Differing Regulations Hinder the Markets
Byline: Mark Nicolaides
Europe is a sleeping giant in securitisation. Despite significant efforts to harmonise, European securitisation markets face different and conflicting laws and regulations. The absence of uniformity prevents many from enjoying the benefits of securitisation, including lower borrowing costs for consumers and companies, better risk management tools for banks and more transparent capital markets for regulators. The numbers speak for themselves. The European securitisation market should grow by [euro]162bn ($148bn) in 2002, only half the projected growth of $305bn in the US for the same period. Moreover, these estimates mask larger differences. The estimated total outstandings in Europe of just over $1 trillion is dwarfed by US outstandings of more than $4 trillion.
Can Europe catch up? Yes, but only if European governments and regulators act quickly. In recognition of the seriousness of the problem, the European Securitisation Forum (ESF) is hosting a symposium in Brussels this week to highlight the issues and suggest ways forward.
No matter how complicated, most securitisation transactions share common characteristics. Typically, a special purpose vehicle buys financial assets using funds raised by issuing securities to capital markets investors. The purchaser customarily pays part of the price on purchase and the remainder once the assets have been collected.
A key objective is isolating assets from the risks of the seller, permitting the asset-backed securities to perform better financially and bear a lower interest rate. Interest savings are usually passed on to end users, such as home owners whose mortgages are securitised. A second key objective is tax neutrality. A third is to permit sellers to remove these assets from their balance sheets.
Unfortunately, European rules regulating asset transfers, taxes and off-balance sheet treatment are inconsistent.
In theory, it should be possible for an owner to transfer financial assets to any purchaser without notice to debtors, without regard to any contractual restrictions on a transfer, without government consent or document costs, under a governing law chosen by the seller and the purchaser. This is not yet possible in many European jurisdictions.
In the UK, for example, it is possible to transfer receivables without notice to debtors, but UK law imposes stamp duties on the documentation for the transfer at 4% of the value of the transaction.
In France, receivables may only be transferred to either a French fond commun de creance (FCC) company or to EU credit institutions or group companies - and then only under particular provisions of French law. One of the French transfer methods requires notice to debtors by a bailiff or huissier, which is highly burdensome.
The Netherlands and other countries, including Sweden, require notice to debtors in order to isolate assets from the seller, which is impractical in most circumstances.
In Italy, notice to debtors is required under general assignment rules, but can be avoided if the transfer is made under one of the Italian securitisation laws. In Germany, a transfer does not require notice to debtors, but the deferred purchase price cannot be too high or the transfer is not valid.
In Spain, attorneys sometimes recommend that transfer documents be notarised, resulting in high costs.
Industry participants recognise that uniform laws are needed, and that change at the EU level is the ideal solution. The ESF symposium in Brussels is the first attempt to move the debate forward. Until then, isolated progress on a national level will be made, but it will be slow. In the latest UK Budget, for example, Gordon Brown, the Chancellor, proposed eliminating stamp duty on transfers or receivables by late 2003. …