New UK securitisation regulatory regime to come into force on 1 November

Harjeet Lall of Pinsent Masons was commenting after the UK government made a commencement order in the UK parliament that confirms that reforms to the UK’s securitisation regulatory regime will come into force on 1 November.

Current UK securitisation regulatory rules are set out in UK legislation originally introduced to implement EU legislation and which was retained on the UK statute book at the point of Brexit. The previous UK government subsequently pushed forward with reforming UK financial services regulation to streamline requirements and change the entire model by which financial services regulation rooted in retained EU law – such as in relation to securitisation – is made, so that the rules in those areas could be more easily adapted over time by UK regulators.

The effect of the commencement order is that, as of 1 November, the EU-derived securitisation regulation will be revoked in the UK. In its place will sit the UK Securitisation Regulations with detailed rules set out in two regulatory rulebooks – one belonging to the Prudential Regulation Authority (PRA) and the other belonging to the Financial Conduct Authority (FCA). The regulators widely consulted on their new rulebooks and finalised policy guidance in April 2024, in anticipation of the move to the new regime.

“Financial institutions complying with their Article 5 due diligence requirements and originators of securitised exposures will now need to comply with the new FCA and PRA rules, as applicable, under the new UK securitisation regulatory framework once this comes into force on 1 November 2024,” Lall said.

‘Grandfathering’ provisions have been built into the new UK securitisation framework to allow securitisation transactions that close prior to 1 November to be governed by the ‘old’ regulatory regime. The position will, however, be different for transactions completed on or after 1 November, and Lall said it is possible that market participants will see growing divergence between the UK and EU securitisation regimes over time.

Further divergence may particularly now be expected following the publication on 10 October of the anticipated consultation by the European Commission on the functioning of the EU securitisation framework. The scope of the consultation has been broader than anticipated in parts, and may mean more significant amendments are on the table in a bid to revive the European securitisation market after the consultation closes in December 2024.

“After 1 November, market participants will need to consider structuring transactions cautiously to the extent transactions are intended to comply with both the UK and EU securitisation regulations,” Lall said. “There may be some benefits from the perspective that in relation to NPE securitisations, it would be possible to structure the retention of the material net economic interest on the basis of the non-refundable purchase price discount to be used to calculate the size of the retained interest and comply with both the EU and UK securitisation regimes.”

“However, the concern with regulatory divergence will continue to grow given the FCA and the PRA plan to consult on further changes to the UK securitisation framework later this year or early 2025,” she added.