Key issues in structured finance and securitisation transactions in United Kingdom

Transactional issues

Which forms can special purpose vehicles take in a securitisation transaction?

Most SPVs are either a private or a public limited company incorporated under the Companies Act 2006 (CA 2006). If the SPV is to issue listed bonds, then it will typically be incorporated as a public limited company in order to comply with CA 2006. In some cases, (particularly in UK covered bond issues) an SPV may be a limited liability partnership under the Limited Liability Partnerships Act 2000. UK SPVs are usually separate entities having their own corporate identity and legal existence. An SPV can be a subsidiary of the originator. Most commonly, the shares of the SPV will be held by a share trustee on a discretionary trust for the benefit of charitable purposes, thereby rendering the SPV an orphan and unrelated to any party to the transaction.

What is involved in forming the different types of SPVs in your jurisdiction?

An SPV incorporated in England and Wales will be subject to English laws that affect corporate entities generally, such as CA 2006 and the Insolvency Act 1986 (IA 1986). Constitutional documents for English law incorporated companies include the memorandum and articles of association and certificate of incorporation. The incorporation of the SPV can take place within a few days and at a low cost. If the SPV is to issue-listed bonds, then it should be a public limited company. This requires the SPV to have a minimum share capital of £50,000. Before a public limited company can commence business (eg, sign contracts), it needs to have at least one-quarter of its capital paid up (ie, as to at least £12,500) and obtain a trading certificate from the UK registrar of companies.

Is it possible to stipulate which jurisdiction’s law applies to the assignment of receivables to the SPV?

Yes. Parties are free to choose the law they wish to have apply to their contracts in the UK. This choice of law will be modified only to the extent that:

• the law of another jurisdiction is closely associated with the relevant contract and there are rules of that country that cannot be disapplied by contract;
• the choice of law is contrary to mandatory rules of UK law, which overturn such choice of law; or
• where the chosen foreign law is manifestly incompatible with UK public policy.

It should be noted that consumer protection law (such as FSMA 2000, the Consumer Credit Act 1974 and the Consumer Rights Act 2015) constitute mandatory rules of UK law.

May an SPV acquire new assets or transfer its assets after issuance of its securities? Under what conditions?

English law would not prevent an SPV from acquiring or disposing of assets after the issuance of bonds. The transaction documents will, however, usually contain such restrictions (or subject to conditions, permissions).

What are the registration requirements for a securitisation?

There are none. However, English SPVs are required to register (with the UK registrar of companies) the details of any charges or other security they create. An SPV issuing bonds will need to obtain a legal entity identifier (LEI) to transact with the underwriters (MiFID II regulated banks and investment firms are required to ensure that their counterparties have a LEI). These can be obtained from any local operating unit (LOU) of the Global Legal Entity Identifier Foundation (a not-for-profit organisation established by the Financial Stability Board). A LEI can be obtained from any LOU the SPV chooses (wherever such LOU is located). The London Stock Exchange is the UK LOU.

Must obligors be informed of the securitisation? How is notification effected?

Receivables can be validly assigned to the securitisation SPV without the obligors under those receivables being notified of the assignment. This is an equitable assignment and is the most commonly used form of assignment in English law securitisations. However, prior to notice of the assignment being given to the obligor, a subsequent purchaser of a receivable without notice of the prior assignment by the seller may take priority over the claims of the initial purchaser. Further, a subsequent purchaser can, if it notifies the obligor before the initial purchaser does so, require the obligor to make payment to such subsequent purchaser. Moreover, prior to receiving notice of the assignment, the obligor:

• may continue to discharge its debt by making payments to the seller;
• may set off claims against the seller arising prior to receipt by the obligor of the notice of assignment;
• agree amendments to the assigned contract with the seller (as opposed to the purchaser) without the purchaser’s consent being required; and
• cannot be sued by the purchaser in the purchaser’s own name (although there are procedural steps that the purchaser can take that mean that this aspect of an equitable assignment is rarely an impediment to it enforcing an assigned receivable in practice).

What confidentiality and data protection measures are required to protect obligors in a securitisation? Is waiver of confidentiality possible?

See question 5 regarding registration under GDPR. The GDPR only applies to data relating to natural persons and not to information about corporations. Data controllers must comply with a set of principles regarding the processing and keeping of personal data. The general obligation is that the processing of data must be fair and lawful. Data must also not be transferred outside of the European Economic Area (EEA) unless adequate protection is in place.

Individuals have rights to prevent publication of confidential information about themselves, to see the information held about them, to seek correction of incorrect information and to have data deleted if there is no longer a good reason to hold it. As a matter of contract, parties are free to waive confidentiality. The terms of many consumer finance contracts provide for the borrowers to consent to the disclosure of certain information about their loan.

Are there any rules regulating the relationship between credit rating agencies and issuers? What factors do ratings agencies focus on when rating securitised issuances?

The relationship between credit rating agencies (CRAs) and issuers is regulated by Regulation (EC) No. 1060/2009, as amended in May 2011 by Regulation (EU) No. 513/2011 (CRA II) and Regulation (EU) No. 462/2013 (CRA III). The registration and ongoing supervision of EU-based credit rating agencies is the responsibility of ESMA.

CRA III imposes a number of obligations on securitisation issuers appointing CRAs, including:

• appointing at least two CRAs to rate any securitisation bond it is having rated;
• to consider appointing at least one CRA with less than a 10 per cent total market share and if it decides not to, to document such determination; and
• mandatory rotation of CRAs every four years.

What are the chief duties of directors and officers of SPVs? Must they be independent of the originator and owner of the SPV?

The directors of the SPV need not be independent of the originator or owner of the SPV. It is typically a CRA criteria that at least a majority of the directors of such SPV be independent in order to strengthen the bankruptcy-remoteness of the SPV (see question 32) but not all SPVs follow this practice. If the SPV is incorporated under CA 2006 (which will usually be the case), the directors will be subject to the statutory duties set out in sections 171 to 177 of CA 2006.

Are there regulations requiring originators and arrangers to retain some exposure to risk in a securitisation?

Under the Securitisation Regulation, originators, sponsors and issuers are obliged to ensure that an originator or original lender retains some exposure to the securitised assets.

The Securitisation Regulation requires such retention of a material net economic interest to take of the following five forms:

• vertical slice: retention of at least 5 per cent of the nominal value of each class of notes;
• originator’s interest (revolving assets): retention of an interest in revolving assets equal to at least 5 per cent of the nominal value of the portfolio;
• on-balance sheet: retention of randomly selected assets that would otherwise have been included in the securitisation portfolio, equal to at least 5 per cent of the nominal value of the securitised portfolio, provided selection is made from a pool comprising not less than 200 assets;
• first loss (notes): retention of the most subordinated classes of notes (having at least the same maturity as non-retained classes of notes) equal to at least 5 per cent of the nominal value of the securitised portfolio; and
• first loss (individual assets): retention of a first loss exposure of not less than 5 per cent of the nominal value of each portfolio asset.