A beacon or a chink of light - EU and UK securitisation regulatory forms on the horizon?

Background 

Despite the relative success of the simple, transparent and standardised (STS) label and growth of the Significant Risk Transfer (SRT) market, the securitisation market still lags considerably behind pre-Global Financial Crisis (GFC) volumes and volumes seen in other countries like the United States. Having had a tarnished image due to the GFC and languishing in the doldrums for a number of years, securitisation is increasingly seen as a potential force for good by policy makers and needed for broader growth of the wider economy particularly in the context of the green and digital transition. 

The new UK securitisation framework introduced in November 2024 brought about some helpful targeted reforms; and a further second batch of reforms is expected later this year. It is hoped that additional targeted changes will continue to facilitate the UK market. The Prudential Regulation Authority’s (PRA) recent consultation CP13/24 – Remainder of CRR: Restatement of assimilated law incudes proposals on the securitisation capital reforms and promises some positive changes for UK securitisations, particularly in relation to the p-factor, unfunded SRT and Mortgage Guarantee Schemes (MGS) but arguably additional change is needed. 

In the EU, statements from policy makers, together with consultations and reports as to possible areas of regulatory reform might leave room for optimism that meaningful change is possible. In general, there is an increased focus on competitiveness and growth, including creating more agile regulatory frameworks that do not impose unnecessary barriers. We would however caution this with a note of pessimism; whilst policy makers see the benefit that securitisation can bring in financing the wider transition, it is not clear whether all voices will align, particularly in the EU when any legislative proposal eventually makes its way through the European Council and European Parliament. Further, the need to align to international standards on regulatory capital could hamper much-needed change. Added to this is the risk the EU and the UK create additional friction as they diverge. If change is to be meaningful, it needs to ensure that new entrants are encouraged into the market and previous participants, who withdrew from the market, such as insurers, are supported to return. 

We consider below some of the key areas where change is needed and what might be coming down the tracks this year in the UK and in the EU, as well as how far reforms need to go in order to achieve the wider competitive and growth agenda objectives. 

The UK Securitisation Framework and possible “Batch 2” reforms

The implementation of the new UK Securitisation Framework

The new UK Securitisation Framework, which came into force on 1 November 2024 (New UK Securitisation Framework), included some targeted adjustments. A notable improvement was the adoption of a proportionate regime for third-country securitisations, providing for “sufficient” disclosures to assess risk, with access to further information. This is a more flexible regime in relation to third-country securitisations which does not require UK institutional investors to verify investments based on templates. The responses to the European Commission’s Targeted consultation on the functioning of the EU securitisation framework (EU Targeted Consultation) indicated that this could be a useful approach for the EU to adopt.

"Batch 2” reforms 

A further round of reforms is expected later in 2025. We expect the UK regulators to consider the possibility of changes to the disclosure templates including (i) a more proportionate approach to the loan-level data reporting, (ii) which securitisations should be considered public and should be required to report via a Securitisation Repository and (iii) whether those transactions defined as private securitisations should be subject to a less stringent, more proportionate reporting regime. 

There are a number of other areas that were raised in the initial consultations on the new UK Securitisation Framework which might form part of the “Batch 2” proposals. We might hope to see some flexibility on the ability to transfer the risk retention for example. 

In addition, it is possible that the regulators will keep an eye on developments in the EU and new points could come into focus; for example the question of the scope of the EU Securitisation Regulation which has been discussed in response to the EU Targeted Consultation (see below). 

Additionally, certain areas have come into focus since the commencement of the UK Securitisation Framework. In particular, some clarity would be helpful on whether dual compliance with the FCA and PRA rules is needed. For example, a non-bank originator might be asked by a bank investor to agree that it will comply with both the FCA and PRA rules e.g. for disclosure and retention. This obviously adds additional compliance obligations and costs. Our view is that this is not necessary under the rules, even in the event of a change of law or a difference in approach to the rules between the FCA and PRA given that there is an overarching requirement for overall coherence. 

