Securitisation Regulations 2024

Policy Background

The Securitisation Regulations 2024 (the “Regulations”) are a pivotal part of the UK government’s broader initiative to establish a “Smarter Regulatory Framework” for financial services, tailored specifically for the UK in the post-Brexit era. This initiative is driven by the Financial Services and Markets Act 2023 (“FSMA 2023”), which aims to replace retained EU law with UK-specific regulations. The Regulations, which repeal and replace the previous UK Securitisation Regulations 2017 (the “2017 Regulations”), now delegate considerable rule-making power directly to the FCA, PRA and Treasury. This regulatory overhaul is intended to foster a more agile and efficient securitisation framework in the UK.

Regulations in force from 30 January 2024

Certain limited provisions of the Regulations came into force from 30 January 2024, providing a foundation for the new regulatory framework and empowering the Treasury, FCA and PRA to make rules and provide guidance. These are:

1. “Designated Activities” (Part 2 of the Regulations)

The regulations specify the following securitisation activities as “designated activities” under the Financial Services and Markets Act 2000:

• Acting as an Originator: Engaging in the initial creation of securitisation receivables or the purchase of receivables to be securitised.
• Acting as a Sponsor: Taking responsibility for managing or overseeing securitisation transactions.
• Acting as an Original Lender: Providing the original loans or credits that are subsequently securitised.
• Acting as a Securitisation Special Purpose Entity (SSPE): Operating as an entity specifically established to facilitate securitisation transactions.
• Selling a Securitisation Position to a Retail Client: Engaging in the sale of securitisation positions to retail clients located in the United Kingdom.

This designation empowers the Financial Conduct Authority (FCA) to create rules and to give directions to persons or groups of persons in connection with such rules. However, the FCA must consult with the PRA before creating rules or giving directions affecting PRA-regulated entities.

Further, the Regulations prevent the FCA from imposing requirements on PRA-regulated entities in respect of the following activities (except in connection with STS securitisations):

• due diligence in relation to any securitisation;
• risk retention or selection of assets;
• provision of information in respect of a securitisation;
• the inclusion of securitisation positions in the underlying exposures that may be used in a securitisation; and
• activities relating to how credit is granted for the assets that will be included in a securitisation.

2. “Matter to which the FCA and PRA must have regard when making rules relating to securitisation” (Regulation 8)

 Regulation 8 of the Regulations outlines the matters that the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) must consider when making rules related to securitisation. Specifically, the Regulation requires that the FCA and PRA have regard for “the coherence of the overall framework for the regulation of securitisation”.

This regulation applies to the FCA’s power to make designated activity rules (outlined above), as well as its broader rule-making powers under the Financial Services and Markets Act 2000. Similarly, it applies to the PRA’s rule-making powers under the same Act.

3. Overseas STS Regime (Regulation 13)

Regulation 13 of the Regulations closely follows the amendments made by FSMA 2023 to the 2017 Regulations by conferring on the Treasury the power to designate non-UK jurisdictions as equivalent for the purposes of overseas Simple, Transparent, and Standardised (“STS”) securitisations. This means that securitisations from these designated jurisdictions can be treated similarly to UK STS securitisations, with the intention of facilitating cross-border transactions and promoting the UK as a global hub in the securitisation market.

Changes to the rules

The regulators implemented certain industry feedback into their final documents following consultation responses (both published in April 2024) [1], introducing several welcome changes and ultimately updated their respective rulesets, with the new rules effective as of 1 November 2024 (the “Main Commencement Day”) [2]. Broadly, the FCA and PRA both opted to preserve the positions established in the 2017 Regulations, save for several targeted updates, notably including:

• Disclosure Timing: Wording regarding timing of disclosures and due diligence has been updated to refer to the timing of a commitment to invest as an alternative to pricing. This is more appropriate for private securitisations and secondary market transactions.
• Hedging Against Retained Risk: Hedging retained credit risk is permitted if undertaken prior to the securitisation as part of prudent risk management and does not create a favourable position in respect of credit risk for the risk retainer over securitisation investors.
• Change of Retainer: Risk can now be transferred to a new retainer in the event of the original risk retainer’s insolvency.
• Due Diligence for Institutional Investors: UK Institutional Investors no longer need to require disclosures to take specific formats provided that focusing on sufficient information to assess investment risk is provided. Note that this provides flexibility to UK investors in overseas securitisations as UK securitisations must still provide disclosures using standardised templates.
• Delegation of Due Diligence: UK institutional investors can still delegate due diligence to any party but will now remain responsible for compliance unless the delegation is to another UK institutional investor regulated by the FCA or PRA.
• Sole Purpose Test: The UK rules now specify factors to be considered when assessing whether an originator acts solely for securitisation (and therefore cannot act as risk retainer), differing from the previous requirement for all criteria to apply.
• Risk Retention for NPE Securitisations: Retention calculations for non-performing exposures can now be based on purchase price (rather than the nominal value of exposures), but UK rules do not allow the servicer to act as risk retainer.
• Secondary Markets: The new rules now also distinguish between primary and secondary market investors, relaxing the requirement for secondary market investors to verify pre-pricing information.
• Permissions and Waivers: The FCA and PRA can grant waivers to rules, though it remains unclear how and when these powers may be exercised in practice.

