Reform of the EU Securitisation Framework—Part 6: Changes to the Supervisory Regime

Background 

Under the current Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for STS securitisations (the "EU Securitisation Regulation"), national competent authorities, rather than any centralised EU regulator, are responsible for overseeing and enforcing compliance with the EU Securitisation Regulation.  

Generally speaking, these supervisory powers are divided among a patchwork of national authorities within any given Member State, depending on the type of entity being overseen:

• Banks and investment firms are overseen by their domestic banking supervisor, but significant EU institutions are overseen by the European Central Bank ("ECB"); 
• Insurance undertakings and investment funds are supervised by their own sectoral regulators; and 
• Institutional investors are supervised by their own prudential supervisors (again, either national authorities or the ECB, depending on the entity).

Meanwhile, STS notifications are jointly overseen: Originators and sponsors self-certify compliance with the STS criteria and notify the European Securities and Markets Authority ("ESMA"), who maintains the public STS register; however, these entities are still ultimately supervised by their national competent authority rather than by ESMA. Further, individual Member States are responsible for prescribing their own rules on sanctions and other measures for breaches (so long as they are sufficiently effective, proportionate and dissuasive), which are then carried out by competent authorities. 

The involvement of several competent authorities, combined with the current complexity of the decision-making process, highlights the need to strengthen supervisory coordination across the EU. Although the Joint Committee of the ESAs does coordinate between national regulators, ultimate supervisory responsibility remains fragmented, creating significant potential for regulatory divergence (and for individual competent authorities to impact the broader market) under the current framework. The Commission understandably believes that fostering greater supervisory convergence is essential for the proper functioning and further development of the EU's securitisation market, which brings together a wide range of economic actors often based in different jurisdictions—even for the same transaction.  

It is also of note that the EU Securitisation Regulation currently only requires third-party verifiers to be authorised by national competent authorities, without assessing whether those third-party verifiers continue to comply with the conditions for their authorisation on an ongoing basis. In this regard, the Commission has focused on bolstering supervision of STS third-party verifiers, given their crucial role in assessing securitisations' compliance with STS criteria.  

The Proposals 

The Commission's proposed amendments to the supervisory and enforcement framework include the following changes: 

• Empowering the EBA, through the ESAs' Joint Committee, and in close cooperation with ESMA and the European Insurance and Occupational Pensions Authority, to adopt guidelines to establish common supervisory procedures and to develop the reporting templates referred to in Article 7 of the EU Securitisation Regulation, specifying the information required of sell-side entities;
• Entrusting the EBA with a permanent stewardship role of the Joint Committee Securitisation Committee;
• Requiring that STS third-party verifiers be supervised (as well as authorized) by their relevant competent authority to assess compliance of securitisations with the STS criteria provided for in Articles 19 to 26(e) of the EU Securitisation Regulation (Article 28 of the EU Securitisation Regulation);
• Entrusting banking national competent authorities with responsibility for supervising sell-side entities' compliance with the STS criteria set out in Articles 18 to 27 of the EU Securitisation Regulation (Article 29 of the EU Securitisation Regulation); and
• Empowering domestic supervisors to apply administrative sanctions against institutional investors who fail to comply with their due diligence requirements under Article 5 of the EU Securitisation Regulation (the explicit inclusion of such sanctions is also a proposed change to the current framework) (Article 32 of the EU Securitisation Regulation).

Analysis of the Proposed Changes

The Commission's particular focus on the supervisory and sanctions regime reflects its intention to create a synergic market which limits fragmentation arising from a lack of coordination among domestic authorities. Simplifying and strengthening existing frameworks for supervisory coordination, where feasible, should support the broader objective of regulatory and supervisory simplification. Greater convergence can be achieved by making more efficient and effective use of the powers currently allocated to the ESAs and competent authorities.  

Giving the ESAs' Joint Committee Securitisation Committee a leading role in reforming the supervisory framework for the securitisation market—including empowering it to issue guidelines and develop reporting templates—has been welcomed by the industry. Further, given that securitisation activity within the EU is primarily concentrated in the banking sector, it seems appropriate for the EBA to assume a permanent stewardship role within the Securitisation Committee, as proposed by the Commission. However, these changes will need to be carried out meticulously in order to avoid damaging certain domestic securitisation markets, which have developed strong expertise (thanks also to the competence of domestic authorities) compared to other markets (see, for instance, the comparison between the Scandinavian countries and the South-Europe countries).  

Further, the market—particularly institutional investors—are likely to welcome the Commission's focus on increasing supervision of STS third-party verifiers, not least because it signals support for the STS framework and could help expand the volume of STS securitisation transactions in the coming years. However, if regulators place too much emphasis on third-party verifier requirements (e.g., eligibility criteria, operational independence, technical expertise and conflict-of-interest checks) and enforce them too rigidly, this could introduce unnecessary rigidity into the securitisation market, hindering its growth. 

Finally, it also should be noted that the proposed changes will result in further divergence between the respective securitisation regimes in the EU and the United Kingdom. The United Kingdom retained the EU's securitisation framework and EU's STS framework post-Brexit, with the EU Securitisation Regulation forming part of UK law. The current regime in the United Kingdom mirrors the pre-amendment regime in the EU. As of yet, UK authorities have not given any indication as to whether they intend to follow the EU in extending the supervision, inter alios, on third-party verifiers. 

Looking Ahead

The Commission's proposed amendments have been submitted to the European Parliament and the Council of the EU for review and approval. Changes to the current draft amendments should be expected as part of the legislative negotiation process, though it is unclear at the present stage how extensive such changes may be. There is no defined timeline for the process, though it is expected to be at least 18-24 months before the proposals would become law. The proposed amendments also give rise to certain practical issues, which might challenge the success of the legislative proposals. 

Further, it is unclear whether the United Kingdom will seek to minimise regulatory divergence by adopting similar changes to its "on-shored" version of the EU regime. Market participants are advised to conduct a thorough legal analysis of the evolving regulatory landscape, including the interplay between EU and United Kingdom regimes, to ensure compliance and to capitalise on new investment opportunities that may arise from a harmonised or divergent approach.

Sneak preview: In part seven of this series, we will look at the Commission's proposed reform of the significant risk transfer framework.