Unfortunately it appears, from the PRA consultation paper 13/24 (as discussed further below), that extending the STS label in the UK for synthetic securitisations is not on the agenda for now, although there has been some movement on the supervisory parameter. 

Clarification would be also be helpful for those pre-November 2024 grandfathered transactions as to what information under Article 5 would be “substantially the same”. 

We will watch this space with interest and particularly for areas of divergence between the UK and EU regimes as they develop. 

Many EU banks are active in the UK market and require dual compliance with both the UK and EU regulatory regimes. Further divergence risks a heavier regulatory burden on market participants, with associated costs and no doubt regulators will take this into account when assessing reforms, in conjunction with their competitiveness and growth objectives. As long as the UK requirements are lighter than the EU, which has been the case to date, the friction is more manageable, noting also that many UK banks lend into the EU out of EU branches or entities. 

For more information on the UK reforms, please see Not harder, still smarter? The new UK securitisation framework nears the finish line and Smarter, not harder - a new securitisation framework for the UK for more information.

UK securitisation capital reforms 

The PRA’s consultation paper CP13/24 – Remainder of CRR: Restatement of assimilated law included targeted proposals for the securitisation capital reforms with some potentially positive changes for UK securitisations, including, inter alia:  

• Optional p-factor proposal: noting deviations from Basel in other jurisdictions, and the PRA’s secondary objectives for competitiveness and growth, whilst “pursuing the principles of the output floor”, the PRA has deviated from Basel with the proposal for a formulaic p-factor for the securitisation standardised approach (SEC-SA). The proposal aims to remove a significant disincentive for synthetic SRT securitisations using the internal-ratings-based approach (SEC-IRBA) by creating a more risk sensitive p-factor that will reduce the impact of the output floor under Basel 3.1 and address the excessive level of capital non-neutrality in the SEC-SA. Taking into accounts its secondary competitiveness and growth objectives, the PRA noted that the risk weights produced by the SEC-SA can be “disproportionately high relative to the SEC-IRBA and not justified by the risk associated with the securitisation positions” and that changes were justified in order to ensure “the economic viability of securitisation as a risk-transfer mechanism”. 

Under the proposal, firms may choose to use either (i) the existing fixed p-factor (i.e. p=1 for securitisations that are not STS and p=0.5 for STS securitisations) or (ii) a proposed formulaic p-factor for the SEC-SA, based on the p-factor in the SEC-IRBA calculation (and subject to (a) a floor of 0.5 and a cap of 1 for non-STS securitisations; and (b) a floor of 0.3 and a cap of 0.5 for STS securitisations. This new option would be available both for capital calculations under the SEC-SA and for output floor calculations (for SEC-IRBA banks). This goes further than the EU position, which only legislated for a temporary relief of the supervisory parameter for the purposes of the output floor only. 

The PRA noted that any “further reduction in the proposed p-factor floor would represent a larger deviation from the Basel standards”. However the PRA contemplates support for a future review by the Basel Committee on Banking Supervision (BCBS) of the Pillar 1 securitisation capital requirements and the risk-sensitivity of the current Basel securitisation risk-weight floors but was not able to deviate further in its proposals at this time. 

The proposals appear to be an improvement; an analysis by AFME observed that the proposals will reduce the p-factor for all of the asset classes it considered in its study, other than for residential mortgages. The differences in the EU approach, coupled with the fact that there is no STS for synthetic securitisation in the UK, means that the UK may remain at a competitive disadvantage, however, in certain areas, such as SRT and residential mortgages. 

