The Securitisation Regulations 2024 were published in January (the “Regulations”).

The Regulations were then amended by a set of amending Regulations in April this year, which introduced changes specifically applying to occupational pension schemes (albeit those amending provisions are on the whole not yet in force – see below). 

Two weeks ago a further set of amending Regulations, the Securitisation (Amendment) (No. 2) Regulations 2024, were published in draft by HM Treasury.

This is all well and good but what are these Regulations and why do they keep being mentioned in the context of occupational pension schemes? 

Ahead of the key provisions of the Regulations coming into force on 1 November, we look at why occupational pension schemes should be aware of them and the key obligations under them for trustees / managers. Action should be taken just now to confirm whether their pension schemes currently have, or are considering, any investments in securitisations and, if so, to establish whether the Regulations apply to their scheme.

Background

At a very simplistic level, securitisation is the process by which certain types of assets are pooled so that they can be repackaged into interest-earning securities.

The Regulations were first published in draft back in July 2023 and the final version of them did not change much from that draft, other than carving out occupational pension schemes which were then addressed in the first amending regulations. 

The Regulations are part of the UK’s efforts to establish a “smarter regulatory Framework” for financial services and “to replace areas of retained EU law in financial services with an approach to regulation that is tailored properly to the UK. That includes the EU law relating to securitisation”.

The Regulations replace the UK Securitisation Regulation and form part of the UK’s new securitisation framework alongside the rules contained in the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) rulebooks which give both financial services regulators powers to make new rules for securitisation.

At a very simplistic level, securitisation is the process by which certain types of assets are pooled so that they can be repackaged into interest-earning securities. 

What do the Regulations do?

Most of the key provisions of the Regulations will come into force on 1 November 2024.

At a high level, the Regulations specify certain securitisation activities as “designated activities” for the purposes of the Financial Services and Markets Act 2000 and confer powers on the FCA to make rules and give directions in relation to these activities. The activities are acting as an originator, sponsor, original lender or securitisation special purpose entity in a securitisation and selling a securitisation position to a retail client in the United Kingdom.

The Regulations specify the coherence of the overall framework for the regulation of securitisation as a matter to which the FCA and the PRA must have regard when making rules relating to securitisation.  Our Financial Services colleagues have just published a blog about the Regulations which explains their purpose in more detail.

Why are the Regulations relevant to pension schemes?

Occupational pension schemes are also subject to securitisation due diligence rules. 

However, the Regulations did not initially bring occupational pension schemes into the new framework. But, as mentioned above, the first set of amendments to the Regulations inserted a provision preserving what was the previous law (under the previous UK Securitisation Regulation) regarding due diligence by occupational pension schemes in relation to securitisation. These rules broadly align with those applicable to entities regulated by the PRA and FCA. 

The due diligence requirements for occupational pension schemes are now set out in Part 7 of the Regulations. The requirements had to be set out in regulations because the Pensions Regulator (TPR) does not have rule-making powers.

Broadly, trustees or managers “must at least establish appropriate written procedures that are proportionate to the risk profile of the securitisation position” and must undertake a number of other detailed diligence, monitoring and checking requirements in relation to securitisations. These due diligence requirements may be delegated but, unless the delegate is a relevant authorised party (i.e. authorised by the FCA or the PRA), the trustee or manager retains responsibility for compliance with the due diligence rules. 

Who will enforce compliance by occupational pension schemes with the Regulations? 

Whilst there were previous indications from HM Treasury when the Regulations were in draft form, that the FCA would carry out monitoring of occupational pension schemes’ compliance with the due diligence obligations under the Regulations, it seems that it is intended that TPR will fulfil that function, which would seem more logical.

The Regulations (as amended by the April amending regulations) now provide that:-

“….. The Pensions Regulator must maintain arrangements designed to enable it to determine whether trustees or managers of occupational pension schemes are complying with the requirements of regulations 8A(2), 32B and 32C.

….The Pensions Regulator must also maintain arrangements for enforcing compliance by trustees or managers of occupational pension schemes with those requirements.”.

TPR does not currently have any specific guidance in place in relation to these requirements nor has it confirmed its position in relation to the Regulations and its duties under them (there is nothing, as far as we can see, on TPR’s website mentioning these obligations for occupational pension schemes or indeed its role in monitoring compliance with them). We are aware within the industry that clarification has been sought from TPR of its understanding of its role in monitoring compliance of these securitisation requirements. 

Comment

We would recommend that trustees and managers of occupational pension schemes consider whether they currently have, or are considering, any investments in securitisations and that they discuss with the scheme’s investment advisers as appropriate, to establish whether the Regulations apply to their scheme. If the Regulations do apply, trustees or managers will need to ensure compliance with the onerous due diligence requirements (or alternatively delegate those obligations to their investment adviser, assuming they are appropriately authorised).

If you have any questions about this article, please do not hesitate to contact your usual Burges Salmon pensions contact or our pensions partner, Clive Pugh.  

 This article was co-written by Charlotte Colvin, Mairi Carlin and Clive Pugh. It is current as of 29 October 2024.