General framework

Legislation

What legislation governs securitisation in your jurisdiction? Has your jurisdiction enacted a specific securitisation law?

The UK contains several jurisdictions. This chapter covers the laws of England and Wales (ie, English law). It does not cover the laws of Scotland, Northern Ireland, Jersey, Guernsey and the Isle of Man, which differ from English law.

There are no specific laws on securitisation in the UK. See question 30 in respect of certain insolvency and tax law regimes designed to accommodate securitisation transactions. Compliance with these is not, however, mandatory and not all UK securitisations operate under them. See question 4 for certain regulatory regimes applying to securitisations.

Applicable transactions

Does your jurisdiction define which types of transactions constitute securitisations?

English law has no legal definition of securitisation per se. When considering the applicability of risk retention rules, the key legal definition of a securitisation is a transaction or scheme, whereby the credit risk associated with an exposure or pool of exposures is tranched, having both of the following characteristics:

  • payments in the transaction or scheme are dependent on the performance of the exposure or pool of exposures;
  • the subordination of tranches determines the distribution of losses during the ongoing life of the transaction or scheme; and
  • the transaction or scheme does not create exposures which possess all of the characteristics listed in article 147(8) of Regulation (EU) No. 575/2013 (CRR) (this provision carves out transactions such as project finance, asset finance or real estate finance transactions that involve limited recourse lending to special purpose vehicles (SPVs), but that create direct exposures to underlying assets that are not themselves debt obligations).

To allow the appointment of an ‘administrative receiver’ (who enforces security with regard to the interests of the secured creditor only, as opposed to other insolvency officials who must have regard to the body of creditors generally) when enforcing, the transaction will have to meet certain criteria. The most common method of meeting those criteria is to issue bonds that are listed on a stock exchange or rated and are secured by the grant of a qualifying floating charge (which is a floating charge that states that it is so qualifying) over all the assets of the SPV in favour of a trustee for the benefit of the bondholders (see also question 30).

Market climate

How large is the market for securitisations in your jurisdiction?

According to the Association for Financial Markets in Europe securitisation data report for the third quarter of 2017, the total amount of then outstanding securitisation issuances from the UK at the end of the second quarter of 2018 was €308.0 billion.

Regulation

Regulatory authorities

Which body has responsibility for the regulation of securitisation?

The Securitisation Regulation (Regulation EU No 2017/2402) imposes certain risk retention and reporting requirements. However, it does not create a requirement for regulatory approval of securitisation transactions. If the underlying assets of the securitisation are regulated, then the originator and servicer will need to be regulated. UK Residential mortgage and consumer credit lending are regulated by the Financial Conduct Authority (FCA). UK banks, insurers and investment firms are regulated by the Prudential Regulation Authority (PRA), which will also be responsible for enforcing the Securitisation Regulation in respect of them (or the FCA in the case of small banks and investment firms, who will be responsible for enforcing the Securitisation Regulation in respect of those entities). The UK Listing Authority (a division of the FCA) is the UK’s competent authority for approving prospectuses under the Prospectus Directive (Directive 2003/71/EC). The FCA is also responsible for administering the Directive on Markets in Financial Instruments (Directive 2014/65/EU) (MiFID II) in the UK. The European Securities and Markets Authority (ESMA) is responsible for administering Regulation (EU) No. 462/2013 (CRA III).

Licensing and authorisation requirements

Must originators, servicers or issuers be licensed?

The carrying out of a securitisation does not, of itself, require a licence. However, residential mortgage lending, consumer lending and the servicing of both those types of loan are regulated activities under the Financial Markets and Services Act 2000 (FSMA 2000). ‘Arranging investments’ and ‘investing in investments’ are regulated activities under FSMA 2000 and the arrangers and lead managers will need to have the correct authorisations to do so.

In addition, the General Data Protection Regulation (Regulation EU No. 2016/679) (GDPR) governs the use and safeguarding of personal information. There is no general registration requirement under GDPR, but an originator, servicer or issuer who processes personal data in an automated manner will need to register with the Information Commissioner’s Office.

What will the regulator consider before granting, refusing or withdrawing authorisation?

Originators and servicers regulated under FSMA 2000, will need to comply with the conditions for authorisation set out in that Act. These include requirements in respect of location of offices, appropriate resources including adequacy of financial resources, suitability of directors and certain senior managers, effective supervision and the firm’s business model. Note that SPVs would not usually be authorised under FSMA 2000. In the case of regulated assets (ie, mortgages and credit to consumers), it will need to ensure it has appointed a regulated servicer.

Sanctions

What sanctions can the regulator impose?

