Compliance Challenges in EU Securitisation Regulation Limit ABS Investor Base Growth
A new report by the Association for Financial Markets in Europe (AFME) highlights the challenges posed by compliance with investor due diligence requirements under Article 5 of the EU and UK Securitisation Regulation. The report reveals that investors are likely to interpret ambiguous provisions conservatively, which leads to disproportionately high business costs. Furthermore, the regulation reduces agility and flexibility in the investment process, limiting investment opportunities for new investors and impacting liquidity in secondary markets. This results in a less efficient market and creates high barriers to entry that make it difficult for even experienced credit investors to participate in the asset-backed securities (ABS) market. The AFME believes that targeted changes to the Securitisation Regulation and prudential frameworks are necessary to revive the securitisation market and promote its growth.
Complying with Investor Due Diligence: EU & UK Securitisation Regulation
The challenges highlighted in the new report by the Association for Financial Markets in Europe (AFME) regarding compliance with investor due diligence requirements under Article 5 of the EU and UK Securitisation Regulation have significant implications for the financial sector. These challenges not only affect specific financial institution types, such as banks, investment firms, and credit investors involved in the securitization market, but also have implications for regulatory jurisdictions in the European Union (EU) and the United Kingdom (UK).
The report emphasizes that investors tend to interpret ambiguous provisions conservatively, leading to disproportionately high business costs. This interpretation, coupled with reduced agility and flexibility in the investment process, poses several obstacles. It limits investment opportunities for new investors, impacting liquidity in secondary markets, and ultimately creating high barriers to entry in the asset-backed securities (ABS) market. As a result, the securitization market becomes less efficient, hindering its growth potential and making it challenging for experienced credit investors to participate effectively.
These challenges reverberate throughout the financial landscape, potentially leading to a less diverse investor base, which stifles innovation and competition within the ABS market. Such limitations dampen the prospects of the securitization market as a vital source of funding for investments in the real economy. The lack of clarity in the regulation's requirements further exacerbates the situation, causing inconsistencies in implementation across institutions. This inconsistency undermines market efficiency and erodes investor confidence, posing additional obstacles to the market's proper functioning.
Recognizing the urgency for reform, the AFME report emphasizes the need for targeted changes to the Securitisation Regulation and prudential frameworks. The report aligns with the European Commission's targeted consultation on the securitization framework in September 2021, which confirmed that the existing regulation did not effectively widen the investor base due to significant barriers to entry. Reforming the interpretation of Article 5 of the Securitisation Regulation becomes crucial to unlock the benefits of investor due diligence and attract investors back to the securitization market.
Looking ahead, the forthcoming second report by AFME, which proposes guidance and clarifications in the form of Q&As, presents a promising opportunity. It could serve as a catalyst for relevant competent authorities to provide clearer interpretations of investor due diligence requirements. This enhanced transparency and guidance can instill market confidence, promote the growth of the securitization sector, and foster a well-functioning market that effectively supports investment in the real economy.
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