• Unfunded credit protection in SRT transactions: supervisory expectations are clarified that the use of unfunded credit protection in synthetic SRT transactions is permissible “where relevant requirements and supervisory expectations are met”, with firms encouraged to discuss the structures with the PRA at an early stage. The market, and potentially insurance companies, could start looking at increasing their use of unfunded credit protection. However, market feedback has suggested that insurance companies will unlikely be prepared to include collateral triggers on a downgrade of their credit rating, so unless the PRA follows the European approach of allowing insurers to participate as protection sellers with appropriate risk-weighting, the appetite for direct participation in the UK may be limited. 
• Capital treatment of MGS: a new capital treatment of retail residential mortgage loans under the MGS and private mortgage insurance schemes with similar contractual features to MGS is proposed. We note that the AFME response welcomes the changes but includes a number of suggestions for further changes in this area and also requests clarification that “securitisation of assets benefitting from MGS guarantees and Private Sector Equivalent Schemes…should not be understood to constitute re-securitisations”. 

For further information on the UK securitisation capital requirements, please see our articles: Following the Basel Brick road: Significant risk transfers in 2025 and Can't put a price on risk: the impact of Basel III on significant risk transfer securitisations

The EU Securitisation Regulation and possible reform

Approach of policy makers 

In the EU, statements from policy makers, as seen in the Statement by the ECB Governing Council on advancing the Capital Markets Union, Statement of the Eurogroup in inclusive format on the future of Capital Markets Union and European Council meeting conclusions of 27 June 2024 and in the Letta, Noyer and Draghi reports of last year, promoted support for securitisation reform. 

On 29 January 2025, the European Commission also published its Competitive Compass and on 19 March 2025 announced a new strategy for a Savings and Investments Union strategy to enhance financial opportunities (SIU) which provides further support for securitisation, building on the Draghi proposals and including an aim to remove barriers to securitisation and allow banks to transfer risk and free up capital for additional lending, including to small and medium-sized enterprises (SMEs). SIU is a key EU initiative, building on the Capital Markets Union, which aims to boost economic growth and competitiveness, including encouraging access by EU citizens to the capital markets and “better financing options for companies” whilst addressing broader challenges relating to the digital and climate transition as well as other areas such as defence. The announcement on the SIU strategy confirmed that the European Commission will make proposals on securitisation in Q2 this year, including on due diligence and transparency requirements, with adjustments to the prudential requirements for banks and insurers. 

In addition, similar to the approach in the UK, the Competitiveness Compass shows a desire to simplify legislation to support competitiveness and growth, so we might witness broader changes to regulatory frameworks going forward. 

Regulatory initiatives 

The EU Targeted Consultation and subsequent Call for Evidence (Targeted Review) investigate areas where possible changes are needed to revive the securitisation market. On 13 February 2025, ESMA published a Consultation Paper (Private Template Consultation) on the revision of the disclosure framework for private securitisation under Article 7 of the EU Securitisation Regulation. On 31 March 2025, the Joint Committee of the European Supervisory Authorities (Joint Committee) published its long-awaited report on the functioning of the EU Securitisation Regulation (Article 44 Report), which may inform the assessment of the EU Securitisation Regulation by the European Commission. 

Some key areas of possible change 

Following the very wide-ranging Targeted Review, which contemplates a number of areas that could be subject to reform, and given the support noted above from policy makers including for SIU, it is not unreasonable for the market to hope for some significant outcomes in terms of the changes to the requirements of the EU Securitisation Regulation. Whether all of the outcomes are positive remains to be seen. For example, the outcome of Private Template Consultation potentially adds additional reporting burdens, there is an increased emphasis recently on supervision and the Article 46 Report suggests that bringing investors within scope of the current Article 32 requirements could be beneficial. These could bring fresh challenges for the market. 

We discuss below, however, some key areas where changes to the EU Securitisation Regulation could be most beneficial to the market. 

• Disclosure and transparency reforms

Reform of the disclosure (Article 5 of the EU Securitisation Regulation) and transparency (Article 7 of the EU Securitisation Regulation) requirements would be helpful. The current requirements create costly and burdensome obligations on originators and investors, are not always helpful for investors, and often not used at all by investors who rely on bespoke information in order to make their assessments, thus presenting a significant and unnecessary barrier, particularly to new entrants into the securitisation market. A more proportionate, principles-based regime, including a review of the distinction between public and private securitisations, with a streamlined private disclosure template should be considered by the European Commission. 

