UK securitisation - welcome proposals represent divergence from the EU position

The Financial Conduct Authority (FCA)’s CP 26/6 “Rules for reforming the UK Securitisation Framework” appeared on Tuesday morning setting out 47 questions for consideration. There was also a parallel consultation from the PRA, CP2/26 – “Reforms to securitisation requirements”. They intend to produce the same outcome, and the FCA reassures us that any differences in drafting style “are not reflective of a divergence in policy intentions between the two authorities”. The proposals are likely to be enthusiastically welcomed. They represent a clear divergence from the EU position. 

 

Internationalisation vs a single market 

The EU is focussed on attempting to achieve a “savings and investment union” – a single market in capital within the EU, whereas the post-Brexit UK sees itself as being part of an open, international market, and in particular open to investment flows from and to the USA. 

The FCA sees its proposals as being a “shift away from the existing rules that restrict the type of securitisations that an investor can invest in — which are atypical internationally” which:

“will strengthen the competitiveness of FCA-regulated institutional investors by permitting access to securitisations from other jurisdictions, as long as a mechanism is present to align the interest of the investor and that of the manufacturer”;

whereas the European Council sees SIU as a way to:

“strengthen Europe’s economic resilience and reduce dependency on external sources of financing by improving the internal allocation of savings. This would contribute to the EU’s open strategic autonomy, ensuring that the EU has more control over its economic and technological future”. 

The liberalisation which is heralded by these two UK papers, and the introspection of the June 2025 European Commission proposals, stem from these different standpoints. Quite where the EU will come out depends on the outcome of the trilogues, which are not due to start until later this year.

 

Due diligence obligations liberalised

This started in 2024 

Back in 2024, we saw some liberalisation of the UK due diligence rules as regards non-UK issues. The prescriptive due diligence requirements inherited from the EUSR were adjusted so that, although a UK investor was still required to carry out thorough due diligence, and the UK rules specified a minimum level of disclosure (which followed the Basel Committee requirements), they no longer required UK investors to obtain disclosures which matched the UK transparency obligations for UK sell side parties, and so they no longer needed to be on prescribed templates, and not necessarily at loan-level.

But now it is taken much further  

CP26/6 now increases the shift away from prescription to a principles-based approach; away from a verification requirement to a risk-assessment requirement. 

Understanding the structure 

A UK investor must obtain a “comprehensive and thorough understanding” of the risks involved, but the existing prescriptive list of structural features that must be assessed (in SECN 4.2.2R(1)(b)) is to be deleted, and replaced with simple guidance in new SECN 4.2.2B G about key factors: priorities of payment, flip clauses, credit enhancements, and so on; and the existing continuing obligations in SECN 4.4.1R(1)(a)-(k) are to be reclassified as simply guidance in SECN 4.4.1A G.

The FCA’s view is that “investors should be able to conduct different forms of monitoring for ongoing due diligence, where the level of risk attached to a specific securitisation justifies a different approach”. Industry will welcome this.

Proportionality 

The level and nature of due diligence should be “proportionate to the risk profile" of the securitisation position. For example, what is appropriate before buying into the senior tranche going to be held short-term should logically involve less than if a position lower down the capital stack is being considered for a holding to maturity. This is not to say, of course, that the FCA is proposing a free-for-all, but it recognises that UK institutional investors are likely to have the necessary sophistication, and in any event are subject to their own sectoral requirements, such as UK AIFMD. So this will remove an overlay of what can sometimes seem excessive requirements. 

Compare the position of EU investors, which at present are subject to the same standard on a small senior tranche investment as for a large junior tranche. The March 2025 joint ESAs report recommended the introduction of some proportionality here, as did the Council, and we wait to see how this emerges from the upcoming trilogues.

Stress testing and internal management reporting 

In the same vein, stress testing and internal management body reporting requirements are being removed as standalone obligations under the securitisation rules, and instead these will be governed by the existing FCA “SYSC” rules for senior management arrangements, systems and controls.  

Verifying compliance with credit-granting criteria to be removed

The requirement to verify compliance with credit-granting criteria is to be deleted. In its place, where the originator/original lender is not a UK CRR firm or FCA investment firm, a UK institutional investor must consider the originator’s credit-granting standards and processes and form its own view as to whether they are, in the words of paragraph 3.19, “robust enough to suit their risk appetite”, with new guidance in SECN 4.2.2A G adding that the level and nature of the due diligence assessment undertaken “should be proportionate to the risk profile of the securitisation position”.

Verifying STS status to be removed 

The requirement on investors to verify the STS status of a securitisation,  which at present exists even if the STS categorisation is regarded by it as being irrelevant, is to be removed. The FCA’s view is that whether STS status should be verified should depend, among other things, “on whether such status (or lack thereof) could have a material impact on the performance of the investment”.

