On Aug. 7, UK FCA proposed rules for the UK securitization markets.
UK FCA issued consultation on its proposed rules for the UK securitization markets.
CP23/17: Rules relating to Securitization sets out proposed rules to replace the firm-facing provisions from UK securitization regulation (UK SR), transferring to FCA handbook.
FCA proposed legal instrument and related technical standards, annexes.
UK FCA also updated its securitization information page to reflect the proposals.
Follows FCA Jul. 2023 said it will consult on adding securitization rules, see #122026.
UK SR is retained EU law which specifies how securitization markets are regulated.
Supervisory responsibility for regulation shared primarily between FCA and UK PRA.
As part of UK Treasury’s Smarter Regulatory Framework (see #179037), some UK SR provisions will be brought into new UK legislation; as part of this, UK FCA explained that most firm-facing provisions of UK SR will be covered by new FCA and PRA rules.
UK Treasury expects to lay a statutory instrument (SI) before Parliament.
UK FCA stated that this new instrument will keep part of the UK SR in new legislation.
This consultation should be read alongside the near-final UK Treasury draft SI.
UK PRA also published its own consultation paper on proposed rules to replace firm-facing requirements in the UK SR, for which it has supervisory responsibility.
Consultation Details
UK FCA set out the wider context behind its proposals, outlined how they link to its primary objectives and new secondary international competitiveness, growth objective.
Also outlined approach to replacing relevant firm-facing provisions in the UK SR.
Included proposals in relation to due diligence requirements for institutional investors.
Explained approach to due diligence rules for small AIFMs, due diligence requirement adjustments re manufacturers’ disclosures, and clarified delegation of due diligence.
Proposals regarding risk retention provisions, focused on non-performing exposure (NPE) securitizations; insolvency of the retainer; cash collateralization for synthetic or contingent form of retention; sole purpose test; additional criteria on cherry picking.
Outlined proposals in areas including, but not limited to, geographical scope of UK SR, technical standards on homogeneity in STS securitizations and credit granting criteria.
Discussed distinction between public and private securitizations and transparency requirements for these securitization categories, without putting forward proposals.
And provided a cost benefit analysis (CBA) to assess the impact of proposed changes.
Effectiveness
The deadline for comments on the proposals is Oct. 30, 2023.
Oct. 16, 2023 Addendum to Consultation
On Oct. 16, 2023, UK FCA issued an addendum to securitization consultation paper.
Regulator said changes are needed to draft Handbook text in consultation, in relation to the application of due diligence requirements and institutional investor delegation.
References to occupational pension schemes (OPS) made in paper to indicate these will continue to be regulated by UK TPR, para 4.17 set out exception to new proposed rules on delegation when institutional investor delegates investment decision to OPS.
However, draft Handbook text implied scope of exception was wider than just OPS.
Addendum changes are consistent with paper's policy position, exception for OPS only.
The amendments should be inserted into instrument as indicated, and any responses to consultation paper should be made on the basis that these changes are made.
Though policy intention and consequently consultation's cost benefit analysis has not changed, will be 3-week extension for respondents to consider changes in addendum.
So consultation period for chapter 4 Due diligence requirements for institutional investors will close Nov. 20, 2023, period for rest of paper will still end Oct. 30, 2023.
FCA also updated its guidance webpage on securitization to highlight the addendum.
Oct. 19, 2023 EU Law Replacement Page
On Oct. 19, 2023, UK FCA updated its webpage, Repeal and replacement of retained EU law, by adding a link to the addendum to its consultation paper on securitization.
Nov. 20, 2023 Securitization Page Update
On Nov. 20, 2023, UK FCA updated its guidance webpage on securitization to remove information on the addendum to its consultation paper on securitization, CP23/17.
Closing date for responses to chapter 4 of paper, amended by addendum, was Nov. 20.
Apr. 2024 Policy Statement
On Apr. 30, 2024, UK FCA published finalized PS24/4 Rules relating to Securitisation.
Policy statement set out final rules and summarized feedback to the UK FCA proposals.
Included FCA 2024/18Securitisation (Smarter Regulatory Framework and Consequential Amendments) Instrument 2024 which comes into force on Nov. 1, 2024.
Inserted new Securitisation sourcebook (SECN) into the FCA Handbook (FCA HB).
FCA, PRA and the Treasury have decided to implement the FCA and PRA rules on Nov. 1, 2024, subject to the Treasury revoking the UK SR and related technical standards.
This is in response to feedback from some respondents asking for a 6-month period to give market participants more time to prepare before FCA final rules come into force.
Also added transitional provisions for pre-implementation securitisations which broadly preserve treatment under pre-SRF framework; broadly aligned FCA, PRA rule drafting.
Clarified meaning of before pricing in due diligence, transparency, STS requirements.
Adjusted due diligence requirements for secondary market investors re disclosures made by manufacturers; clarified it is possible for UK institutional investor to delegate its due diligence to another investor, which is not a managing party so long as retains the responsibility for compliance with the due diligence requirements as specified.
Clarified the prohibition on hedging of the material net interest required to be retained under the risk retention requirements; clarified that there is no need for risk retention in relation to securitisations of own liabilities (e.g., own issued covered bonds).
Incorporated a new rule which is similar to the cooperation requirement in PRIN 11.
FCA, PRA plan to consult on further changes to securitisation rules Q4 2024/Q1 2025.
Instrument makes changes to the FCA Handbook to transfer the largely preserved firm facing requirements of the UK Securitisation Regulation (UK SR) to the FCA Handbook and bring clarity to a targeted number of provisions of the UK SR.
At a later stage, the FCA intend that their second consultation will have a broader remit for policy change, including a review of the reporting regime; the instrument comes into force on Nov. 1, 2024; feedback is published in policy statement above.
