HM Treasury announced measures to tighten the UK Regulated Covered Bond regime alongside the Chancellor’s autumn statement yesterday (Tuesday), confirming that the FSA will require loan-by-loan data disclosure and introducing a minimum OC level.

The moves conclude a joint review initiated by HMT and the FSA in April.

The Treasury said that an amendment to UK covered bond legislation will, in its words:

• Give issuers of covered bonds the option (but not the obligation) to declare that their bonds are backed by only a single type of asset.
• Exclude securitisations as eligible assets for covered bonds.
• Set a minimum level of credit protection for investors in covered bonds.
• Create a formal requirement for UK covered bond programmes to appoint an asset pool monitor.
• Clarify the FSA’s powers to require issuers to publish information for investors.

“There are no viable alternatives to regulations, since European law and investors favour regulated covered bonds,” said the Treasury. “These proposals will improve existing regulation to make sure it meets its policy objective.”

A minimum overcollateralisation level of 8% is being introduced under the amended regime. The Treasury said that this was “around the midpoint” of respondents’ suggestions in a summary of responses the authorities received during a consultation that was part of the review. The minimum level applies up to but not beyond issuer insolvency.

In the summary, the Treasury also said that most issuers opposed the provision of loan-level data on grounds of cost and confidentiality, and because they believed investors did not require such detail – investors responding to the consultation gave a mixed picture. However, while the Treasury said that reporting standards are a matter for the Financial Services Authority (FSA) – which told The Covered Bond Report last week that it will be publishing a Policy Statement soon – it confirmed that the FSA has decided to proceed with the requirement for loan level data.

“This is on the grounds that the proposed changes will limit marginal costs for issuers while providing very substantial transparency and flexibility for investors to utilise the data to suit individual needs,” it said.

The government decided against expanding the range of eligible assets and changing the SPV model used in the UK. Some other questions that were discussed – such as allowing access to the Bank of England Discount Window facility for post-insolvency cover pools, asset encumbrance, and the treatment of covered bonds in a bail-in – were mentioned but either left to the Bank and the FSA to deal with or deferred.

The Treasury said that the overall package will save £25.6m annually for “business, charities or voluntary bodies”. The regulations will commence on 1 January 2013 and the Treasury is required to review the regulations after five years.

The relevant documents can be found here:

http://www.hm-treasury.gov.uk/consult_covered_bond_review.htm