Verifying risk retention to be removed 

At present, both in the UK and the EU, an investor must verify that risk is retained in a way which complies with the UK (or EU as the case may be) risk retention requirements. Under the new proposals, the old verification requirement will be replaced by a requirement to be satisfied that a non-UK originator, sponsor or original lender “maintains, on an ongoing basis, a sufficient and appropriate alignment of commercial interest in the performance of the securitisation” (see new SECN 4.2.1R(1)(d), along with guidance in SECN 4.2.1B G which explains that this could be achieved via a risk retention and/or "through alternative means, such as management fees due to the originator, sponsor or original lender under the terms of the transaction documents that are linked to the performance of the securitisation”.

Consequences for market practice: opening up US CLOs

The FCA considers that these changes will reduce “an unnecessary and disproportionate burden on FCA-regulated institutional investors” and “will expand the universe of potential investments for UK investors, enabling them to better diversify their portfolios and, potentially, to improve their risk-adjusted returns”. At present, UK investors cannot invest in most US CLOs, because open-market CLOs (i.e. where the assets are acquired in open-market transactions – to put it another way, where the originator is a limb (b) originator rather than limb (a)) are not subject to any risk retention requirement: this has been the case ever since the 2018 LSTA decision. This will now change. Whether UK investors would want to, or currently have the skill set to, invest in a CLO of broadly syndicated loans, is another matter. They entail risks other than credit risk – liability management exercises of one sort or another – which require careful understanding if they are not to be a trap for the unwary.

 

Risk retention

A surprise announcement, but consistent with the Bank of England’s internationalist outlook, is to permit L shaped risk retention (as is already permitted in the USA) i.e. a first loss tranche plus some vertical retention to make up the 5%. This is familiar to US investors and may assist in marketing UK issues to them.

 

Transparency

Fewer templates 

The FCA proposes to reduce the number of underlying exposure templates significantly (and, in a welcome alignment, PRA-regulated sell-side parties will be directed to use the FCA templates; the PRA will not have its own forms).  

The templates to be deleted and replaced with a principles-based disclosure approach relate to:  

• short-term highly granular exposures e.g. credit cards and trade receivables (investors usually prefer aggregated information about credit quality, performance and risk characteristics);
• CRE exposures (CMBS usually consist of just a few heterogeneous exposures. The FCA encourages the market to develop its own reporting standards, quite possibly thinking of the CREFC investor reporting package);
• non-CLO corporate exposures (a varied asset class, including SMEs, large corporates, rated or unrated);
• esoteric exposures (a very heterogeneous category).

Templates will be retained for residential real estate, automobile, consumer, and leasing exposures, but these will be in a simplified form, aligned with Bank of England loan-level templates for eligible collateral - which the FCA says will result in fewer fields needing completion. For example, for auto, there will be 56 mandatory fields compared to 84 at present (the FCA has produced redlines here). Inside information and significant events will continue to be communicated, but no longer on a prescribed template. Instead, principles-based requirements would remain in SECN 6.2.1R, and MAR Article 17 and DTR 6.3.3 will apply in any event.

A new CLO template 

A new simplified CLO-specific template will be introduced. At present, the corporate exposures template is used, about a quarter of the fields of which are inapplicable to CLOs. The proposed simplified template has almost half the number. The FCA accepts that the CLO market is “large and mature”, and it is open to disapplying the need for any CLO template during a warehouse phase. This makes sense, because warehouses are private arrangements, and so the investors can ask for and get whatever information, in whatever format, they want anyway. 

Disclosure of transaction documentation 

At present, SECN 6.2.1R(2) and PRA chapter 2 article 7(1) track EUSR Article 7(1)(b), requiring disclosure of “all underlying documentation essential for the understanding of the transaction”, then going on to provide a minimum list of documents. 

This list will be replaced by a requirement to disclose instead an offering document, prospectus or termsheet, together with all of the transaction documents (excluding legal opinions). These would be provided to investors and, upon request, to potential investors and regulators. A summary (in the absence of a prospectus) would no longer be required, which makes sense because investors would want the documents if there was no prospectus, so a summary was an unhelpful chore. The timeframe for providing final transaction documents will be extended from 15 days after closing to the earlier of 30 days after closing or the first scheduled interest payment date. 

EU templates may be used 

The proposals address UK/EU cross-border friction where a UK sell-side wishes to market to EU investors. The sell-side will be able to satisfy UK requirements by providing underlying exposures information in the corresponding EU underlying exposure templates (for residential real estate, automobile, consumer and leasing exposures), although this flexibility does not apply to CLOs, which must use the new UK CLO template.