The FCA and the PRA have extensive powers to impose sanctions on non-compliant institutions and individuals, including:

  • censure;
  • fines;
  • suspension of rights to carry on certain business temporarily or permanently;
  • banning orders for individuals; and
  • withdrawal of authorisation.
Public disclosure requirements

What are the public disclosure requirements for issuance of a securitisation?

Issues of transferable securities require a prospectus if:

  • they are being offered to the public (for the purposes of the Prospectus Directive (Directive 2003/71/EC), bonds having a minimum denomination of €100,000 (or equivalent) or more are not offers to the public); or
  • they are to be admitted to trading on a regulated market (usually the reason for UK securitisations to issue a prospectus).

The Prospectus Directive and related guidelines set out the disclosure requirements for listed prospectuses, the specifics of which vary according to the nature of the issue. There is also a requirement to publish a supplementary prospectus if, between the date of the prospectus and the admission of the relevant bonds to trading, any significant new factor, material mistake or inaccuracy arises in respect of the original prospectus.

In addition, under the Securitisation Regulation, the issuer, originator and sponsor are jointly responsible for making specific information about the transaction publicly available through a website (the European Rating Platform) to be established by the European Securities and Markets Authority (ESMA). Such disclosure information about the underlying assets (specifically their performance and creditworthiness), the securitisation’s transaction documentation, structure, cash flows and any collateral supporting exposure to the securitisation. The public disclosure obligations contained in the Securitisation Regulation will be supplemented by a Commission Delegated Regulation (which is currently in draft form and has not as yet been officially promulgated) which sets out detailed templates for loan by loan reporting. It is as yet unclear whether non-public securitisations will be subject to a requirement to make identical disclosures to investors (but without the requirement to make the same publicly available in a securitisation repository).

Furthermore, the risk retention regime in the Securitisation Regulation (see question 24) contains an obligation on the risk retention holder to make a public disclosure about its identity and to provide further details about its risk retention holding. The information in respect of this disclosure must be also be contained in each investor report, which must be supplied at least quarterly (or monthly for an ABCP conduit). The sponsor and originator are under a duty to disclose to potential investors ‘all materially relevant data’, including data relating to the creditworthiness and performance of the underlying assets, cash flows and any collateral supporting those assets, and any information investors may require to analyse the cash flows and collateral supporting those assets.

What are the ongoing public disclosure requirements following a securitisation issuance?

The public disclosure obligations under the Securitisation Regulation are ongoing disclosure obligations (see question 8). The risk retention holder is also obliged to make a disclosure if it breaches its retention commitment or any of its obligations, or where there has been a material change to the performance of the securitisation, the securitisation’s risks or any of the underlying assets. If the SPV has issued a listed prospectus (see question 8), then it will also be obliged (under the under the Securitisation Regulation and Market Abuse Regulation (Regulation (EU) No. 596/2014) (MAR)) to disclose to the market as soon as possible any ‘inside information’ it holds, being precise information directly or indirectly related to it or the bonds, which if publicly disclosed would have a significant effect on the bonds’ price.

Eligibility

Originators

Outside licensing considerations, are there any restrictions on which entities can be originators?

Generally, there are no restrictions on who can be an originator. However, for the purposes of risk retention, a retaining originator cannot be an entity set up for the sole purpose of securitising exposures.

Receivables

What types of receivables or other assets can be securitised?

The Securitisation Regulation prohibits (with very limited exceptions) resecuritisations (ie, securitisations of exposures that are themselves securitisations). Apart from that, there is no legal restriction on the assets that can be securitised in the UK. Note, however, that securitisations will only be able to achieve the ‘simple, transparent and standardised’ label in respect of certain types of underlying asset. However, usually only assets that have a defined or identifiable and stable cash flow are securitised. Examples of assets that have been securitised in the UK include:

  • residential mortgage loans;
  • leases and rental receivables;
  • credit card receivables;
  • consumer loans;
  • auto loans;
  • corporate loans;
  • trade receivables; and
  • public utility revenues.
Investors

Are there any limitations on the classes of investors that can participate in an offering in a securitisation transaction?

Under MiFID II and the Regulation on Markets in Financial Instruments (Regulation (EU) No. 600/2014) (MiFIR), MiFID II regulated ‘manufacturers’ (ie, entities creating, developing, issuing or designing financial instruments) and ‘distributors’ (ie, MiFID-regulated underwriters and sellers of such products) must identify ‘target markets’ based on suitability metrics that include knowledge, experience, risk appetite and ability to absorb losses. In applying these metrics, it is unlikely that manufacturers and distributors will include retail investors (ie, investors who are not wholesale investors) in their target market for complex products, which are likely to include securitisations. Note that for the purposes of MiFID II and MiFIR, the definition of ‘wholesale investor’ is narrower than it is under the Prospectus Directive.

