The UK's new Securitisation Rules

New rules for securitisation transactions in the UK were published on 3 April 2024 by the Financial Conduct Authority ¹ and the Prudential Regulation Authority ² (the "UK Securitisation Rules"), in each case that apply from 1 November 2024. As there was an extensive consultation process regarding the proposed UK Securitisation Rules in 2023, the final publication does not contain many surprises (and provides for a UK regime that does not currently diverge materially from the existing UK Securitisation Regulation regime), however it does contain some helpful changes and clarifications, drawn out through the consultation process, and does also note a number of further points raised by market participants that may inform policy development in the UK in the future.

Key Point

• Risk Retention – During the consultation process in respect of the UK Securitisation Rules, it was clear that the existing risk retention requirements would not be materially revisited, save that the retention requirements in respect of securitisations of Non Performing Exposures ("NPEs") would be brought more in line with the approach taken by EU regulatory authorities. In this respect, the UK Securitisation Rules now provide that in the case of NPE securitisations, where a non-refundable purchase price discount has been agreed, the retention of a material net economic interest in the securitisation shall not be less than 5% of the sum of the net value of the securitised exposures that qualify as non-performing exposures and, if applicable, the nominal value of any performing securitised exposures.   
• The UK Securitisation Rules do not go as far as permitting an NPE Servicer to be an eligible risk retainer (a common structural feature in EU NPE securitisations) but the FCA has noted this comment from market participants for future consideration, alongside other requests for more substantial changes to the retention requirements (such as the use of "L" shaped retention, for example).  The "sole purpose" test for retaining entities proposed during the consultation phase has been retained, and the UK Securitisation Rules also clarify that hedging of a retention position is permitted where it is undertaken prior to the securitisation as a legitimate and prudent element of credit granting or risk management and does not create a differentiation for the retainer’s benefit between the credit risk of the retained securitisation positions or exposures and the securitisation positions or exposures transferred to investors. 

• Transparency and due diligence – the more "principles-based approach" to due diligence proposed by the PRA during the consultation phase is retained in the UK Securitisation Rules and provides that UK institutional investors are required to verify that they have sufficient information independently to assess the risks of holding the relevant securitisation position (along with a table specifying the categories of information that investors should receive). This makes far more clear the expectations of a UK institutional investor in a non-UK securitisation as compared with the requirements set out in the UK Securitisation Regulation regime.

 Some helpful changes to the UK Securitisation Rules based on market participant feedback during the consultation phase are:

- due diligence (and disclosure) obligations are required to be fulfilled "before pricing or commitment to invest". The latter lends further weight to the approach taken in many private securitisation or warehousing transactions that such obligations should be fulfilled prior to signing of the transaction documentation

- a distinction is now made between a primary market investor and a secondary market investor so that secondary UK investors only need to check they have received the requisite information before they are committed to invest rather than having to diligence whether investors received information prior to pricing (i.e. on original issuance)  

- the ability of UK investors to delegate due diligence obligations to third parties is now permitted, however the UK Securitisation Rules are clear that the relevant investor remains responsible for any diligence failures unless the delegation is to a UK institutional investor  

• For UK originators, the transparency requirements remain in their familiar form (quarterly reporting on underlying exposures as well as the quarterly investor report in prescribed form  as well as significant event reporting and publication of prospectus/transaction summary and key documentation). One welcome change in the final UK Securitisation Rules is that originators may provide the information specified in anonymised or aggregated form or as a summary of the specified documentation, where and to the extent that is necessary in order to comply with the law applicable in the United Kingdom governing the protection of confidentiality of information and the processing of personal data and with any confidentiality obligation relating to customer, original lender or debtor information. The ongoing industry discussion on the treatment of "private vs public" transactions is not addressed (as expected) but is anticipated to be a key topic in future consultations by the FCA and PRA.
• Geographic Scope – the UK Securitisation Rules clarify that the rules generally only apply to UK established entities 

Timing:

• The UK Securitisation Rules will apply from 1 November 2024
• Existing UK Securitisations closed before 1 November 2024 will be grandfathered, subject to some exceptions, most notably that the existing ability for a UK investor to delegate diligence obligations (see above) to a non-UK party will not be preserved past this date

Footnotes:

1. https://www.fca.org.uk/publication/policy/ps24-4.pdf
2. https://www.bankofengland.co.uk/prudential-regulation/publication/2024/april/securitisation-policy-statement#:~:text=The%20Securitisation%20Regulations%202024%20and,rules%20(or%20fall%20away).

Authors: Thomas Picton, Partner, Theodoros Kotsiras, Senior Associate, Agathe Motte, Partner, Martin Kaiser, Partner, Annalisa Santini Partner, Jose Christian Bertram Partner