UK Treasury Proposes Changes to UK Securitization Framework as Part of Financial Services Reform | Morgan Lewis

Recently announced UK financial services reforms include proposals to make significant changes to the framework under which UK securitization is regulated. An illustrative draft legal instrument and explanatory guidance indicate that many of the requirements applicable to securitisations are likely to be managed by the UK financial services regulators’ rulebooks rather than regulation.

BACKGROUND

On December 9, 2022, the UK Chancellor of the Exchequer announced a series of reforms known as the Edinburgh Reforms, designed to boost the growth and competitiveness of the UK financial services sector. The aim is to create a more flexible and responsive regulatory framework for the UK after Brexit. The Edinburgh reforms include a reform of the earmarking requirements for banks, the repeal and replacement of the Solvency II regime for insurance companies and an overhaul of the UK prospectus regime. The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) – the main financial services regulators in the UK – have as a secondary objective the promotion of growth and strengthening the UK’s international competitiveness.

The announcement of the Edinburgh reforms follows the Financial Services and Markets Act (the FSM Act) making its way through the UK Parliament (it is currently on a second reading in the House of Lords, having passed the Commons and is expected to be finalized by Spring received royal assent in 2023). The FSM Law will repeal retained EU law relating to financial services and markets. In addition, a new regime for named activities will be introduced which will allow regulators to make certain rules in relation to certain named activities relating to UK financial markets and exchanges and financial instruments, products and investments issued or sold to or by persons in the UK .

After the end of the Brexit transition period on 31 December 2020, the EU Securitization Regulation (Regulation (EU) 2017/2402) was incorporated into UK law and then amended by UK regulations to ensure it works effectively in the United Kingdom. Regulation (EU) 2017/2402, as incorporated and amended into UK law, including the Securitization (Amendment) (EU Exit) Regulations 2019, is often referred to as the UK Securitization Regulation. Under the FSM Act, the UK Securitization Regulation and other related legislation will be repealed.

PROPOSED CHANGES TO THE UK SECURITIZATION FRAMEWORK

As part of the Edinburgh Reforms, HM Treasury (the Treasury) has published an illustrative draft legislative instrument, the Securitization Regulations 2023 (the draft SI), and an explanatory policy note (the Policy Note).

The policy note states that the Treasury Department is committed to working with the FCA and the PRA to advance the various reforms outlined in the Treasury Department’s December 2021 Review of the Securitization Regulation: Report and Call for Evidence Response. (the HMT report) have been identified. . This includes reforms in the following areas:

• Amendment of certain risk retention provisions, including in relation to the replacement of CLO managers holding the risk retention and in relation to securitisations of non-performing exposures, similar to the changes made under the EU Securitization Regulation
• Consideration of the definitions of public and private securitisations and disclosure requirements for private securitisations
• Clarification of due diligence requirements for UK institutional investors investing in non-UK securitisations
• Amending the definition of institutional investor in relation to certain non-UK resident alternative investment fund managers (AIFMs) to remove them from the scope of due diligence

The HMT report also included a proposal to introduce a regime to recognize securitisations issued by non-UK issuers as equivalent for the purposes of the UK’s Simple, Transparent and Standardized (STS) regime. This is to be implemented within the framework of the FSM law. The temporary recognition of EU STS securitisations has now been extended to the end of 2024.

The SI draft incorporates certain provisions of the UK Securitization Regulations, some in modified form. These include a number of definitions, restrictions on the formation of securitization special purpose vehicles in high risk countries, investor due diligence requirements for occupational pension schemes, provisions relating to securitization registers, provisions relating to STS equivalence, requirements for certain parties involved in the United Kingdom for STS securitizations and provisions relating to external reviewers.

However, it is intended that other key requirements currently in place under UK Securitization Regulations such as: B. Due diligence requirements for other institutional investors regulated by the FCA or PRA, risk retention requirements and transparency requirements will no longer be dealt with by regulation but will instead be set out in rules to be enacted by the FCA and PRA. Similarly, the UK STS criteria will be set out in regulations to be issued by the FCA.

The policy note indicates that most of the requirements are expected to remain in the FCA and PRA rules. The FCA and PRA are also expected to consider the various reforms identified in the HMT report.

The Policy Note makes it clear that the exact draft, design and format of the SI draft are not final and will evolve after the FSM Act comes into force.

The policy note also states that the FCA’s and PRA’s powers to set technical standards will be phased out over time as these form of legal instruments emerge from EU law. The content of the technical standards is dealt with in the FCA and PRA rules instead.

Separately, the PRA is expected to also consider the capital and liquidity treatment of securitisations.

NEXT STEPS

The Policy Note points out that the final version of the Draft SI will probably come into force in 2023 at the earliest. It also says the PRA and FCA intend to set out their detailed approach to the replacement rules, including any reforms, in consultations from 2023 onwards.

CONCLUSION

It is likely that there will be further regulatory differences between the EU and UK securitization regimes, although it remains to be seen to what extent the content of some of the key requirements will change. Market participants should welcome the increased flexibility and responsiveness that the revised approach to UK securitization rules should bring.

It will be important for those active in the UK securitization market to monitor further developments and consider possible consultations on more detailed proposals.

Morgan Lewis will be following this issue closely over the coming months.

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