Custodians/servicers

Who may act as custodian, account bank and portfolio administrator or servicer for the securitised assets and the securities?

These roles, if relevant, would be performed by a bank or investment firm regulated by the PRA or FCA.

Public-sector involvement

Are there any special considerations for securitisations involving receivables with a public-sector element?

There are no specific requirements for securitising public-sector receivables. Certain public-sector bodies may be:

  • subject to limits on their capacity; or
  • entitled to claim sovereign immunity and the due diligence necessary to ensure that the receivable is binding on and enforceable against the obligor should be carried out.

Transactional issues

SPV forms

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.

SPV formation process

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.

Governing law

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.

Asset acquisition and transfer

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).

Registration

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.

Obligor notification

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.

Credit rating agencies

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.
Directors’ and officers’ duties

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.

Risk exposure

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.

Security

Types

What types of collateral/security are typically granted to investors in a securitisation in your jurisdiction?

English securitisation SPVs usually grant security as mortgages, charges or assignments by way of security. Charges can be fixed or floating in nature. A security interest is floating if it expressly states that it is floating; and is likely to be held to be floating if it allows the debtor to dispose of assets subject to it without having to obtain the consent of the secured creditor. However, a floating charge will rank behind a fixed charge in priority, so most securitisations will endeavour to take as much notionally fixed security (including assignments by way of security over contractual rights and receivables) as possible and also a qualifying floating charge.

Such security will typically be granted to a security trustee to hold for the benefit of the securitisation investors and will be enforceable only by such security trustee. While the securitisation investors will not have rights to directly enforce the security, they typically have the ability to direct (if a sufficient proportion of them provide the requisite directions) the security trustee to enforce such security.

Perfection

How is the interest of investors in a securitisation in the underlying security perfected in your jurisdiction?

Where the SPV granting the security is a company incorporated under CA 2006 (as is usually the case), the details of the security it grants will (with limited exceptions) need to be lodged for registration with UK registrar of companies within 21 days of being created. Failure to so lodge the relevant details will result in the security being invalid against the other creditors of the SPV and any liquidator or administrator (both types of insolvency official) appointed in respect of the company.

Enforcement

How do investors enforce their security interest?

See question 25. If the securitisation is structured, as described in the second paragraphs of questions 2 and 25, then the security trustee is likely to enforce the security by appointing an administrative receiver. An administrative receiver is an official who acts in the interests of such secured creditors. Administrative receivers have wide-ranging powers to use and dispose of the assets of the debtor over whom they have been appointed, but subject to the terms of the security documents under which they are appointed. An administrative receiver could, in theory, service the securitised assets and operate the cashflows of the issuer throughout the remaining life of the securitisation. However, in practice, the administrative receiver will generally try to sell the assets for the best price reasonably achievable and distribute the proceeds thereof in accordance with the applicable priorities of payment. For so long as an administrative receiver is in office, the unsecured creditors are not entitled to appoint any official over the assets the subject of the administrative receivership (theoretically, a liquidator could be appointed while the administrative receiver is in office, but such liquidator would not have any rights to the secured assets until the secured creditors had been fully paid; in practice, such appointment of a liquidator is unusual in securitisations). The person entitled to appoint an administrative receiver is also entitled to be notified of any steps being taken to appoint another insolvency official and to seek appointment of an administrative receiver instead.

Commingling risk

Is commingling risk relating to collections an issue in your jurisdiction?

Commingling risk is an issue in the UK. Where the proceeds of securitised assets are paid into an account that also holds other funds, there is a risk that in the collection accountholder’s insolvency, the proceeds of collections related to the securitised assets might not be available to the securitisation investors. Mitigating techniques include the collection accountholder declaring a trust over the proceeds of securitised assets in such account, sweeping funds frequently from the collection account to an account in the name of the securitisation SPV or both.

Taxation

Originators

What are the primary tax considerations for originators in your jurisdiction?

The corporation tax treatment of the assets sold to the SPV will depend on the nature of those assets and the way the securitisation is accounted for. Generally speaking, where a securitisation is accounted for as a financing by the originator, it should be possible for a UK-based originator to be taxed as if it had borrowed the funds raised by the securitisation, and continued to own the assets that had been disposed of. This treatment may not be appropriate where the assets being securitised are certain non-financial assets, or where the securitisation is not treated as a financing; in which case, the tax treatment of the sale will depend on the nature of the underlying assets and may give rise to corporation tax charges on any gain resulting from the disposal. The current rate of UK corporation tax is 19 per cent. The UK government has announced this rate will be reduced to 17 per cent from April 2020.

