Overview

On 27 July 2023, the Prudential Regulation Authority published Consultation Paper 15/23 – Securitisation: General requirements (the PRA CP).¹ The PRA CP sets out the PRA's proposed rules to replace those retained EU Securitisation Regulation rules that apply to PRA-authorised persons within the UK Securitisation Regulation and related risk retention and disclosure technical standards.

Further, the PRA CP also covers:

• adjustments to the scope of PRA supervisory statement (SS) 10/18 – Securitisation: General requirements and capital framework; and
• the circumstances in which the PRA envisages using a new power under section 138BA of the FSMA for disapplying or modifying proposed rules on the use of re-securitisations.

Key Developments

The PRA proposals contained in the PRA CP look to largely restate those currently required under the UK Securitisation Regulation, the Risk Retention Technical Standards and the Disclosure Technical Standards, with the PRA suggesting "targeted adjustments" as follows:

• Clarification of the person scope of requirements on manufacturers² – the PRA has suggested revised wording to make it clear that the application of Articles 6 to 9 of the UK Securitisation Regulation will capture, in addition to PRA-authorised Capital Requirements Regulation (CRR) firms and Solvency II firms, one-off securitisations by PRA-authorised non-CRR firms and non-Solvency II firms, given that there is currently some ambiguity in the current UK Securitisation Regulation if they do not manufacture securitisations "as a regular occupation or business activity". Section 2 of Supervisory Statement 10/18 sets out supervisory expectations for PRA-authorised CRR firms and Solvency II firms in relation to their arrangements, processes and mechanisms for compliance with the UK Securitisation Regulation. The PRA proposes to extend the scope of these expectations to also include PRA-authorised non-CRR firms and non-Solvency II firms.
• Adjustments to due diligence requirements in relation to manufacturers' disclosures – the PRA has suggested a more "principles-based approach to due diligence obligations on PRA-authorised institutional investors in relation to disclosures by manufacturers" with the objective of making requirements more proportionate and to facilitate international competitiveness.
  • Currently, under the UK Securitisation Regulation, there is a distinction between the due diligence requirements for UK securitisation transactions (Article 5(1)(e) – i.e. UK institutional investors to verify whether UK manufacturers have made available the information required by Article 7 in accordance with the frequency and modalities provided for in that Article) and for non-UK securitisation transactions (Article 5(1)(f) – i.e. UK institutional investors in securitisation positions to verify whether non-UK manufacturers have made available information which is "substantially the same" (and with substantially the same frequency and modalities) as that which would have been made available by UK manufacturers under Article 7)).
  • The draft revised PRA rules (as set out in Annex 1 (Draft Securitisation Rules instrument) to the PRA CP) (the Draft PRA Rules) include at Article 5(1)(e) a replacement to the existing Article 5(1)(e) and Article 5(1)(f) which requires, prior to holding a securitisation position (both UK and non-UK), that an institutional investor, other than the manufacturer of a securitisation, to verify that the manufacturer of that securitisation "has made available sufficient information to enable the institutional investor independently to assess the risks of holding the securitisation position and has committed to make further information available on an ongoing basis, as appropriate".
  • Such information is required to include at a minimum the categories of information listed in Article 5(1)(e) (including in relation to the underlying exposures and the structure of the securitisation) at certain times or frequencies. These largely mirror the existing disclosure requirements imposed by Article 7 on UK manufacturers, but without importing all the details currently contained in Article 7 and the associated Disclosure Technical Standards (importantly, it does not include the detailed reporting templates currently required to be provided).
• Clarification of provisions on delegation of due diligence to a managing party – Article 5(5) of the UK Securitisation Regulation currently provides that, where an institutional investor (the delegating party) has given another institutional investor (the managing party) authority to make investment management decisions that might expose it to a securitisation, the delegating party may instruct that managing party to fulfil its due diligence obligations in respect of any exposure to a securitisation arising from those decisions (for example, a fund (falling within the definition of "institutional investor") delegating to its investment manager (falling within the definition of "institutional investor")). The PRA is concerned that the wording of Article 5(5) may have created some ambiguity as to whether enforcement action could be taken against both the delegating party and the managing party for failure to fulfil such due diligence obligations of the delegating party. Accordingly, the PRA proposes to clarify in the proposed rules replacing Article 5(5) that, if a delegating party instructs a managing party to fulfil any of its due diligence obligations in these circumstances, the delegating party would not be responsible for failure to comply with the relevant obligations, provided that the managing party is subject to the equivalent due diligence obligations under the proposed PRA or FCA rules.
• Non-performing exposure securitisations and the non-refundable purchase price discount – the PRA is proposing to broadly align the measurement of the 5% material net economic interest for securitisations of non-performing exposures (NPEs) to that currently used with respect to the EU Securitisation Regulation (i.e. rather than considering the nominal value of the securitised exposures for NPEs, the non-refundable purchase price discount (NRPPD) for NPEs can be reflected where appropriate so that the purchase price/net value is considered rather than the nominal value of the NPE). The PRA, however, is not proposing to make any further changes in relation to NPE securitisations to bring them in line with the EU regime, such as allowing the servicer of an NPE securitisation to hold the risk retention piece, but may consider these in future.
• Clarification of timelines for manufacturers making available certain information – the current UK Securitisation Regulation requirement for manufacturers to provide information "before pricing" even where this is impossible (such as providing the pricing information in deal documentation prior to such pricing having been agreed) has been clarified so that it now aligns with the current Article 22(5) requirement regarding STS securitisations, whereby the required documentation must be made available before pricing at least in draft or initial form and that the final documentation must be made available to investors at the latest 15 days after closing of the transaction.
• Restrictions on re-securitisations, section 138BA of the FSMA and the proposed statement of policy – Article 8(2) of the Securitisation Regulation currently gives the PRA a power to grant permission to PRA-authorised manufacturers to manufacture re-securitisations where it deems the use of a re-securitisation to be for a legitimate purpose. Legitimate purposes currently include:
  • the facilitation of the winding-up of a credit institution, an investment firm or a financial institution;
  • ensuring the viability as a going concern of a credit institution, an investment firm or a financial institution, in order to avoid its winding-up; or
  • where the underlying exposures are non-performing, the preservation of the interests of investors.

