My Lords, we welcome this SI and will support it today. Its provisions are clearly necessary and are mostly explained clearly in the accompanying documentation. I would be grateful, however, if the Minister could say a few words about commencement and address a few questions.
Two provisions seem to come into force when the instrument is made, and the rest on 1 November later this year. As I read it, this arrangement aims, in essence, to correct a mistake in January’s SI and to give the regulators time to introduce the envisaged new rules on the repeal of existing EU law on 1 November. Is that correct? I would be happy to wait for an answer.
We have a few questions arising from HMT’s policy note of July last year, dealing with this SI. In paragraph 4.8, HMT says that
“the FCA will be provided with a specific rulemaking power to make due diligence requirements for small, registered UK AIFMs who are institutional investors”.
What progress is being made in this area? When can we expect to see the necessary draft SI?
I turn to paragraph 4.13, which explains that,
“where an OPS delegates its investment management decisions and due diligence obligations for investing in a securitisation to another institutional investor (whether they are another OPS, an FCA firm, or a PRA firm), sanctions for failure to comply would be imposed on the managing party, and not the delegating party”.
This does not appear to work the other way round. Paragraph 4.14 says:
“Where an institutional investor who is an FCA firm or a PRA firm delegates its investment management and due diligence obligations to an OPS, sanctions for failure to comply would not be imposed on the OPS as the managing party”.
Does this not let the OPS off rather lightly? Why should it not operate to the same standards of due diligence as FCA and PRA firms?
Paragraphs 4.16 and 4.17 deal with matters to which the FCA and the PRA must have regard. Paragraph 4.16 says that
“the Sec Reg contains a requirement for the originator, sponsor, or original lender of a securitisation to maintain a material net economic interest in the securitisation of at least 5% … Once the Sec Reg is repealed, the FCA and the PRA are expected to make rules covering some of the same areas, such as risk retention, for different sets of firms”.
It explicitly acknowledges:
“This risks fracturing the regime which currently exists and increasing complexity”.
The next paragraph, paragraph 4.17, proposes what seems to be intended as a remedy. It acknowledges the importance of the regime being “clear and coherent” and says that
“this SI requires the FCA and the PRA to have regard to the coherence of the overall framework for the regulation of securitisation when making rules relating to securitisation”.
It is not immediately obvious that this rather loose and third-order requirement will prevent the risk of fracturing the current regime and increasing complexity. Replacing a simple, generally applicable risk retention scheme by a layered and necessarily more complicated scheme seems a retrograde step. Can the Minister say what the current thinking is and, if we remain committed to this approach, why?
I acknowledge that I have asked some rather detailed questions. Of course, I would be happy if the Minister were to write to us in response.