These changes to the draft policy statements were largely thought to have been well-received by the markets.

What changes took effect on 1 November 2024?

On the Main Commencement Day, all of the Regulations came into full force. As a result, the 2017 Regulations were repealed in their entirety and replaced by the rulesets published by the FCA and PRA, including the changes outlined above and bringing, most notably, the following into effect:

1. Restriction on establishment of a securitisation special purpose entity (Part 3A of the Regulations)

The Securitisation (Amendment) Regulations 2024/705 added an additional obligation for originators and sponsors to ensure that any SSPE is not established in a “high-risk jurisdiction” (as listed by the Financial Action Task Force). This is now contained within Part 3A of the Regulations.

2. STS Securitisations (Part 4 of the Regulations)

Previously, the specific criteria that securitisations had to meet to be classified as STS were set out in the 2017 Regulations. The new Regulations delegate this power to the FCA and are now found in the FCA Sourcebook (SECN 2). Notably, the Regulations delegate the power to make rules regarding STS criteria to the FCA only, including for PRA-regulated entities, without a duty to consult with the PRA.

The Regulations specify the procedures for notifying the Financial Conduct Authority (FCA) when a securitisation meets the STS criteria and for the process by which a securitisation can be removed from the STS list if it no longer complies with the criteria. They also provide that the following securitisations can use the “STS” designation:

• “Overseas STS securitisations”, where a securitisation is registered in a jurisdiction designated by the Treasury pursuant to regulation 13 (as explained above)
• “grandfathered” EU STS securitisations that are registered with the ESMA prior to 31 December 2024.

3. Regulators to make rules regarding due diligence requirements of institutional investors (Part 7 of the Regulations)

This regulation similarly provides that the FCA and PRA can now apply their own discretion to amend or vary the rules without requiring a new statutory instrument. The rules set out by the FCA and PRA remain broadly the same as under the 2017 Regulations, other than as referred to in 'Changes to the rules' above. The rules explaining the due diligence requirements for institutional investors are contained within SECN 4.2 (for FCA-regulated entities) and at part 2 of the PRA Rulebook (Securitisations) (for PRA-regulated entities).

The Future of the Securitisation Framework

While delegating rule-making responsibility should allow for a more agile environment, the departure from the on-shored EU position adopted by the 2017 Regulations casts some doubt on the long-term harmonisation of the EU and UK standards. At the time of publication, the European Commission is undertaking a “targeted consultation on the functioning of the EU Securitisation Framework”, which is due to close on 4 December 2024 and seeks feedback on fundamental aspects of the EU securitisation regime, including (i) due diligence requirements; (ii) transparency; and (iii) the STS regime. The outcome of this consultation may result in further regulatory divergence between the EU and UK regimes.

Furthermore, the UK regulators are planning an additional review of the rules (forecast to take place in early 2025), which is anticipated to include a review of the distinction between public and private securitisations and a review of reporting requirements, including potentially augmenting ESG reporting requirements. These amendments may also result in an increased gap between securitisation standards either side of the channel, meaning those sponsors, originators and investors engaging or investing in cross-border securitisations will need to ensure compliance with potentially divergent regulations.

Reach out to our top-ranked Securitisation team to make sure you stay ahead of the latest developments and find out how we can help your business navigate the new regulatory environment.

Authors: Mark Thomas (Partner), Hugo Khan (Associate)

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[1] FCA Policy Statement: PS 24/4: Rules Relating to Securitisation
PRA Policy Statement: PS 7/24 – Securitisation: General Requirements

[2] PRA Rulebook: Securitisation | Prudential Regulation Authority Handbook & Rulebook
FCA Securitisation Sourcebook: The Securitisation Sourcebook

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2024. Specific advice should be sought for specific cases. For more information see our terms & conditions.