Securitisation (Amendment) Regulations 2024
Debate between Lord Roborough and Lord Sharkey
Lord Roborough (Con)
My Lords, this SI forms part of the Government’s ambitious programme to deliver a smarter regulatory framework for financial services and to replace areas of assimilated law, formerly known as retained EU law, in financial services with an approach to regulation that is tailored to the UK. That includes the EU law relating to securitisation. In January this year, Parliament agreed to establish a new legislative framework to replace the assimilated securitisation regulation of 2017. This included revoking regulations from UK legislation to enable the UK financial services regulators, the PRA and the FCA, to make rules for securitisation. This framework will come into effect from commencement on 1 November 2024.
Occupational pension schemes are also subject to securitisation due diligence rules. Occupational pension schemes are supervised by the Pensions Regulator. However, the Pensions Regulator does not have equivalent statutory rule-making powers to the PRA and the FCA and so cannot make the necessary rules for occupational pension schemes. These rules need to be created in legislation instead. Therefore, this instrument restates due diligence requirements for occupational pension schemes which invest in securitisations. HM Treasury’s approach is necessary to avoid a regulatory gap after the coming into force of the revocation of the securitisation regulation of 2017 and to ensure consistency in due diligence requirements for institutional investors, whether subject to forthcoming FCA and PRA rules or supervised by the pension scheme regulator.
This instrument maintains the Government’s existing approach whereby most rules governing occupational pension schemes investors are set through legislation. Legislating for these changes now has allowed the Government to reflect the outcome of the regulators’ consultations and final policy views on due diligence requirements for other financial services firms. The approach also ensures that occupational pension schemes face the same rules as other firms. These restated due diligence requirements include targeted adjustments to ensure that they are more principles-based and proportionate—for example, streamlining the amount of information required to assess risks and clarifying responsibility for due diligence requirements where investment decisions are delegated. This should reduce regulatory burdens on occupational pension schemes and support their participation in the UK securitisation market.
This SI designates the FCA as responsible for supervising any occupational pension schemes that are acting as originators, sponsors or special purpose entities for securitisations. This aligns the supervision of occupational pension schemes with other firms which are undertaking these activities. In practice, HM Treasury envisages that the impact will be minimal as neither my department nor the regulators is aware of any occupational pension schemes engaged in these activities. However, the Government wish to anticipate the possibility and deal with it.
This SI also makes two changes to make the investor protection framework in the UK more effective and competitive. It restates the prohibition on transacting securitisations through securitisation special purpose entities in high-risk jurisdictions. These are the three jurisdictions subject to FATF measures, namely Iran, Myanmar and North Korea. The SI modifies the prohibition in two ways. It expands this restriction to investors in securitisations as well as originators and sponsors of securitisations. However, it streamlines the requirement, reducing regulatory burdens by removing a redundant prohibition on engaging in securitisations in jurisdictions which do not comply with certain OECD model tax agreements. This also removes ambiguity from the requirement.
HM Treasury published a draft SI and policy note on these changes in July 2023 which received generally positive industry feedback on the principles-based approach to restated provisions. Together, the changes made by this SI will ensure the consistency and integrity of UK securitisation regulation for institutional investors in securitisation, whether subject to regulator rules or restated provisions. The changes also ensure that the UK’s requirements are more proportionate, streamlined and principles-based, whether for due diligence requirements on occupational pension schemes as institutional investors or for compliance with prohibitions on securitisations in high-risk jurisdictions. I hope that the Committee will join me in supporting these regulations. I beg to move.
Lord Sharkey (LD)
My Lords, we welcome this SI and will support it today. Its provisions are clearly necessary and are mostly explained clearly in the accompanying documentation. I would be grateful, however, if the Minister could say a few words about commencement and address a few questions.
Two provisions seem to come into force when the instrument is made, and the rest on 1 November later this year. As I read it, this arrangement aims, in essence, to correct a mistake in January’s SI and to give the regulators time to introduce the envisaged new rules on the repeal of existing EU law on 1 November. Is that correct? I would be happy to wait for an answer.
We have a few questions arising from HMT’s policy note of July last year, dealing with this SI. In paragraph 4.8, HMT says that
“the FCA will be provided with a specific rulemaking power to make due diligence requirements for small, registered UK AIFMs who are institutional investors”.
What progress is being made in this area? When can we expect to see the necessary draft SI?
I turn to paragraph 4.13, which explains that,
“where an OPS delegates its investment management decisions and due diligence obligations for investing in a securitisation to another institutional investor (whether they are another OPS, an FCA firm, or a PRA firm), sanctions for failure to comply would be imposed on the managing party, and not the delegating party”.
This does not appear to work the other way round. Paragraph 4.14 says:
“Where an institutional investor who is an FCA firm or a PRA firm delegates its investment management and due diligence obligations to an OPS, sanctions for failure to comply would not be imposed on the OPS as the managing party”.
Does this not let the OPS off rather lightly? Why should it not operate to the same standards of due diligence as FCA and PRA firms?
Paragraphs 4.16 and 4.17 deal with matters to which the FCA and the PRA must have regard. Paragraph 4.16 says that
“the Sec Reg contains a requirement for the originator, sponsor, or original lender of a securitisation to maintain a material net economic interest in the securitisation of at least 5% … Once the Sec Reg is repealed, the FCA and the PRA are expected to make rules covering some of the same areas, such as risk retention, for different sets of firms”.
It explicitly acknowledges:
“This risks fracturing the regime which currently exists and increasing complexity”.
The next paragraph, paragraph 4.17, proposes what seems to be intended as a remedy. It acknowledges the importance of the regime being “clear and coherent” and says that
“this SI requires the FCA and the PRA to have regard to the coherence of the overall framework for the regulation of securitisation when making rules relating to securitisation”.
It is not immediately obvious that this rather loose and third-order requirement will prevent the risk of fracturing the current regime and increasing complexity. Replacing a simple, generally applicable risk retention scheme by a layered and necessarily more complicated scheme seems a retrograde step. Can the Minister say what the current thinking is and, if we remain committed to this approach, why?
I acknowledge that I have asked some rather detailed questions. Of course, I would be happy if the Minister were to write to us in response.
Lord Livermore (Lab)
My Lords, I am grateful to the noble Lord for introducing this SI and setting out its purpose. I welcome him to his place.
As the noble Lord noted in his opening remarks, this statutory instrument forms part of a wider programme to deliver a smarter regulatory framework for financial services. We support this SI as it closes a potential gap in regulation. We believe that it is part of an important package of reform aimed at developing in our country a securitisation market that contributes to growth in the real economy.
I have just two questions. First, I understand that the FCA and the PRA expect to consult on further changes to their securitisation rules in Q4 2024 and Q1 2025. Is the Minister confident that those timelines will be met? Secondly, in the event of a Dissolution of Parliament, will the regulators be under any rule-making restrictions during the regulated period? Does the Treasury have a clear schedule of SIs that require consideration by Parliament in the remainder of the current Session? I thank the noble Lord in advance for his answers.