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The Prudential Regulation Authority (“PRA”) has published Consultation Paper 15/23 – Securitisation: General requirements (“CP 15/23”) setting out its proposed rules to replace retained EU law requirements on:
CP 15/23 also proposes: (a) adjustments to supervisory statement 10/18 on General requirements and capital framework; (b) how the PRA will use its power under the newly revised Financial Services and Markets Act 2000 (law since 29 June 2023) (“FSMA”) to disapply or modify certain rules under new s 138BA; and (c) clarification that the rules also apply to one-off securitisations by PRA-authorised firms that are non-CRR and non-Solvency II. CP 15/23 also seeks views on the distinction between public and private securitisations and associated transparency requirements which may be the subject of a future consultation.
While the PRA’s proposals are mainly re-stated from retained EU law and largely preserve current requirements when retained EU law is transferred to the PRA Rulebook there are targeted adjustments which we set out below. The PRA considers that these adjustments are broadly in line with market expectations.
CP 15/23 applies to PRA-authorised persons established in the UK (including insurers), qualifying parent undertakings and financial institutions that are subsidiaries of these firms. It does not apply to non-UK firms with UK branches.
The PRA is proposing a “more principles-based and proportionate approach” when replacing the requirements for verification by institutional investors of disclosures by both UK and non-UK manufacturers. This will be achieved by requiring investors to verify that manufacturers have made sufficient information available to enable assessment of the risks, and by requiring that the information includes at least certain types of information at certain times but without the level of detail currently included in the retained EU legislation. Note that, regardless of the new scope of obligations on institutional investors to verify the information set out below, the obligations of originators, sponsors and securitisation special purpose entities (“SSPEs”) to make certain prescribed disclosures remain as before.
The Draft Securitisation Rules instrument appended to CP 15/23 sets out at new Article 5(1)(e) that the originator, sponsor or securitisation special purpose entity must make 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.” This information must include at least the following:
CP 15/23 proposes clarification of the enforcement position of a managing party delegate for failure to fulfil delegated due diligence obligations. Provided that the managing party is subject to equivalent due diligence rules, the delegating party will not be responsible for a failure to comply with those obligations.
The PRA is proposing to allow the calculation of the risk retention requirements in UK SecReg for NPE to be assessed at their net value (the non-refundable purchase price discount or NRPPD).
The PRA is proposing clarifying the requirement in UK SecReg Article 7(1) for manufacturers to make certain information available “before pricing” to align it with the requirement in Article 22(5) for the information for STS securitisations to be made available before pricing at least in draft or initial form, with final documentation available to investors no later than 15 days after closing.
The current position under Article 8(2) of UK SecReg allows the PRA power to give permission to manufacture resecuritisations when this can be said to be for a legitimate purpose including:
While the current draft of the Securitisation Regulations 2023 does not include this power, the PRA understands that the UK Government intends to use section 34 of FSMA to switch on a new power for the PRA under section 138BA of FSMA to disapply or modify its rules. CP 15/23 therefore appends a proposed statement of practice on the PRA’s approach to using this power in relation to resecuritisations, which is broadly in line with its current remit.
While the PRA proposes to retain current provisions, CP 15/23 includes a number of adjustments to reflect changes to the securitisation market that have occurred since the current risk retention technical standards were formulated in 2014.
We have published separate notes following: (i) the publication of the Final Draft Regulatory Technical Standards (the “RTS”) specifying the requirements for originators, sponsors and original lenders in relation to risk retention (see our previous Clients and Friends memo from April 2022), and (ii) following the 7 July 2023 European Commission adoption the final text of the risk retention RTS (the “Final Text”). With respect to risk retention, CP 15/23 and the Final Text do not contain any material differences, but we have noted some minor nuances below:
The PRA proposes to retain the substance of the current requirements, but will be working with the FCA to review and possibly consult on changes to these in a future consultation exercise. The PRA has also confirmed that, provided transitional provisions are included in the final Securitisation Regulations, the PRA and FCA’s Joint Direction on the Reporting of private securitisations will continue to have effect. The Joint Direction speaks to the manner in which the originator, sponsor or SSPE makes available the information required under Article 7(1)(a) to (g) of the EU Securitisation Regulation 2017 (Regulation (EU) 2017/2402) to the FCA or the PRA concerning private securitisations.
While the PRA and FCA are currently reviewing transparency requirements, CP 15/23 is not making any proposals in this area. However, the PRA is interested in any comments on possible approaches for revising the distinction between “public’ and ‘private” securitisations and on whether disclosure templates for private securitisations could be made more proportionate. CP 15/23 flags that the FCA’s upcoming consultation on “Rules relating to Securitisation” will consider both these questions in Chapter 7.
Comments are due by 30 October 2023 and the proposed implementation date for the new rules is Q2 2024.