On 30 April 2024, the FCA and PRA published the UK’s new securitisation rules (the “New Rules”). These are firm-facing rules contained in the FCA’s Policy Statement PS24/4 and the PRA’s Policy Statement PS7/24 and are set to come into force from 1 November 2024. The New Rules will apply to a range of market participants involved in securitisation transactions, including UK originators and sponsors (“manufacturers”), Securitisation Special Purpose Entities (SSPEs), institutional investors and third-party service providers who are authorised and regulated by the FCA and PRA.

The New Rules form part of the UK Government’s ‘Smarter Regulatory Framework’ (the “SFR”); replacing ‘assimilated’ (formerly ‘retained’) EU legislation with new, domestic rules set by the UK’s financial services regulators (for more information about the SFR, please see our blog post here). While much of the assimilated EU legislation has been preserved under the New Rules, there are some key points to be aware of, including: 

Risk Retention for non-performing exposures securitisations: 

The New Rules clarify and adjust the risk retention requirements for non-performing exposures (NPE) securitisations where there is a non-refundable purchase price discount. In particular, the New Rules introduce a new calculation for retention requirements for NPE securitisations which is based on the purchase price rather than the nominal value of exposures (and brings the UK into line with the EU).

 Eligible Risk Retainer:

The Sole Purpose Test (used to determine whether an originator is eligible to act as the risk retainer) has been adjusted such that the factors under the test are regarded as considerations rather than mandatory requirements which must be complied with. The considerations include whether the entity has a broader business, whether the management body has the necessary experience, and whether the entity has adequate corporate governance arrangements. 

Hedging of Credit Risk:

The New Rules expressly permit the hedging of credit risk of retained exposures where it was undertaken prior to the securitisation and was entered into as a prudent element of the original credit granting or risk management.  

Investor Due Diligence:

Whilst sell-side parties in UK securitisations are still required to disclose information on prescribed templates, under the New Rules, a more principles-based approach to investor due diligence has been adopted. The New Rules provide that investors must have received information sufficient to assess the risk of holding the securitisation position with no requirement that the information is provided via a templated format. This will be particularly welcomed by UK investors looking to invest in cross border securitisations, where disclosure may be presented in differing formats and represents a welcome contrast to the more stringent approach taken under the EU regulations. 

“Private” vs “Public” Securitisations: 

The New Rules have not altered the distinction between “private” and “public” securitisations or changed the balance of associated reporting obligations. This topic will be revisited as part of future consultations on the UK regime, scheduled for Q4 2024/Q1 2025.

We will continue to follow the implementation of the New Rules and provide further updates in due course. The easiest way not to miss an update is to subscribe to our regular financial services regulation updates which you can do here. You can meet our financial services regulation team here and our securitisation and structured finance team here.