Repositories and XML need not be used 

Reporting via securitisation repositories will no longer be required, and the requirement for XML format will go. Repositories were intended to provide centralised and standardised templated data on the securitisation market in XML format to investors and regulators, but this was at a cost to originators and sponsors, and in practice many investors did not use them, and they prefer to get the data they want from other sources, and so the FCA and PRA propose to disapply this and allow they to. If the market wants to use a repository, it can, but it will not be a regulated one.

 

Private vs public

The distinction between “public” and “private” issues has been the subject of debate on both sides of the channel for a couple of years. The idea had been floated by both UK and EU regulators that anything listed on an MTF should be classified as “public”, meaning more extensive disclosure than for “private” issues, and disclosure having to be made via a securitisation depository, even though the listing was only done for quoted eurobond (or investment parameter) purposes. This idea has thankfully been dropped in the EU, as it now has been in the UK. The FCA and PRA now propose having just one disclosure regime for both public and private alike, with no requirement to make disclosure via a repository. The distinction between public and private will still have some relevance: as regards the STS notification requirement and for disclosure to the Bank of England (currently required by the 2019 joint FCA and PRA Direction, which is to be replaced with new rules in SECN 6 – and the PRA will not require the notification also to go to it). 

The FCA’s thinking is that this, coupled with the template reforms regarding underlying exposures, investor reports, inside information and significant events, should make this palatable enough. Still, there is still a case for being yet more liberal as regards private securitisations, where the investors are free to bargain for whatever information they want.

 

Resecuritisations

After the GFC, resecuritisations were subjected to a blanket ban under Basel: nobody wanted to permit CDO squared-type issues again (readers wanting to read more about these could usefully read “Illusory AAA tranches: the case of resecuritisations” in the BIS Quarterly review from December 2014). 

This has not changed, but the FCA and PRA are now prepared to allow resecuritisations where the underlying asset is either (a) a position constituted by one exposure and its related credit protection (such as loans underwritten under the Mortgage Guarantee Scheme) or (b) a position in the most senior tranche (whereas CDO squared deals involved lumping together junior tranches), subject to a few safeguards. The exemptions will only be available where the originator and sponsor of the resecuritisation are PRA authorised persons – there are no corresponding proposals for FCA regulated manufacturers. However, FCA institutional investors will be able to invest in these products. The FCA is also clarifying that retranching of contiguous issued tranches into fewer tranches is not a resecuritisation.

Resecuritisation holdings are generally penalised by the UK CRR regime (e.g. the non-neutrality “p” factor is 1.5) but for these newly-exempt resecuritisations, the PRA proposes (see paragraph 2.130) a “proportionate reduction”. This makes sense. The problem with CDO squared was that they relied on a purported degree of accuracy in the measurement of the credit risk which, when the market collapsed, was seen to have been illusory. This problem is not going to exist if you are dealing with senior tranches.  In passing, MGS loans are probably not securitisations anyway, so a securitisation of those should not be a resecuritisation anyway, but the logic is similar as in relation to resecuritisations of senior tranches, since the junior risk is taken by the UK government via its first loss guarantee, leaving the remainder as a high quality low risk asset.

 

Definition of “securitisation"

The FCA and PRA are not proposing a wholesale review of the definition, which may come as a relief because that definition, for all its faults, has been with us now for several years, and the market can generally understand and work with it, both where securitisation treatment is or is not wanted. However, some helpful exemptions from the securitisation conduct rules are floated in chapter 10 of the FCA paper (it is not being suggested that this would alter the application of the UK CRR rules).  These are:

• CLOs CLOs are outside the US securitisation rules and (in particular) are not subject to any risk retention requirement under US rules. Managed CLOs (which is most of them) are quite different from a static pool and, depending on the length of the reinvestment period, could result in every one of the initial pool assets having been churned one or more times by maturity, and so the performance of the management is highly significant. CLO managers are usually AIFMs and subject to risk management and due diligence rules applicable to AIFMs anyway, and the fee structure provides alignment of interest of the CLO manager without the need for any risk retention piece. The FCA seems to have an open mind about whether CLOs should be taken out of scope, and the CLO market can be expected to make representations.

• Whole business securitisations The FCA floats the idea of taking WBS out of scope, whilst not mentioning that most WBS should not be regarded as securitisations anyway: a better name would be  “secured corporate transaction” (see this ESMA consultation paper from 2018), so this should not be controversial.

• Correlation trading portfolios These are derivatives transactions but it seems that they can be regarded as a securitisation within the four corners of the definition.

 

Readability

Lawyers will note the PRA’s proposal to make its securitisation rules more readable by, for example, putting all the risk retention and transparency rules together in one part. At present the PRA’s rules format (unlike the FCA’s) follows the EUSR format, which can be rather convenient. This will be lost but, on the other hand, we are starting to see divergence here in any event, and lawyers will have to live with it.

The consultations run until Monday 18 May with final rules expected in the second half of 2026, with a six month lead-in period.