Covered bonds regulation model published

The lack of a UK regulatory regime for covered bonds, securities backed usually by mortgages or public sector loans, is addressed in a joint consultation by HM Treasury and the FSA. The Treasury is working on legislation - The Recognised Covered Bond Regulations 2007 - which specify, for example, that the asset pool must be sufficient to meet bondholder claims. The FSA, meanwhile, proposes ‘special public supervision’ that would require the issuer to formally declare that they are compliant with the Regulations. It would also need confirmation of this compliance from a qualified third party professional adviser. Recognised issuers and their issuing programme(s), but not the details of individual bonds, would be published on the FSA website and the same information passed to the European Commission. The regulator will wish to be sure that the assets are capable of covering claims attaching to the bond. It says it would adopt a risk based approach to recognition, entailing deeper due diligence when there were concerns around firms’ systems and controls, the bond rating or location of the assets. Exception-based reporting would provide for immediate notification in writing if the asset pool proved unable to satisfy bond-holder claims. There would be no routine reporting. ‘Orderly continuation of business’, that is, the proper management of the asset pool to meet claims, would be assured through an independent third party representative, contractually bound to act for the bondholders. The FSA also proposes that it should be able to require a section 166 FSMA skilled person's report from the issuer at any point. The consultation closes on 15 October and the Government expects to lay the Regulations before Parliament in the fourth quarter in time for the new regime to come into effect on 1 January 2008.