UK’s FSA reviews regulatory framework for Covered Bonds

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9 April, 2011: 

To support further development of the UK covered bond market and help UK covered bonds compete on a level playing field with other jurisdictions, the UK Treasury and the Financial Services Authority (FSA) reviewed the covered bonds regulations and published the Consultative Paper on 6 April, 2011. The objective of the review is to provide issuers stable mode of funding from covered bonds, allow UK's regulation to meet the relevant European regulatory standards,  investor confidence in UK covered bonds and consistent use of covered bonds by financial institutions.

The Government and the FSA propose that the changes above should come into force at the end of 2012. The highlights of the consultation document includes

  • Issuers to maintain a fixed minimum level of over collateralization
  • The consultation document reviews creating an option in legislation for an issuer to formally designate a regulated covered bond program as backed by only a single asset type and liquid assets  Issuers so far have been using residential mortgages as cover pool, however the legislation provides for much broader range of eligible assets.
  • Excluding securitization from the cover pool, keeping covered bonds and securitization distinct to render clarity to issuers
  • Formal asset pool monitor to be appointed for ongoing monitoring of the assets in the cover pool
  • Updating and consolidating the regulatory reporting that the FSA requires when issuers apply to register with the FSA and on an ongoing basis

Also the concern in the consultation document has been that the bail-in powers proposed in the new regulations should not affect the secured creditors' rights to collateral in case of failing financial institution and the claims of covered bond holders in relation to the supporting asset pool should not be affected as well.

Many of these changes are already features of covered bond regulation in other European covered bond markets and have been also proposed in the draft regulations proposed in Australia (see our news on the draft covered bonds bill in Australia here).

The review of the regulations is to promot investors' understanding of the UK's regulated covered bond regime and bringing about consistency in investor reporting standards. The document is open for consultation with market participants till July 1, 2011. To get the text of the Consultation document click here

[Reported by: Nidhi Bothra]