The UK reforms included a more principles-based due diligence regime which requires that investors have “sufficient” information when conducting due diligence; this has been a helpful change, including for non-UK originated securitisations as templated disclosure is not required. The interpretation of Article 5(1)(e), as confirmed in the European Commission Report On the functioning of the Securitisation Regulation of 10 October 2022, that full Article 7 templates are required by third-country securitisations in all circumstances was disappointing. Non-EU originators might not want to incur the additional costs and therefore may be disincentivised from transacting with EU investors, notwithstanding that they might otherwise be able to provide sufficient information for investors. EU investors therefore suffer lost investment opportunities. 

ESMA’s Private Template Consultation on the revision of the disclosure framework for private securitisation under Article 7 of the EU Securitisation Regulation attempts to address some of the concerns of the market, but without going as far as some market participants might want in terms of providing a streamlined private template. Crucially, it failed to address the needs of investors in third-country securitisations and it is unclear how the proposals would interact with the wider review of the level 1 text. 

The Article 44 Report includes recommendations that overlap with themes in the Private Template Consultation. The Joint Committee has proposed a more proportionate, less burdensome streamlined approach to the templates and possible principles-based due diligence requirements. There is also proposal for the definition of “public securitisation” and relief for intra-group transaction as well as small-and medium-sized reporting entities which could help alleviate costs and encourage new participants to the market. 

A legislative proposal from the European Commission is expected in Q2 this year that will address disclosure and transparency requirements, taking into account the developments mentioned above. We hope that the European Commission and policy makers will look at the impact that costly and burdensome requirements have on the market which may be unnecessary for both investors and supervisors, particularly bearing in mind the EU’s wider SIU growth objectives and the need to encourage new entrants.

For further information, please see our article, ESMA consults on private templates for Securitisation Disclosure – more haste, less speed, which discusses the private template proposals in more detail. 

• Scope of the EU Securitisation Regulation 
  

The EU Targeted Consultation considered whether the definition of “securitisation” should be changed The market has a broadly settled understanding of what a securitisation is and changing the definition of “securitisation” would entail a significant review of other related legislation, in particular in relation to capital requirements, so as to avoid unintended consequence. However, removing certain transactions from the scope of application of the EU Securitisation Regulation could be beneficial; for example, transactions involving a single asset or only a few large assets (where investors can reasonably be expected to independently assess the risks more easily) and transactions where the assets or parties, such as an asset manager, are subject to alternative regulatory regimes. This was considered in detail in the AFME response to the EU Targeted Consultation. The Article 44 Report also proposes that some transactions from scope but that the definition of “securitisation” should remain unchanged.

• Targeted changes to facilitate SME financing 
  

The EU’s wider aims include facilitating finance for SMEs. The current regulatory requirements are seen as complex and costly for SME financing. Targeted changes to the EU Securitisation Regulation could helpfully address areas of friction which limit SME-related securitisation; for example, a more proportionate disclosure and transparency regime and addressing the restrictive homogeneity geographical requirements could contribute to enhancing SME financing. The responses to the EU Targeted Consultation also observe that unfavourable capital requirements are a limiting factor¹. 

The Article 44 Report also discusses limitations on SME financing and includes some proposals for reform including the possible delegation of reporting obligations for SME banks to reduce costs and encourage new entrants, as discussed above. 

