On 30 April 2024, the Financial Conduct Authority (FCA) published Policy Statement PS24/4, in which it sets out its final rules relating to securitisation and summarises feedback to its earlier consultation for the UK securitisation markets (CP23/17). CP23/17 was published broadly in parallel with PRA Consultation Paper CP15/23. The PRA has published Policy Statement PS7/24 also in parallel with PS24/4.

Background

Most firm-facing provisions of the UK Securitisation Regulation (UK SR) will be set out in the FCA Handbook and Prudential Regulation Authority (PRA) Rulebook as part of the repeal and replacement of retained EU law. The FCA published CP23/17 in August 2023, outlining the proposed rules that will go into its Handbook to replace the firm-facing provisions from the UK Securitisation Regulation.

The FCA’s approach was to largely preserve the relevant requirements of the UK SR along with some proposed targeted policy changes. In addition to the transfer of UK SR provisions into the Handbook, the FCA consulted on rules to:

  • Clarify what kind of information UK institutional investors require to fulfil their due diligence obligations.
  • Amend and clarify risk retention provisions, with particular reference to changes to facilitate non-performing exposure securitisation.
  • Clarify that in certain circumstances where an institutional investor instructs a managing party to fulfil any of its due diligence obligations, only the managing party and not the delegating party would be responsible for any failure to comply with the relevant obligation.
  • Make a number of clarificatory changes to other areas of the regulation based on market feedback, such as the geographical scope of the UK SR and the criteria for homogeneity in simple, transparent and standardised (STS) securitisations.
  • There was also a discussion chapter as part of the FCA’s consultation, which sought views from respondents on an alternative definition of public and private securitisations but did not put forward any policy proposals. The FCA indicated that it would consider the feedback before consulting on a new definition as well as changes to the associated disclosure templates.

The final rules

In response to the feedback received to CP23/17, the FCA has made some changes to its original proposals including:

  • Allowing for a 6-month period between publication of PS24/4 and the implementation date for the new rules.
  • Adding transitional provisions for pre-implementation securitisations which broadly preserve their treatment under the existing framework.
  • Clarifying the meaning of ‘before pricing’ in the due diligence, transparency and STS requirements.
  • Adjusting the due diligence requirements for secondary market investors in relation to disclosures made by manufacturers.
  • Clarifying that it is possible for a UK institutional investor to delegate its due diligence to another investor, which is not a ‘managing party’ as defined for purposes of the Securitisation Sourcebook, so long as the institutional investor retains the responsibility for compliance with the due diligence requirements as specified in the FCA rules.
  • Clarifying the prohibition on hedging of the material net interest required to be retained under the risk retention requirements.
  • Clarifying that there is no need for risk retention in relation to securitisations of own liabilities (e.g., own issued covered bonds).
  • Incorporating a new rule which is similar to the cooperation requirement outlined in PRIN 11 (Relations with regulators).

PS24/4 also highlights that the changes outlined do not materially impact the analysis of the interaction between its proposals in CP23/17 and the FCA’s statutory objectives, however it has updated its analysis in light of the changes.

By making the policy changes set out in PS24/4, the FCA is aiming to make the UK SR more proportionate; to remove barriers to the issuance of, and investment in, securitisations; to implement such proposals while maintaining appropriate protections for investors and with as minimal additional regulatory and operational cost upon impacted firms as is possible; and to provide a clearer framework within which the market can operate.

Next steps

Following a request from some respondents to CP23/17 for a 6-month implementation period to give market participants more time to prepare before the final rules come into place, the FCA, the PRA and HM Treasury have decided on an implementation date for the FCA and PRA rules of 1 November 2024 (6 months after the publication of PS24/4), subject to the revocation of the UK SR and related technical standards.

The FCA and the PRA also plan to consult on further changes to their securitisation rules in Q4 2024 / Q1 2025, although timings are potentially subject to change. The second consultation would review the definition of public and private securitisations and the associated reporting regime, amongst other areas for policy consideration. Any potential changes would aim to make the reporting regime more proportionate, and the FCA also plans to consider enhancing ESG reporting as part of this review.