We covered the PRA consultation a fortnight ago (see “UK Securitisation: jam today, and tomorrow”). The FCA’s 7 August 2023 consultation is consistent with the PRA’s (the two consultation papers themselves have been independently written, but the FCA reassures us that it and the PRA “have co-ordinated their approach… to create a coherent framework”). It weighs in at a very bonny 707 pages, because its new draft rules contains all the reporting templates. Its proposals are the same as the PRA’s as regards all of the below (and so we will not repeat what we said a fortnight ago):
- broadly adopting the existing regime
- a more principles-based and proportionate approach to due diligence
- risk retention
- disclosure “before pricing”
- tweaks relating to restrictions on resecuritisations, the delegation of investment management decisions, cherry-picking, etc.
In terms of policy content, there are additional provisions, not in the PRA consultation, about homogeneity (because STS falls within the purview of the FCA) and a “discussion” about public vs private securitisations, which sets the scene for the forthcoming second consultation paper.
As regards homogeneity, the FCA proposes (as has the EBA in its draft homogeneity RTS) that loans to certain corporates will be treated as homogeneous with loans to individuals if the relevant underwriting approaches and servicing procedures are similar, plus some minor clarifications about homogeneity. It emphasises that mixed pools of owner-occupied and BTL mortgage loans will generally not be homogeneous, since they have different underwriting or servicing procedures.
As for public and private securitisations, so as not to pre-empt the forthcoming consultation on the reporting regime, it limits itself to discussing its approach to definitions. In para 7.6 it identifies two “potential issues with the current framework”:
“To be considered as public, the UK SR requires securitisations to be listed on a UK regulated market. A number of UK securitisations - those where the originator, sponsor or SSPE are located in the UK - have tended not to seek admission to trading in the UK. Instead, they have sought admission to regulated markets elsewhere and, predominantly, those in the EU. As a result, and since Brexit, the number of UK public securitisations has decreased. We note in particular that the number of private STS securitisations on our website has increased markedly, and, prior to Brexit, most would have qualified as public securitisations. Further, as outlined in the Treasury Review, some UK securitisations with characteristics akin to public transactions are not captured by the definition because they are listed on non-regulated markets, such as Euronext’s Global Exchange Market (GEM), a multilateral trading facility (MTF) in Ireland, and continue to be largely listed there”;
“Industry feedback suggests that current reporting requirements for transactions (especially private ones) may not always be proportionate, and the information reported is not always useful to investors. This is partly because the legal definition of a securitisation is broad and includes transactions which go beyond well-understood securitisation transactions, such as traditional residential mortgage-backed securities (RMBS). More bespoke transactions such as private asset financings with a low number of investors – often only one investor - fall under the same definition”.
This emphasises a central point i.e. how the wide definition of “securitisation” is a trap for the unwary. The FCA says, promisingly, that it wants a more proportionate disclosure regime for private issues, which bodes well for unsuspecting lawyers who are not securitisation specialists, because most accidental securitisations – such as some loan on loan transactions - are private issues.
The FCA is inclined (see para 7.13) to expand the definition of “public securitisation” to cover not only primary listings on UK or “appropriate equivalent non-UK” markets but also “primary admissions to trading on an appropriate UK MTF and similar non-UK venues, where there is at least one UK manufacturer” – and the GEM is probably particularly in its sights, which would presumably mean full Article 7-level disclosure on prescribed templates for issues listed on that.
Annex 4 contains a useful table showing derivations and changes from the existing UKSR.
The consultation closes on 30 October 2023, and implementation is expected in Q2 of 2024.