which would disqualify it from acting as a risk retainer. These factors include the extent to which the originator has significant other assets and business activities beyond securitisation and related risk retention, as well as whether it has adequate decision-making and corporate governance structures in place. This approach may be advantageous for originators, as these factors only need to be considered.

In contrast, the EU test focuses on whether securitisation and related business activities constitute the originator's "predominant source of income." This criterion can be more challenging to meet, especially if the originator has substantial leverage that must be serviced primarily from revenue sources outside of securitisation.

The EU rules treat these elements as definitive facts; if all are present, the originator is deemed not to be a sole purpose originator. Despite the slight differences between the EU and UK approaches, this divergence is unlikely to cause significant issues, as most originators can typically satisfy either set of criteria.

Change of Risk Retainer on Insolvency

The new UK regulations permit the change of a risk retainer in the event of the entity's insolvency. However, it seems that such a change is not allowed under any other circumstances.

Due Diligence Requirements

A new principles-based approach requires investors to verify that they have received sufficient information to independently understand and assess the risks of investing in a specific securitisation, without the need for predefined templates. While this obligation can be delegated, the responsibility remains with the institutional investor unless it is delegated to an FCA/PRA regulated entity.

Disclosure Requirements

Institutional investors in the UK are no longer required to produce disclosure templates but must ensure that specific prescribed information is provided, regardless of the format. However, if a UK sponsor, originator, or securitisation SPV is involved, those entities are still obligated to produce the disclosure templates.

Key Differences of The New Rules Compared to the EU Regulatory Regime

While the new UK rules largely align with the EU Securitisation Regulation, there are some post-Brexit features from the EU regime that the UK has not yet adopted. Two notable examples include:

1. Synthetic STS: The UK has not followed the EU in allowing synthetic transactions to qualify as "STS" securitisations. As the Significant Risk Transfer Market continues to grow, this could pose a disadvantage to capital markets in the UK.

2. Retention by the Servicer: For risk retention on NPL securitisations, the UK has adopted the EU's updated position of using the net value of NPE exposures to calculate retention value. However, the UK has not extended this to allow the servicer to act as the retainer, limiting structuring options for UK entities.

3. Credit-Granting for NPLs: Additionally, unlike the EU, the UK has not provided a derogation from the credit-granting requirements for NPE acquisitions.

Take Aways

In conclusion, the introduction of the UK’s new regulatory framework represents a notable evolution in the country's securitisation landscape. By empowering the PRA and FCA with substantial rule-making authority, the UK aims to create a more responsive and efficient regulatory environment. The targeted policy changes and grandfathering provisions ensure continuity while addressing specific market needs. These updates, along with the new risk retention, due diligence, and disclosure requirements, reflect the UK's commitment to maintaining robust regulatory standards. As the financial market adapts to these changes, entities involved in securitisation must stay informed and compliant to navigate the evolving landscape successfully.

How Can We Help

Through our team of highly competent and experienced practitioners, Cafico International offers the full range of services required for the establishment, operation, and management of SPVs.

Our specialist legal and accounting teams ensure that corporate governance and financial management are carried out to the highest standards. Through careful monitoring and diligent application, we ensure that all SPVs are fully compliant with all applicable laws and regulations.

Working extensively with the originators of securitised assets, financial institutions, investment managers, arrangers, trustees, investors, collateral managers, and regulators, we offer a comprehensive suite of services that can be tailored to meet the specific requirements of each transaction to offer the best solutions for your business’s needs.

For more information on the above, or to find out how Cafico International can assist your business, please contact Niamh Manning, Business Development Manager.