• Supervision
  

The lack of harmonised supervision can create additional friction in the market and a number of responses to the EU Targeted Consultation indicated that improved regulatory certainty and co-operation would be beneficial. It is clear that a focus of the Private Template Consultation, and from the Article 44 Report, that the needs of supervisors will be a significant consideration in formulating any changes. The ESMA Peer Review Report - Peer Review on the implementation of the STS securitisation requirements (ESMA Report) of 27 March 2025 considered divergent supervisory approaches in a few relevant jurisdiction with high volumes of STS securitisations and identifies areas for improvement. We except this to be a continued theme as SIU develops. The Article 44 Report identifies problems with fragmentation and reporting burdens, co-ordination challenges, resources constraints and divergent practices. Recommendations include (albeit beyond the scope of the Article 44 mandate) more consistent supervisory practices, transition to a consolidated model under the ESAs and harmonised Third Party Verifier supervision at EU level. Supervisory improvements could include (i) promoting convergence or (ii) a new joint supervisory structure. 

• STS standard and recognition

The STS-label has had varying degrees of success. Whilst it has improved transparency, it has complex restrictive requirements, including as to homogeneity and eligible collateral requirements for EU synthetic STS securitisations and the prudential treatment for STS and non-STS securitisations could benefit from adjustments. 

The UK has extended the recognition of the EU STS transactions until 30 June 2026. There is currently no reciprocity by the EU so development of an equivalence regime would be beneficial. The Article 44 Report has proposed that selective amendments to improve efficiency are needed, including, among other matters, allowing unfunded credit protection, less restrictive collateral arrangements, amendments to homogeneity criteria, consideration of location of key parties as well as some targeted drafting clarifications. 

What further reforms are needed to improve the functioning of the EU and UK securitisation frameworks?

• Insolvency and tax harmonisation and a securitisation platform
  

It has been widely discussed that a broader package of reforms would be helpful, as well as looking at targeted changes to the EU Securitisation Regulation for the market to meet its full potential, including harmonisation of the currently fragmented insolvency and tax frameworks EU-wide². Increased harmonisation in these could widen the investor base and encourage the use of securitisation in countries that are not currently active in the market.

The EU Targeted Consultation has also opened the door to considering an EU securitisation platform; this could provide a safe asset which might support securitisation, potentially along the lines of the US Freddie Mac and Fannie Mae models. This is an interesting concept and safe asset structures have been used successfully in the EU, notably in Italy to support the non-performing loan market. However, a deeper dive is needed as to the benefits, or downsides, of such a platform, with a separate consultation into how such a framework could be constructed and the possible impact on different asset classes and the wider markets. A key concern is that it should not impact the investment of private capital in, and artificially skew the functioning of, the securitisation market³. 

Whilst it is clear that addressing broader harmonisation, as well as more agile regulatory processes are laudable aims, and could well be advantageous particularly for less well-developed markets, these are enormous tasks and ultimately significantly longer-term measures. Reforms that are achievable in the shorter-term should be a key focus for regulators. 

• Prudential and liquidity reforms for banks and (re)insurers 
  

A key factor in reviving securitisation, identified by various market participants and, more recently, by policy makers is the need to modify the prudential treatment of securitisation for banks and insurers. This a stated aim of the SIU strategy with proposals expected in Q2 2025. 

The current capital requirements are widely viewed as requiring over-capitalisation of securitisation exposures. Further reduction of the non-neutrality p-factor in the Pillar 1 securitisation capital requirements and a review of the risk-sensitivity of the current Basel securitisation risk-weight floors has been called for by a number of market participants. Some participants propose that a fundamental review of the design of the current capital requirements is needed and that there are unjustified distortions in the relevant formulae which should be thoroughly reassessed. Risk Control has published papers that describe the need for “capital velocity” for banks to be able to deploy risk capital more frequently, something that securitisation is uniquely able to achieve, in comparison for example, to covered bonds⁴. Similarly, AFME has conducted detailed analyses which indicate the need for further improvements to the overall capital and prudential framework⁵. 

Aspects of the Liquidity Coverage Ratio, such as the applicable haircuts and eligibility criteria, could benefit from review. Improvements to Solvency II should also be considered if broader investment in securitisation is to be supported, with the current requirements viewed by many as a disincentive to investments by insurance companies in securitisation, including STS and non-STS securitisations. 

