Reed Smith In-depth

Revising the UK’s legal framework governing securitisations was identified as a priority in the government’s so-called Edinburgh Reforms announced in December last year. The government has published a near final draft statutory instrument (Final Draft SI) setting out the high-level framework and granting the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) rule-making powers to flesh out the detail of the new regime. The PRA and FCA have each recently consulted on the proposed rules they wish to make, and the approaches taken are unsurprisingly broadly consistent. The Final Draft SI, together with the proposed PRA and FCA rules, for ease are referred to below as the Draft Rules. The requirements set out in the Draft Rules do not represent a major departure from the existing regime contained in the UK Securitisation Regulation (the retained law version of the EU Securitisation Regulation). However, there are a number of targeted amendments, many of which are welcome, especially when seen in the context of potentially generating greater deal flow.

Authors: Romin Dabir Nathan Menon Bethan Harris

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Some key changes to the existing regime include a more unified approach to due diligence requirements for UK and non-UK securitisations, improved clarity surrounding the timing of disclosures in the context of the issue of securities, and a more principles-based approach generally (and particularly with respect to risk retention). Potentially less welcome is the proposed extension of the regime to entities that were not previously covered by the rules and proposed changes to the definition of a “public securitisation”, which could result in greater disclosure for certain issuances.

1. What changes have been made to the due diligence requirements for investors in securitisations?

The Draft Rules propose that UK institutional investors in UK and non-UK securitisations will be able to adopt a unified approach in terms of verifying the disclosures made by the sell-side parties on the transaction. The more principles-based and proportionate approach will require UK institutional investors to verify that:

  • sell-side parties have provided sufficient information to enable the investors to independently assess the risk of holding the securitisation position;
  • they have received at least the information listed in the rules (for example, offering and marketing materials, and information on the transaction documents and legal structure); and
  • they have a commitment from sell-side parties to continually provide further information (for example, investor reports and material information or significant change reports).

While UK sell-side parties will still be required to provide reporting information in a prescribed template, this change will mean that UK institutional investors will be able to invest in non-UK securitisations without requiring sellers to provide information in a prescribed template provided that the above requirements are satisfied in substance.

The Draft Rules also clarify that, where investment management has been delegated to another institutional investor, the delegate is responsible for any failure to comply with the due diligence requirements rather than the delegating party. This has removed an area of ambiguity under the current regime.