The new Article 8(2) under the Draft PRA Rules provides that, as an exemption to the ban on re-securitisations, "any securitisation in respect of which the PRA has granted a permission or direction for the underlying exposures to include securitisation positions" shall be permitted. The Draft UK SR SI does not preserve the PRA's power under Article 8(2) of the Securitisation Regulation to grant such permissions. However, the PRA understands that, under section 34 of the Financial Services and Markets Act 2023, HM Treasury intends to grant (at a time to be confirmed) a new power for the PRA under section 138BA of the FSMA to disapply or modify its rules. The PRA Statement of Policy (as set out in Appendix 3 (Permissions for re-securitisations under section 138BA of the FSMA) of the PRA CP) indicates that the PRA would usually envisage using the new power in section 138BA of the FSMA to permit a re-securitisation only in circumstances broadly similar to those in which the PRA could currently grant permission for a re-securitisation under Article 8(2) of the Securitisation Regulation. Accordingly, whilst there are a number of amendments in this area, the overall result is likely to be limited.

• Replacing relevant provisions in the Risk Retention Technical Standards with PRA rules – the PRA proposes in the PRA CP new rules to replace relevant requirements on PRA-authorised persons in the Risk Retention Technical Standards. However, these proposals largely retain in its proposed rules relevant provisions of the Risk Retention Technical Standards, with a limited number of policy adjustments. These adjustments have been made to reflect the fact that the risk retention rules have not been updated since 2014, whilst the regulatory framework for securitisations has gone through significant changes, including the implementation of the EU Securitisation Regulation in 2019. Certain of these changes are to align the Draft PRA Rules to various provisions of the Commission Draft RR RTS. Key points of the Draft PRE Rules to note are:
  • Change of the risk retainer – the PRA proposes to permit a change of the retainer (and a transfer of the retention) in the event of the retainer's insolvency. The Commission Draft RR RTS contains a further exemption for "where the retainer, for legal reasons beyond its control and beyond the control of its shareholders, is unable to continue acting as a retainer" (Article 12(3)(b) of the Commission Draft RR RTS) which does not feature in the PRA text.
  • Risk retention for NPE securitisations – see "Non-performing exposures securitisations and the non-refundable purchase price discount" above.
  • The "sole purpose test" – as per the Commission Draft RR RTS, criteria have been included in the Draft PRA Rules to assess whether the retainer has been established for the "sole purpose of securitising exposures" for the purposes of the second paragraph of Article 6(1) of the UK Securitisation Regulation. The language of the test largely mirrors the Commission Draft RR RTS test, but takes the approach of the European Banking Authority's (EBA) Draft RR RTS (the EBA Draft RR RTS) whereby the two factors (broadly: (a) the strategy/assets to meet a broader business model outside the relevant securitisation; and (b) a management body with the necessary experience to pursue the established business strategy) are to be "taken into account". The Commission Draft RR RTS instead refers to the two factors and requires that "all of the [factors] apply".
  • Risk retention for re-securitisations – the PRA proposes to clarify that, in the re-securitisations that may be permitted, a retainer would generally have to retain the material net economic interest in relation to each of the transaction levels. This would mean that, in any re-securitisations that may be permitted, the retention of risk would generally be at the levels of both the underlying securitisation and the re-securitisation. In applying such approach, the PRA proposes that:
    • where the originator acts as the retainer in the underlying securitisation, securitises only exposures or positions retained in excess of the minimum net economic interest in the underlying securitisation and there is no maturity mismatch between the underlying securitisation positions or exposures and the re-securitisation, the retention for the underlying securitisation would be sufficient;
