Securitisation after Brexit - Considerations for securitisations involving UK entities

Introduction
The UK left the EU on 31 January 2020 at 11:00 p.m. UK time. This legal update summarises the application of EU law in the UK after Brexit, with particular reference to the Securitisation Regulation.

Brexit and the application of EU law in the UK during the transition period
On 17 October 2019, the UK and the EU entered into a withdrawal agreement in relation to Brexit (the “Withdrawal Agreement”).

The Withdrawal Agreement provides for a transition period from the exit date until 31 December 2020 (unless such period is extended). During this transition period, EU directives which have already been implemented into UK law and EU regulations (which are directly applicable in EU member states without the need for any local law implementing measures) will continue to apply in the UK. New EU regulations will also automatically become part of UK law during that period. Any reference to “Member States” in such EU laws will be construed to include the UK (unless otherwise stated in the Withdrawal Agreement).

Consequently, although the UK is no longer in the EU, it will continue to be treated as an EU member state during the transition period and the EU Securitisation Regulation will apply with respect to institutional investors, originators, sponsors, original lenders and securitisation special purpose entities (“SSPEs”) which are established in the UK.

Since any new EU regulations will be directly applicable in the UK during the transition period, any new technical standards relating to the Securitisation Regulation which are finalised before the end of that period will also apply in the UK (although it is likely that they will need to be amended through statutory instruments as regards their application after the transition period - as to which please see below). These are likely to include the EU delegated regulations setting out the technical standards relating to disclosure, which will include the new mandatory forms of reporting templates, and those relating to risk retention.

The application of EU law in the UK after the transition period
The European Union (Withdrawal) Act 2018, as amended by the European Union (Withdrawal Agreement) Act 2020, provides for the repeal of the European Communities Act 1972, thus ending the supremacy of EU law in the UK. It also provides that at the end of the transition period, existing EU laws will be “onshored”, i.e. become part of a new category of UK domestic law known as “retained EU law”, which after that can only be amended by UK legislation (not by subsequent EU legislation).

In connection with this onshoring process, government ministers have been granted the power to make secondary legislation to amend such retained EU law in order to prevent, remedy or mitigate any failure of retained EU law to operate effectively, or any other “deficiency” in such law, in each case which arise as a result of Brexit. Several hundred UK statutory instruments have been put in place under these powers, in order to make sure this retained EU law functions in the UK following the end of the transition period. Originally designed to come into effect in the event of a no-deal Brexit, these regulations will now apply from the end of the transition period.

One of these statutory instruments is the Securitisation (Amendment) (EU Exit) Regulations 2019 (the “UK Securitisation Regulations 2019”), which amend the Securitisation Regulation as it will apply in the UK after the transition period.

These regulations make a number of general amendments to the Securitisation Regulation such as changing references to “the Union” to “the United Kingdom” and removing references to “the EBA” and “ESMA” so that supervisory responsibility is assumed by the appropriate UK regulator. In addition, there are other important changes which go further.

The UK Securitisation Regulations 2019 make certain amendments to the definition of “sponsor”, which are likely to be seen as helpful. These include changes to make it clear that an “investment firm” will be capable of being a sponsor if it is located in a “third country” (i.e., outside the UK). It is not clear from the wording of the Securitisation Regulation how the sponsor definition should be interpreted with respect to third country investment firms, and it remains to be seen whether the EU supervisory authorities will interpret the sponsor definition in the EU regime in a similar way.

There are also amendments which provide some flexibility in the requirements for simple, transparent and standardised, or “STS” securitisations and which allow for a limited grandfathering period for transactions which have been notified as being STS under the EU regime. However, there are currently no reciprocal arrangements in the EU securitisation regime to recognise transactions which would be STS under the UK regime, for the purposes of the EU regime.

Nor are there any grandfathering provisions in the EU regime for transactions with UK originators, sponsors and SSPEs which have been notified as being STS before the end of the transition period (the Securitisation Regulation requires such entities to be established in the EU as a condition for STS treatment).

In addition, the UK Securitisation Regulations 2019 amend the due diligence requirements for institutional investors under Article 5(1)(e) of the Securitisation Regulation with respect to disclosure by originators, sponsors and SSPEs in accordance with Article 7 of the Securitisation Regulation. The interpretation of Article 5(1)(e) of the Securitisation Regulation, which concerns the question of whether an EU institutional investor needs to obtain the relevant disclosure from a non-EU originator, sponsor or SSPE in order to comply with its due diligence requirements, is an area of uncertainty. Non-EU originators, sponsors and SSPEs are generally not considered to be directly subject to the Article 7 disclosure requirements, and may be unwilling or unable to provide such disclosure, in the form of the new reporting templates or otherwise. Market participants are hoping for guidance from the European Supervisory Authorities which will allow EU investors to invest in such transactions. Depending on the approach taken in the EU, the position set out in the UK Securitisation Regulations 2019 could result in different interpretations being taken of the due diligence requirements in the UK, compared to that taken in the EU.

Further details of the changes to the Securitisation Regulation in the UK under the UK Securitisation Regulations 2019 can be found in our previous Legal Update “Onshoring the Securitisation  Regulation – How will it apply in the UK in the event  of a no-deal Brexit?” (except that the changes are now expected to take effect following the transition period rather than on exit day as originally intended).

The amendments made to the Securitisation Regulation by the UK Securitisation Regulations 2019 will result in a parallel UK securitisation regime from the end of the transition period which will be similar to, but not identical to, the Securitisation Regulation. This will be subject to any further amendments which may be made as a result of the negotiations between the UK and the EU, and any future amendments that may be made in the UK.

What about offering documents and transaction documents?
While it is not possible to predict fully the situation after the end of the transition period, there are some steps that can be taken when drafting offering documents and transaction documents for transactions entered into during that period in order to reflect the fact that the UK is no longer part of the EU.

In the case of offering documents, amendments may be required to deal with this. For example, changes may be required to be made to legends and selling restrictions, since they may refer in some places to member states of the EEA (which consists of the EU member states together with Iceland, Liechtenstein and Norway). These amendments will not be major, since EU regulations (such as the Prospectus Regulation and the PRIIPs Regulation) will continue to apply in the UK during the transition period. However, where there is a reference to a member state of the EEA, small amendments will need to be made to ensure that it is clear that the relevant wording is referring to the UK as well as to the EEA member states. In addition, a Brexit risk factor (updated to reflect that Brexit has now occurred) will often be included.

In the case of transaction documents, these should also be reviewed in order to consider whether any changes are required, for example to check whether any references to the EU need to be updated to add references to the UK.

Further changes are likely to be required for transactions entered in or amended following the transition period, and it is important to monitor the situation closely where UK entities are involved in a securitisation.

For further information on the matters discussed in this article, please contact any member of the Mayer Brown securitisation team.