Generally speaking, the securitisation should not give rise to a VAT cost for the originator, although the exact VAT consequences can be complex.

Other than in the case of certain interests in real estate and certain equity-like securities, there are no stamp duties or other transfer taxes in the UK on the disposal of financial assets to an SPV.

Issuers

What are the primary tax considerations for issuers in your jurisdiction? What structures are used to avoid entity-level taxation of issuers?

Most UK public true sale securitisations will be structured to fall under the Taxation of Securitisation Companies Regulations 2006. The regulations allow securitisation companies to be subject to corporation tax (at the rates mentioned in question 29) simply on the cash profit retained within the company after the payment of its disbursements under the transaction waterfall. Broadly, in order to fall within this tax regime, the SPV issuer must qualify as a securitisation company; generally:

  • an SPV that issues notes (valued at least £10 million at the date of issue) wholly or mainly to independent investors and holds financial assets as security for those notes (a note-issuing company);
  • an SPV that is funded by a note-issuing company or intermediate borrowing company, and holds financial assets as security for the capital market arrangement entered into by a note issuing company (an asset-holding company);
  • an intermediate borrowing vehicle that is funded by a note-issuing company or another intermediate borrowing company (an intermediate borrowing company);
  • an SPV that acquires or holds financial assets for the purpose of transferring them to an asset-holding company or note-issuing company (or itself becoming the same) (a warehouse company);
  • satisfy the ‘payment condition’ at all times (ie, that all amounts received flow through to investors within 18 months of the end of the accounting period, other than the SPV’s retained profit in the waterfall, and any amounts reasonably required to cover losses and support creditworthiness);
  • not be party to any transactions for which avoiding UK tax was one of the main purposes; and
  • as a general rule, not be involved in any business activities other than those that are incidental to its role as an SPV in the securitisation.

Certain types of receivable, particularly receivables arising from loans, royalties and real estate rentals, are subject to UK withholding tax unless an exemption applies. Generally, where the receivables are sold to a UK resident SPV, an exemption should apply to the underlying receivable so that no withholding tax is due from the underlying obligor. It is therefore usual for loan portfolios to be securitised through a UK resident SPV; trade finance and other trading payments are more frequently securitised via SPVs in other jurisdictions.

Investors

What are the primary tax considerations for investors?

Interest paid on securitisation notes issued by an SPV in the UK will be subject to UK withholding tax at 20 per cent unless an exemption applies. The main exemption available is the ‘quoted eurobond’ exemption that applies where the notes are listed on a ‘recognised stock exchange’. Many exchanges qualify for these purposes, including the London, Dublin, Luxembourg and the Channel Islands ones. From 1 April 2018, this exemption will be extended to notes traded on a multilateral trading facility operated by an EEA-regulated recognised stock exchange. If these exemptions do not apply, then noteholders may be able to benefit from other exemptions (such as obtaining relief under a double taxation treaty, or an exemption for UK corporation tax payers), but it is not typical to rely on these exemptions in securitisation transactions.

Notes that fall within the loan capital exemption from UK stamp duty and stamp duty reserve tax are exempt from such duties and securitisation notes are usually structured to qualify as such.

Bankruptcy

Bankruptcy remoteness

How are SPVs made bankruptcy-remote?

It is important that the SPV is set up and operates in a way that makes it highly unlikely that it will become subject to insolvency proceedings. Common steps to achieve bankruptcy-remoteness include:

  • ensuring that the SPV is incorporated as a new company with a distinct and separate legal personality;
  • placing restrictions on the SPV incurring liabilities outside those contemplated by the securitisation; and
  • granting security over all the SPV’s assets in favour of the security trustee for the SPV’s secured creditors, thereby disincentivising third parties from commencing insolvency proceedings against the SPV (as the assets validly the subject of such security will not, with some very limited exceptions, be available to satisfy the claims of unsecured creditors).
True sale

What factors would a court in your jurisdiction consider in making a determination of true sale of the underlying assets to the SPV (eg, absence of recourse for credit losses, arm’s length)?

