As part of the Mansion House Package of reforms, HM Treasury (HMT) has published a policy note and draft statutory instrument confirming the changes it will be making to the UK Securitisation framework.  This includes confirmation that the UK will narrow the scope of the institutional investor definition to exclude non-UK AIFMs, removing an important area of uncertainty for non-UK AIFMs seeking UK investors.

In addition, the FCA will be empowered to tailor new rules for due diligence, retention, reporting and many other key requirements to improve the ability of UK managers and their clients to invest in global securitisation products. We have been working with the FCA to highlight the professional nature of the hedge fund industry and where more flexible treatment of securitisation would be beneficial. This includes permitting asset managers to become sponsors of securitisations and supporting the development of a mid-market securitisation product.  This would recognise the growing role of private credit fund managers in financing the economy and further expand the role of capital markets in supporting the UK economy.

Key changes included in the draft SI are as follows:

Regulatory perimeter: Provision of securitisation (‘sell-side’):

• The SI designates specific activities as designated activities under the Designated Activities Regime (DAR) for providing securitisations, including acting as an originator, sponsor, original lender, or SSPE, as well as selling securitisation positions to UK retail clients.
• The FCA is granted rulemaking powers for these activities, while the PRA will make rules for certain areas for PRA-authorised firms. The SI introduces a new power of direction for the FCA to direct authorised and unauthorised firms in case of rule breaches.

Regulatory perimeter: Investment in securitisation (‘buy-side’):

• The SI introduces due diligence rules for institutional investors when investing in securitisations. Small, registered UK AIFMs who are institutional investors will have specific due diligence requirements.
• The scope of the institutional investor definition is narrowed for UK due diligence requirements, specifically for UK authorised AIFMs, addressing concerns about extraterritorial problems.

Due diligence requirements for Occupational Pension Schemes (OPS):

• The SI restates and amends due diligence requirements for OPS investing in securitisations, with some reforms to make them clearer and principle-based.
• OPS will need to verify sufficient disclosures and commitments from originators, sponsors, or SSPEs for assessing risks.
• The SI clarifies the responsibility for failure to comply with due diligence obligations in scenarios of delegation, imposing sanctions on the managing party rather than the delegating party.

Prohibition on establishing Securitisation Special Purpose Entity (SSPEs):

• The SI prohibits originators, sponsors, and institutional investors from setting up SSPEs in jurisdictions considered high-risk or non-cooperative by the Financial Action Task Force or lacking effective tax information exchange agreements with the UK.

Framework to recognise STS-equivalent non-UK securitisations:

• The SI grants HMT the power to designate jurisdictions as STS-equivalent for non-UK securitisations, ensuring they receive the same treatment as UK STS securitisations in terms of capital requirements.
• Amendments to definitions in various regulations, including CRR, SII, MMFR, and EMIR, are restated in the SI to incorporate the capital, liquidity, investment vehicle holding, and clearing obligation benefits for recognizing STS-equivalent non-UK securitisations.

Repealed without replacement:

• Provisions that do not align with the Smarter Regulatory Framework will be repealed, including TPR's responsibility to supervise OPS compliance with Sec Reg requirements.
• Requirements for regulators to monitor risks, as stated in Article 30 of the Sec Reg, will be repealed, as the FCA and the PRA already have appropriate monitoring arrangements in place.

Areas to remain unchanged:

• Requirements for originators and/or sponsors of STS securitisations to be established in the UK for STS designation will be maintained.
• The regulatory regime for Securitisation Repositories (SRs) and Third-Party Verifiers (TPVs) will be maintained, with TPV authorization now referred to as 'registration.'

HMT considers this a near final version of the SI; technical comments can be submitted until 21 August 2023.

For further information please contact Nicholas Smith ([email protected])