HM Treasury Identifies Areas for Improving the UK Securitization Framework

Following its call for evidence earlier this year, HM Treasury has published its report on the review of the U.K. Securitization Regulation. HM Treasury was required to conduct a review of the functioning of the Regulation and report to Parliament on its findings by January 2022.

The Securitization Regulation provides the criteria for identifying which securitizations will be designated as "simple, transparent and standardized" (STS) securitizations, a system to monitor the application of those criteria as well as common requirements on risk retention, due diligence and disclosure. Related provisions under the Capital Requirements Regulation set out the regulatory treatment of exposures to securitizations that are deemed to be STS securitizations.

The review covered a wide range of topics, including the effects of the U.K. Securitization Regulation. HM Treasury notes that it is "challenging" to draw any conclusions on the impact of the Regulation on the U.K. securitization market because it has only been in effect since 2019 and there have been rare events, such as the coronavirus pandemic, that have impacted the financial markets. HM Treasury notes that the Regulation has improved transparency in the U.K. securitization market, although it has not yet advanced securitization issuance as it might have.

However, the government reports that there are areas that would benefit from amendments, which it will work with the Financial Conduct Authority and Prudential Regulation Authority to bring about. These include the appropriateness of the disclosure requirements for different types of securitizations, removing non-U.K. Alternative Investment Fund Managers that market or manage AIFs in the U.K. from the scope of the due diligence requirements, clarification of the due diligence requirements for investors when they invest in non-U.K. securitizations, potential for improving the risk retention regime and introduction of an STS equivalence regime for recognizing non-U.K. securitizations as STS in the U.K. Two areas which appear to be functioning satisfactorily are the third-party verification regime and the provisions on Securitization Special Purpose Entities.

Finally, although outside of scope of the Securitization Regulation, the prudential requirements for securitizations will be assessed due to the high level of interest that emerged in the call for interest.

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