English law does not contain a general doctrine of recharacterisation of transactions. The courts will seek to give effect to transactions in accordance with the terms agreed by the parties. However, if the actual transaction is inconsistent with the labels used in the transaction documents, the courts may treat the transaction by reference to its real form than the labels used in the transaction documents. The following are generally regarded in the UK securitisation market as indicators that a transaction is a grant of security rather than a ‘true sale’:

  • the originator being entitled to have the assets returned if it returns the purchase price to the buyer. This principle will not be offended by obligations on the originator to repurchase assets for breach of representation (being more in the nature of a secured loan, whereby the borrower is entitled to the return of its asset upon repaying the debt). This principle will not be offended by obligations on the originator to repurchase assets for breach of representation;
  • the purchaser having to account to the originator for profits made on a disposition by it of the assets (being more in nature of a secured loan, whereby the lender is entitled to its security for the amount of unpaid debts, but not to amounts exceeding those debts); and
  • the seller being required to compensate the purchaser if it ultimately realises the acquired receivables for an amount less than the purchase price paid (being more akin to the repayment of a loan than the sale of an asset).

The above factors should only be treated as rules of thumb. The English courts will allow transactions that display some or all of the above characteristics to be treated as sales if they otherwise are more consistent with sales than loans with the grant of security. If the ‘sale’ to the SPV is found not be a sale, but rather a secured loan, then it may be void for lack of registration with the registrar of companies (if the seller of the assets in question is a UK company, which is usually the case (see question 26)).

A sale may be set aside by the courts if it is a:

  • transaction at an undervalue;
  • preference; or
  • transaction defrauding creditors under IA 1986.

Transactions at an undervalue or a preference are, however, only capable of being set aside if the originator was insolvent at the time of the transaction or became insolvent as a result of the transaction. A sale will not be set aside as a transaction at an undervalue if it was made in good faith, for the purposes of carrying on the seller’s business and reasonable grounds exist for believing it would benefit the seller. A sale will not be set aside as a preference if the seller was not influenced by a desire to put the purchaser in a better position than the other creditors of the seller. A transaction defrauding creditors can be set aside whether or not the seller was solvent at the time of the sale, but only if the court is satisfied that the purpose of the transaction was to put the assets beyond the reach of a claimant against the seller or to otherwise prejudice the interests of such claimant. The usual mitigant is requiring the originator’s directors to certify that the originator is solvent, entering into the transaction in good faith, for business reasons and the absence of any desire or purpose of preferring the purchaser or prejudicing any claimant against the originator.

Consolidation of assets and liabilities

What are the factors that a bankruptcy court would consider in deciding to consolidate the assets and liabilities of the originator and the SPV in your jurisdiction?

English law has no concept similar to the US doctrine of substantive consolidation. Only in exceptional cases would the UK courts consider it appropriate to ‘consolidate’ the assets and liabilities of two entities with separate legal personality. Examples include where the separate legal personality of a company is being used for fraud, illegality, or where an agency or nominee relationship is found to exist.

Updates and trends

Recent developments

Are there any rules governing securitisations pending in your jurisdiction or reforms under way, such as prohibitions on financial firms betting against the securities they package, improved disclosure and oversight of the asset-backed securities market, rules limiting bank compensation structures that incentivise risk, etc?

The Securitisation Regulation

The Securitisation Regulation takes effect on 1 January 2019. There are still a number of pieces of level 2 regulation that need to be enacted to clarify the details of matters such as the format and content of reports to securitisation repositories.

Prospectus Regulation

The Prospectus Regulation (Regulation (EU) No 2017/1129 commences application on 21 July 2019. While it introduces a number of new provisions in respect of prospectuses, the main change likely to affect securitisations is the requirement it will introduce to rank risk factors according to their materiality.

LIBOR

The FCA will cease requiring reference banks to provide LIBOR quotations from the end of 2021 and current indications are that LIBOR will cease to be published once reference banks are no longer required to provide such quotations. Many floating rate securitisations use LIBOR as the benchmark rate for calculating the interest payable on their bonds. No market standard has yet emerged in terms of either the replacement for LIBOR or the mechanisms by which existing deals that mature after the end of LIBOR will transition to new rates. The UK financial regulators have published their preferred successor to LIBOR, being the Sterling Over Night Index Average (or SONIA). At present, SONIA exists only as an overnight rate (unlike LIBOR, which provides rates for a range of maturities). Whether an overnight rate will be suitable for pricing bonds with quarterly or biannual coupon payment dates remains to be seen. Some issuers (although not securitisations) have issued SONIA bonds that calculate a quarterly coupon based on an average of SONIA across the relevant interest period. Work is also under way in some quarters to create a SONIA yield curve across a range of maturities. However, it remains to be seen whether the market will adopt SONIA as the replacement for LIBOR. As regards contractual mechanisms for transitioning from LIBOR to new index rates, various industry associations have proposed template wording form incorporation in contracts (eg, the LMA and ISDA). Again, it remains to be seen whether these templates will be generally adopted or whether some other mechanism will ultimately become the market norm.