Picture the scene, you're on the tube home, it's late, you are tired. It's a route you've done many times before and whilst not perfect, it's familiar. Suddenly “this train terminates here, all change please” rings out over the loudspeaker. You sigh. You will get to your final destination, that's not the concern, but it will take a bit longer and more importantly, require a few changes. 

If we are honest, that is pretty much how the new UK Securitisation Regulations feel, which are due to come into force on 1 November this year. We all knew, and for better or worse, were comfortable with the existing rules. Now we have to step off this familiar train and get used to a new mode of transport. 

The question is, do we need to Mind the Gap? 

Where have we been?

Up until now (and until 31 October) the UK Securitisation market has been subject to on-shored EU Securitisation legislation. So although we looked to the UK rules, these were based on, and largely consistent with, the EU rules from which they stemmed^[1]. 

Where are we going?

From 1 November that will all change. The on-shored legislation will be repealed and replaced with primary legislation (in the form of the Securitisation Regulations 2024 (as amended)) and firm-facing rules in the FCA handbook and PRA handbook. 

It is true that both the FCA and PRA set out to largely ‘lift and shift’ the existing rules into the new format. They weren't seeking to make widespread changes. And yet taking one set of rules, written in a certain way, and transcribing them into four separate legislative texts will inevitably create some differences, whether intentional or not. That's before you consider the impact of guidance and FAQ's, both at the outset and over time. 

Where is the ‘gap’?

The new UK rules apply to originators, original lenders, sponsors, SSPEs and (in the case of the PRA authorised institutions and occupational pension schemes^[2]) institutional investors that are “established in the United Kingdom”, which shouldn't come as a huge surprise. You would expect the EU rules to apply in the EU, and the UK rules in the UK. That said, the FCA rules do not expressly relate only to UK established investors, but to all institutional investors that are not PRA authorised or occupational pension schemes^[3]. And securitisation is often rather cosmopolitan. It isn't that unusual to have a UK originator with an EU sponsor and EU issuer. Investors, likewise, may be mixed, with some UK based and some EU based. 

So although the rules may be similar on many levels, whether you have to comply with EU or UK rules will depend on who is asking that question - an investor, the originator, the sponsor or the issuer^[4]. It is worth noting here that a UK branch of an overseas company is not “established in the United Kingdom” for the purposes of these rules. The introduction of split regulatory enforcement and the adoption of separate rules for PRA authorised firms and everyone else (and a separate due diligence regime for occupational pension schemes) has increased the number of opportunities to find oneself taking the wrong branch line on this particular journey. One example of this is that the choice of UK reporting templates or EU reporting templates when complying with the transparency requirements is no longer as straightforward as it once was.

Another source of potential confusion may arise around the ability to obtain STS treatment. The UK rules require the originator and sponsor to be “established in the United Kingdom” as one of their criteria. The issuer, under the UK rules, can be located elsewhere. The EU rules, by contrast, require the sponsor, originator and issuer to all be located in the EU. 

There are other areas where the differences are likely to be welcomed. Under the new UK rules, institutional investors no longer have to “mark the homework” of the originator or sponsor. Instead they have a more grown-up responsibility to ensure that they have sufficient information to enable them to independently assess the risks of holding this position, as well as confirming that certain minimum prescribed information has been provided. 

There has also been some clarification provided around hedging of risk retention and non-performing exposures which should prove helpful. 

The final destination 

The new UK securitisation rules are imminent, and at the moment, it's fair to say, unlikely to create much divergence between the UK and EU position. There are clearly some areas which will require closer scrutiny. Questions on deals will come up and views will need to be taken. We are used to that and with the right team in place these can be safely navigated. 

Over time it is likely that more differences will start to emerge. The priorities of the EU and the UK in terms of securitisation and how they want to regulate and support it will run on different tracks. It is, as they say, going to be a journey. A bit like the London tube however, it is best to expect the unexpected, be ready for a change and, most importantly, find a way to get comfortable and enjoy the ride. Oh, and make sure you have the right travel companions with you.
 

Footnotes

[1] Of course, there were already some anomalies – the EU NPE risk retention amendments and the Risk Retention RTS were both introduced after Brexit (so not on-shored into UK law) and the due diligence article was slightly re-written when adopted in the UK. So there has been a degree of inconsistency between the EU and UK rules for some time. But these were known inconsistencies in legislation that was otherwise almost identically drafted and implemented.

[2] The test for occupational pension schemes is in fact that their main administration is in the United Kingdom rather than that they be established in the United Kingdom, but this difference is largely semantic

[3] The due diligence rules for occupational pension schemes are set out in The Securitisation (Amendment) Regulations 2024

[4] If you are a sponsor, originator, original lender, SSPE, a PRA authorised institutional investor or an occupational pension scheme institutional investor. Institutional investors subject to UK jurisdiction (whether established in the United Kingdom or not) are covered by the FCA rules regarding institutional investors, unless they are PRA authorised or occupational pension schemes. PRA authorised institutional investors who are not established in the United Kingdom are not subject to the FCA rules or the PRA rules on securitisation. Occupational pension schemes who have their main administration in the United Kingdom are subject to the due diligence rules set out in The Securitisation Regulation (as amended).