Securitisation (Amendment) Regulations 2024
Debate between Lord Roborough and Lord Livermore
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securitisation to maintain a material net economic interest in the securitisation of at least 5% … Once the Sec Reg is repealed, the FCA and the PRA are expected to make rules covering some of the same areas, such as risk retention, for different sets of firms”.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.
Lord Roborough (Con)
My Lords, I am grateful for the contributions to this short debate. I will try to answer some of the detailed questions that were asked as well as I can but I will have to write on some of them, I am afraid.
Let me first respond to some of the points made by the noble Lord, Lord Sharkey. On timing, we expect that commencing the regulations on 1 November will give the industry time to prepare for the PRA’s and the FCA’s new rules, which regulators will consult on. There will be no further legislation. The regulators are consulting on rules to complement the securitisation SIs.
This will not specifically answer the question on risk retention but the UK’s approach currently aligns with the recommendations from the International Organization of Securities Commissions on; we therefore consider this to be best practice internationally at the moment. However, I understand that the noble Lord’s question went further than that, so I will address that.
This SI represents an important step in finalising the UK’s new financial services framework for securitisation. It complements the Securitisation Regulations 2024 by ensuring consistency on due diligence requirements for all firms participating in the securitisation market. It restates an important prohibition on securitisations in high-risk jurisdictions. The SI was scrutinised by the Secondary Legislation Scrutiny Committee, which made no comment on it and did not draw it to the special attention of the House. A de minimis impact assessment was published alongside this SI; it indicates that, on an ongoing basis, the SI should reduce occupational pension schemes’ compliance costs by making the rules more proportionate.
I will need to reply to the noble Lords, Lord Livermore and Lord Sharkey, on some of their detailed questions but I thank both of them for contributing to this debate, which I hope the Committee has found informative. I hope that the Committee will join me in supporting the regulations.