    • fully supported Asset-backed Commercial Paper (ABCP) programmes of the kind that are not considered to be re-securitisations for the purposes of Article 8 of the UK Securitisation Regulation would also not be treated as re-securitisations for risk retention purposes; and
    • the re-tranching of an issued tranche into contiguous tranches by the securitisation's originator would not amount to a re-securitisation for risk retention purposes.
  • Exemption from cash collateralisation requirement for synthetic/contingent retention – currently the general requirement is that, when retainers fulfil risk retention requirements through a synthetic or contingent form, the retained interest is fully collateralised in cash and segregated as if it were client money and only credit institutions are currently exempted from this obligation. In addition, the PRA proposes to exempt all PRA-authorised CRR and Solvency II firms from this obligation.
  • Comparability of assets held on the balance sheet of the originator with assets transferred to the SSPE – Article 6(2) of the UK Securitisation Regulation provides that originators must not select assets to transfer to the SSPE in order to render such losses, measured over the life of the transaction, higher than the losses over the same period on comparable assets held on the balance sheet of the originator. The PRA proposes clarifying the meaning of "comparable assets" for these purposes. Again this, largely with some minor differences, follows the language set out in the Commission Draft RR RTS, broadly being either:
    • both (a) the expected performance of both the assets to be further held on the balance sheet and the assets to be transferred is determined by similar relevant factors; and (b) as a result of the similarity referred to in point (a) and on the basis of indications such as past performance or applicable models, it can be reasonably expected that the performance of the assets to be further held on the balance sheet would not be significantly better over the relevant time than the performance of the assets to be transferred; and
    • Article 6(2) will be complied with where, after the securitisation, no "comparable assets" are left on the originator's balance sheet and this is clearly communicated to investors.
• Replacing relevant provisions in the Disclosure Technical Standards with PRA rules – the PRA proposes, without specifically setting out the revised rules, that the rules to replace requirements on PRA-authorised persons currently contained in the Disclosure Technical Standards made under Article 7 of the Securitisation Regulation would preserve the substance of the current requirements. However, the PRA also intends to work closely with the FCA to review these requirements and may consult on proposals in this area in a future Consultation Paper. With respect to the distinction between "public" and "private" securitisations, provided that the transition provisions contained in the Draft UK SR SI are maintained, the PRA's and FCA's Joint Declaration on the Reporting of Private Securitisations³ will continue to apply (however, see "Transparency requirements" below).
• Transparency requirements – the PRA is currently reviewing the transparency requirements of the UK Securitisation Regulation. The PRA CP does not contain proposals on which the PRA is consulting, but it does highlight certain issues that are to be considered as part of this proposed review and notes that the PRA may consult on proposals in this area in a future Consultation Paper. The issues highlighted in the PRA CP relate to the treatment of "public securitisations" versus "private securitisations", the distinction between them and whether disclosure templates for "private securitisations" could be "made more proportionate while still supporting the provision of sufficient information by manufacturers of securitisations to investors". The PRA CP notes that the FCA CP outlines possible approaches to this (see "UK Securitisation Regulation FCA Consultation Paper – Public securitisations v. private securitisations").

Next Steps

The PRA CP consultation closes on 30 October 2023. The proposed implementation date for the changes resulting from the PRA CP is 2024 Q2, subject to the progress of the SR SI.

1. https://www.bankofengland.co.uk
2. The term "manufacturers" is used as shorthand for originators, original lenders, sponsors and SSPEs, as defined in the proposed rules.
3. https://www.bankofengland.co.uk/-/media