FCA’s securitization consultation reveals flawed strategy
Constant tweaks show the UK has failed to abandon the prescriptive approach to regulation
A fundamental shift in approach to regulation is required if the UK government is to achieve its objective of unleashing the funding securitization could offer. To do that more trust has to be placed with investors.
Disclosure and due diligence requirements should be dialled back or made voluntary, so investors can assert their own bargaining power. The real focus should be on ensuring that decisions makers' interests align with those of their clients and on boosting the economy.
However, the Financial Conduct Authority's (FCA) publications and consultations so far suggest that the UK’s securitization regulators imagine the public market as something of an unscrupulous supermarket.
Is it the case that if it wasn’t for regulation insisting on ingredient labelling, poor shoppers would blunder around picking up horse meat ready meals, unripe fruit pumped full of sugar and perhaps even a serving of chlorine-washed chicken. If the FCA's approach is anything to go by, investors carry the same lack of determinaton in their decision making.
Obviously, this is not the case. It's more like a wholesale market, where restaurant buyers have long standing relationships with each of the farmers on the stalls. They know who has what for the right price, they know who to trust and what is in season when. They do not require grain by grain labelling of every bag of rice. In fact, insisting on such labelling only slows things down and makes the market more inefficient.
Indeed, investors have told GlobalCapital they often get bankers or lawyers on the phone and ask for more information or further explanation. If they don’t like what they hear, they don’t buy the deal.
That’s not to say there’s no merit in voluntary standardised templates. Perhaps the regulator in this instance should guide, not dictate. If issuers can voluntarily fill in a form that has all the information most investors need there is no reason for things to not run smoothly.
One of the key struggles of incorporating ESG into ABS has been a lack of standardisation, but even there the market is making progress towards its own solutions. For example, the European Leveraged Finance Association's questionnaire won praise at IMN's 10th Annual European CLO conference in April for its attempts to provide clarity and standardisation for the market.
The latest act in the post-global financial crisis regulation of securitization epic is a quibble of how to define “public” securitization.
It seems the FCA is having some trouble plotting out a boundary along the public to private continuum. SRT has landed on the wrong side and isn’t happy. Probably, there will be a little bit of tweaking.
And so goes the UK’s new lean and agile securitization regime. The FCA and Prudential Regulation Authority (PRA) can nimbly adapt every time a new concern is raised. The rules can be endlessly honed and refined until the 707 pages that the FCA published at the start of the month resemble the Encyclopaedia Brittanica.
The PRA and FCA are behaving like geocentrics, accommodating any new complaint with subtle bit of tuning here and there. What they need is to throw the whole thing out and redraw the very principles from which the regulations were formed.
The paradigm has changed since 2008. Banks are better capitalised and certainly still wary of securitization.
There’s no denying you can get it wrong investing in ABS, but it’s about time regulators trusted structured finance investors to take their own risks. Perhaps, if they get it wrong, allowing them to lose their money would be a harsh enough lesson.
What is abundantly clear no amount of tinkering can fix a strategy that is wrong.