This document is intended to serve as a quick reference guide and high-level summary of the position regarding some of the key issues of concern for practitioners under the new UK Securitisation Rules.
Please note that the relevant rules are complex and this summary is not designed to be comprehensive, should not be used as a substitute for reading the rules themselves and is not intended to be legal advice.
The new legislative framework:
- The previous UK Securitisation Regulation (“UK SR”) has been repealed and replaced with a set of new rules in the UK (“New UK Rules”) comprising:
- The New UK Rules apply to securitisation set up on or after 1 November 2024. For transactions entered into prior to this date, transitional provisions apply so that such securitisation will continue to be subject to the UK SR and not the New UK Rules.
- In terms of existing EU guidance, the PRA and FCA have confirmed that pre-Brexit EU guidance can still be used, provided that it has not been withdrawn or superseded. Some of the important clarificatory wording found in the recitals to the EU Securitisation Regulation (“EU SR”) has also been incorporated into the New UK Rules.
- Since the New UK Rules largely reflect the requirements of the UK SR, which in turn was derived from the substantially similar EU SR, they remain very similar to the requirements that apply in the EU.
- We have set out some of the key areas of interest below, including points of divergence between the new UK approach and the position in the EU. As mentioned, this summary is not comprehensive, but it is intended to flag the changes we consider are likely to be of greatest interest to practitioners.
Key points to note
A. Risk retention requirements
Circumstances where hedging the retained amount is permitted
- The New UK Rules now expressly permit hedging (including of credit risk) of the retained amount, where the arrangements in question were initiated prior to entry into the securitisation and were intended as a “prudent element of credit-granting or risk management”, and the hedging does not differentiate between the originator’s securitised and non-securitised credit risk.
Non-performing exposure (“NPE”) securitisation – permissible to use purchase price
- The New UK Rules (consistent with the EU position) confirm that it is possible to use the purchase price (rather than the nominal value) when calculating the 5% required retention amount for NPEs. However, this concession is only available where the securitisation is an “NPE securitisation” (i.e., where the relevant portfolio subject to the securitisation comprises at least 90% NPEs).
Differences in formulation of sole purpose test for originators
- The New UK Rules reference certain factors that must be “taken into account” when assessing whether an originator has been established and is operating for the “sole purpose” of securitising exposures (and therefore is precluded from acting as a risk retainer). These factors include the extent to which the originator has material other assets and business beyond the securitisation and related risk retention, and whether it has adequate decision-making and corporate governance arrangements in place. This may be favourable for originators as these factors need only be “taken into account”.
- The equivalent EU test instead refers to whether the securitisation and the business comprise the originator’s “predominant source of income”. This is potentially a more difficult hurdle to overcome, particularly in circumstances where the originator has taken on significant leverage that would need to be serviced mainly from sources of revenue outside of the securitisation to satisfy the test.
- Rather than referring to factors that must be taken into account, the EU rules refer to these elements as facts which, if they are all present, would mean that the originator is not a sole purpose originator.
- The slight divergence of approach between the EU and the UK tests is unlikely to pose any material difficulties since, in practice, most originators are able to satisfy either of these formulations.
Change of risk retainer on insolvency
- The New UK Rules state that it is permissible to change the risk retainer on the insolvency of that entity. However, it does not appear that a change of risk retainer would be permitted in any other circumstances.
B. Due diligence and disclosure requirements
Permitted delegation of due diligence obligations
- While an investor that is subject to the due diligence obligations may delegate to a person that is not, the New UK Rules confirm that such delegation does not relieve the investor of responsibility for complying with the rules.
Disclosure templates
- UK institutional investors will no longer require disclosure templates to be produced. Instead, they will only need to ensure that certain prescribed information has been provided, regardless of format.
- However, where there is a UK sponsor, originator or securitisation SPV involved, those entities would still need to produce the disclosure templates.
Timing of provision of initial information
The New UK Rules clarify that the initial information prescribed by their transparency requirements is to be provided “at pricing” in the case of public transactions, and at the time of the “[original] commitment to invest” in the case of private transactions. This is helpful in that it clarifies the position as regards private transactions where there is no acknowledged pricing date (and is, in any case, consistent with current market practice).
Client Alert 2024-234