However, whilst reassessment of areas discussed above, could result in more favourable capital treatment needed to free-up bank balance sheets, regulators will be concerned no doubt not to deviate from international standards and maintaining financial stability will be an overriding factor. 

Possible targeted reforms for other institutions

The 10% acquisition limit under the UCITS Directive has been highlighted as being unduly restrictive and that adjustments would be warranted in order to improve access to securitisation. Also, there are hurdles for pension funds, including occupational retirement provision (IORPs) in accessing the securitisation market which could also usefully be addressed, as highlighted in responses to the EU Targeted Consultation. Again, improving the disclosure transparency frameworks would help to remove barriers to entry into the market. 

Final thoughts

Increasingly, we have seen the emphasis on competitiveness and growth in the UK and EU. It is clear, particularly with international developments, including in the United States, that the EU and the UK will need to provide access to capital to support wider financing, including for the green and digital transition, SMEs and for defense. Securitisation is uniquely placed to provide funding for the wider economy but, to do so, it needs a wider investor base, mechanisms to facilitate the use of capital and removal of barriers and areas of friction that inhibit transactions and new entrants to the market. 

Market participants in the EU have long commented that a wider package of reforms is needed to boost the securitisation market. Whilst the plethora of calls from industry for the removal of barriers to securitisation market appear to have been acknowledged at policy level, and some changes appear to have acknowledged challenges faced by the market; such as the temporary adjustments in the EU to the p-factor and more recently the European Central Bank launched a pilot scheme in February 2025 for a “fast-track” process for approval of traditional and synthetic SRT securitisations that meet certain criteria. However, we are still some distance away from meaningful changes to regulations; a significant package of reforms is needed and policy makers need to understand the needs, not just of current market participants, but those who are currently locked out of using securitisation.

Targeted changes to the EU Securitisation Regulation and to the UK Securitisation Framework would be helpful, particularly if changes to the disclosure and transparency regime can reduce unnecessary costs and burdens, which the market has flagged as needing simplification and reform for a number of years. However, in order to release capital for firms to invest in areas that support the wider economy, additional consideration of prudential treatment for banks and insurers is needed. 

Some changes, such as insolvency and tax reform, are more likely longer-term goals. Whilst liberating capital is needed for the wider SIU aims in the EU and for the UK market, particularly for the risk transfer of residential mortgages, changes may remain subject to further deliberation at the BCBS level. For the changes that are within touching distance, it remains to be seen how much further the UK regulators are prepared to go and, in the EU, to what extent the European Parliament and European Council can be persuaded of the benefits for reform. 

Reform also risks bringing new and unwelcome burdens for the market; whilst ensuring financial stability is essential, there is a risk that legislators could replace existing burdens with new challenges; giving with one hand but taking with the other would be counter to the wider competitive and growth objectives. 

When can we expect any changes to be implemented?

In the UK, we expect a consultation on the “Batch 2” reforms later this year. In the EU, a legislative proposals for reforms to the disclosure and transparency requirements and prudential reforms for banks and insurers in Q2 so any reforms proposed are unlikely to be enacted and in force until next year at the earliest. Additional reforms will remain a work in progress and significant capital recalibrations could require BCBS-level consideration which be a long process. Whilst we may seem some beneficial changes in the short term, what are widely seen as game- changing capital and prudential reforms may rest a little further on the horizon. 

For more information on some of the points above please also see:

• ESMA consults on private templates for Securitisation Disclosure – more haste, less speed 
• Not harder, still smarter? The new UK securitisation framework nears the finish line 
• Securitisation disclosure - could less be more? 
• Smarter, not harder - a new securitisation framework for the UK

This note is for guidance only and should not be relied on as legal advice in relation to a particular transaction or situation. Please contact your normal contact at Hogan Lovells if you require assistance or advice in connection with any of the above.

Authored by Julian Craughan, David Palmer, Madeleine Horrocks, Sven Brandt, Sebastian Oebels, Jane Griffiths, Steven Minke and George Kiladze.