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People and MarketsCommentLeader

UK politicians must make case for deregulating securitization

Empty seats in the Palace of Westminster. House of Commons meeting room.

FCA and PRA hold power over the details, but caution will dominate without political impetus

UK politicians need to set the tone when it comes to relaxing financial regulations as they revoke and replace EU rules in the wake of Brexit. Otherwise, systemic caution will stymie this most useful part of the capital markets.

The government published in July an almost final version of its Securitisation Regulations 2023. Yet, the market still has little more than a vague sense of their direction because many of the key decisions have been left to the Prudential Regulation Authority and the Financial Conduct Authority.

Politicians are not expected to rival traders, or even regulators, when it comes to knowing the detail of the ABS markets but they must set those experts in the direction they want them to face before unleashing them.

The crucial question concerns how much risk appetite the UK can handle. If it is left to civil servants to provide the answer, it will be “not very much”. They are incentivised to be cautious because they will carry the can if it all goes wrong, while gaining no credit if the market booms.

This is especially acute in securitization. After all, even though the post-2008 bank capital regime failed to save Credit Suisse, Europe’s rules (if not Switzerland’s) have been lauded for toughening up banks.

The fear of ABS is still palpable — as if no regulator can go a week without rewatching The Big Short, peeking out from behind a sofa cushion in terror. Experienced asset managers cannot buy deals even from the most storied of programmes without being able to produce pages of justification and analysis if the regulator comes knocking.

The problem is that politicians will have to shoulder responsibility for relaxing the rules, but that is the purpose of responsible government — to do what must be done rather than what is most expedient.

The systemic caution and incrementalism of the technocrats will continue to hobble securitization’s rehabilitation and the benefits it could bring the real economy, not to mention the UK market’s competitiveness. The government must grasp the nettle.