New EU Securitisation Regulation – 18/6
28th August 2018
The EU Securitisation Regulation (EU) 2017/2402 and CRR Amendments were published in the Official Journal at the end of December 2017 and become applicable as of 1 January 2019. The new regulations establish new rules and requirements for the securitisation investments, such as proper due diligence for investors and simple, transparent and standardised (STS) criteria.
The amendments also aim to make the securitisation market more effective and to prevent potential harm to investors as a consequence of a lack of appropriate disclosure requirements which would empower investors and enable them to make well-informed decisions.
The new regulation intends to:
- consolidate existing requirements and strengthen the legislation on securitisation
- promote transparency and appropriate due diligence by investors for securitisation investments
- create a framework for simple, transparent and standardised (STS) securitisations
- promote deeper understanding of STS securitisation
In doing so, the European Commission aims to reduce harm caused to investors making badly-informed decisions due to lack of understanding and analysis of the risks in their securitisation investments.
The FCA has acknowledged the need to change a number of provisions of the FCA Handbook in order to achieve consistency with the Securitisation Regulation and the CRR Amendment.
The FCA proposes to make changes to the following Sourcebooks:
- Investment Funds sourcebook (FUND) in relation to the corrective action an AIFM should take when exposed to a securitisation that does not meet the requirements provided by the Securitisation Regulation
- Collective Investment Schemes sourcebook (COLL) in relation to the obligations of Alternative Investment Fund Managers (AIFs) and Undertakings for Collective Investments in Transferable Securities (UCITs) investing in securitisations
- Prudential sourcebook for Investment Firms (IFPRU) with aim to reflect changes brought about by the CRR Amendment.
The Securitisation Regulation also creates a new category of entities – Third Party Verification Agents (TPVs), whose task is to assess securitisation’s compliance with STS criteria in order to promote investors’ understanding of STS securitisations. The TPV’s confirmation of compliance will not be just an opinion of the potential risks of the transaction, but the actual assessment of whether the securitisation transaction fully meets the STS requirements.
TPVs cannot perform the activities of: a credit institution, an insurance undertaking, an investment firm or a credit rating agency. In the same time, the Securitisation Regulation requires TPVs to ensure that the performance of any of their other activities does not compromise the independence of their assessment of a securitisation’s compliance with the STS.
Member States will be required to appoint a National Competent Authority to authorise and supervise firms wishing to act as TPVs. The Treasury has confirmed that it intends to designate the FCA by a Statutory Instrument (SI) as the UK’s Competent Authority to authorise and supervise TPVs.
The Securitisation Regulation requires:
- that the originator and sponsor of a securitisation must jointly notify the European Securities Market Authority (ESMA) where a securitisation meets the STS criteria
- that the originator, sponsor or SSPE may voluntarily use the services of a TPV to check whether a securitisation meets the STS criteria.
However, it is stated that the use of a TPV does not, under any circumstances, affect the liability of either the originator, sponsor or SSPE or of the institutional investors in respect of their individual obligations under the Securitisation Regulation.
The Regulatory Technical standards to the Securitisation Regulation specifies the information that the TPV will have to submit when applying for authorisation.
The FCA intends to allow the firms to submit a draft application for TPV’s authorisation starting from September 2018, so it can start consider those applications in advance. Since the application is not treated as application until the fee is paid, the applicants will be able to finalise their application by paying the fee, after the FCA will get the power to set the fees.
If the company is already regulated by the FCA, it will only apply for the variation of permission to undertake new activities. However, the FCA will offer the usual fee discount, if the authorised firm applies to become the TPVs. The reason behind is that the TPV will be assessed on the specific criteria defined in the Securitisation Regulation, so the collected earlier information will not be relevant.
The FCA aims to recover the cost of its supervision of firms subject to the Securitisation Regulation by introducing, authorisation fees for TPVs, and to subsequently monitor their compliance with the authorisation conditions.
The complexity of authorisation and the amount of work required this authorisation requires are the ground for setting the level of fees. It is anticipated that the work involved in processing a TPV application would be similar to considering a straightforward application, therefore the FCA proposes to charge the straightforward fee of £1,500, as this represents a reasonable contribution towards the cost of authorising TPVs.
To authorise non-credit-related regulated activities the FCA usually charges fees based on three levels of complexity:
- straightforward application – £1,500
- moderately complex application – £5,000
- complex application – £25,000
The FCA also proposes to set a flat-rate annual fee of £250, since TPVs are expected to be low regulatory risk entities, and therefore will not require significant supervisory resources.
This is important to mention that the FCA will apply its new fee’s regime both to firms which are already authorised by the FCA and paying the annual fees and to firms which are not authorised by the FCA. The FCA will oversight the non-authorised firms, however will not feasibly be able to recover the costs from them.
There are also ongoing consultations on two sets of fees for TVPs:
- one-off application fees
- annual periodic fees
How we can help
Should have any queries concerning the EU Securitisation Regulation and CRR Amendment, CPA Audit’s Compliance Team are at hand to advise and assist you. Contact us to discuss your needs.
© CPA Audit LLP 2019.