FCA and PRA Publish Consultation Papers on Reforming the UK Securitisation Framework

Background

The European Union (EU) Regulation (EU) 2017/2402 (EU Securitisation Regulation), set out requirements for (i) originators to follow comprehensive credit underwriting standards, (ii) originators, original lenders, securitisation special purpose entities (SSPEs) and sponsors (each, a manufacturer) to retain a material economic interest in the securitisation to ensure that there was an alignment of incentives between themselves and the securitisation investors, and (iii) investors to perform comprehensive due diligence. While the UK was in the EU, the EU Securitisation Regulation applied in the UK.

Since the UK has left the EU, both the FCA and the PRA have introduced changes to the Securitisation Regulation¹ and have now launched a consultation on further simplifying the UK regulatory regime for securitisation. ^{2, 3}

Proposals under CP2/26 and CP26/6

The key changes proposed by the FCA and PRA are as follows:

1. Simplifying the due diligence requirements for investors.

(a)    Adding guidance which sets out that information made available to undertake the initial due diligence assessment should be proportionate to the risk of the investment (taking into account the type of investment, the risk or size of the investment, and the predicted holding period).

(b)    Removing the requirement on investors to verify compliance with the credit granting criteria and instead replacing it with a requirement that (unless the originator or original lender is a UK established CRR firm or FCA investment firm), institutional investors must consider originators’ credit granting standards and processes and independently assess whether they are sufficiently rigorous to meet their own tolerance for risk.

(c)    Removing the requirement on investors in non-UK deals to verify compliance with the risk retention rules and replacing this with a requirement on investors 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.

(d)    Removing the list of the prescribed structural features that investors must assess prior to holding a securitisation position and replacing it with guidance as to the type of structural features that can materially impact the performance of such securitisation.

(e)    Removing the requirements placed on investors to verify the STS status of a securitisation.

(f)     Removing the current prescriptive ongoing due diligence requirements (but continuing to require institutional investors to monitor, on an ongoing basis, the performance of the securitisation position and of the underlying exposures in a manner proportionate to the risk profile of the securitisation position they hold), by: (i) no longer specifying the credit quality attributes that investors must monitor as requirements; (ii) removing the requirement for institutional investors to perform stress tests on a securitisation’s cash flows, underlying exposures and/or solvency and liquidity of an asset-backed commercial paper programme sponsor; (iii) removing requirements for institutional investors to have in place effective internal reporting to its management body; and (iv) removing the requirement for institutional investors to demonstrate that they have a thorough and comprehensive understanding of their securitisation investments.

2. Simplifying the transparency requirements for UK manufacturers.

(a)    Reducing the number of reporting templates and in some cases replacing templates with a principles-based approach.

(b)    Removing the requirement to produce templates in extensible mark-up language (XML) format, but retaining that it be electronic and machine readable format.

(c)    Adding an exemption from making information available through underlying exposure templates for single-loan securitisations.

(d)    Simplifying retained underlying exposures templates.

(e)    Introducing a specific, simplified underlying exposures template for CLOs.

(f)     Ceasing, in most cases, to treat public and private securitisations differently in the application of transparency requirements.

(g)    Removing the prescriptive approach to providing underlying documentation relating to a securitisation.

(h)    Introducing a mechanism whereby a UK manufacturer’s compliance with the EU transparency requirements would be deemed sufficient to satisfy the UK transparency requirements.

(i)     Lengthening the time allowed for the provision of final transaction documents from 15 days after closing to the earlier of (i) 30 days after closing and (ii) the first scheduled interest payment date of the transaction.

(j)     Removing the requirement to provide a transaction summary.

(k)    Clarifying that the first reporting date of transaction information should be made available at the latest one month after the first scheduled interest payment date of the transaction.

(l)     Subject to HM Treasury approval, no longer requiring information to be reported by UK manufacturers to regulated securitisation repositories.

3. Introduction of exceptions to the ban on re-securitisations.

Allowing institutional investors to invest in a re-securitisation without obtaining an express waiver or permission from the FCA or PRA, respectively, where such re-securitisation is of: (a) securitisation positions which are constituted by one exposure and its related credit protection (e.g. the loans that have been underwritten under a mortgage guarantee scheme); or (b) the most senior securitisation positions.

4. Clarifying the application of the credit granting criteria.

With a view to improving regulatory clarity, amending the wording in the FCA Handbook and the PRA Rulebook, respectively, to: (a) make clear that sound and well-defined credit-granting criteria must apply to any exposure intended for securitisation, regardless of whether other non-securitised exposures exist; (b) replace the term ‘non-securitised exposures’ with a more straightforward reference to ‘comparable assets remaining on the [firm’s] balance sheet, if any’, thereby also accounting for circumstances in which no such comparable assets remain on the balance sheet; and (c) clarify that, all else being equal (i.e., in terms of product type, target clients, and so on), firms must not apply ‘less stringent’ underwriting criteria to securitised exposures than those applied to comparable assets remaining on the balance sheet, if any, thereby ensuring that firms maintain consistent underwriting standards irrespective of whether they intend to securitise the exposures they originate.

5. L-Shaped Risk Retention Modality.

Giving UK manufacturers greater flexibility when deciding the manner by which they intend to hold the risk retention piece in a securitisation by permitting them to hold by way of ‘L-shaped risk retention’, which would require the aggregate of the horizontal (first loss tranche) and vertical (equal proportion in remaining tranches) elements to be in an amount equal to at least 5% of the nominal value of the securitised exposures. In addition, in scenarios where there were multiple holding retainers, each retainer would be required to retain a net interest amount in the securitisation on a pro rata basis and in the same ratio. The inclusion of this as a valid form of retention holding would make it easier for UK issuers to issue in overseas markets where the investor base is more familiar with this modality of risk retention.

6. Recognition of relevant laws in non-UK jurisdictions.

The FCA specifically is also considering whether to recognise applicable relevant laws in non-UK jurisdictions, in order to facilitate the issuance of cross-border securitisations to which the laws of other jurisdictions may apply.

7. CLOs.

The FCA noted that several of those who have provided feedback on prior consultations noted that the structuring and managing of CLOs shares a number of characteristics with the asset management business and that the managers of CLOs are often Alternative Investment Fund Managers (AIFMs) usually subject to regulatory oversight relating to risk management and due diligence. Some of the feedback has suggested that given this regulatory position, the requirement for risk retention in connection with CLOs is overly burdensome. The FCA has expressly asked for additional data-led arguments to strengthen this feedback so that it can assess whether to further amend the regulatory framework in relation to CLOs. If these changes were ultimately put into effect, this would bring UK CLOs in line with open market U.S. CLOs where the U.S. Dodd-Frank credit retention rules do not apply.

Next steps

Both CP2/26 and CP26/6 require comments and responses from interested parties to be made by 18 May 2026. The FCA expects to make its final rules in H2 2026 and then not enter into effect until six months later, whilst the PRA proposes that the implementation date for the changes resulting from its consultation process will be in Q2 2027, in each case, in order to allow market participants sufficient time to make necessary preparations for their implementation.

In the meantime, parties should carefully review their existing and soon-to-be closed transactions to consider whether any amendments may be appropriate to reflect potential changes resulting from the consultation process. For example, SSPEs, originators and CLO managers of non-UK securitisations may wish to consider whether it is now appropriate to draft for any requirement to strictly comply with UK risk retention and UK credit granting rules to automatically fall away, and be replaced by the relevant new requirements on UK investors, on any regulatory implementation of the new requirements.