Securitisation is coming to Norway

On Wednesday 12 June, the EU's rules on securitisation will be incorporated into the EEA Agreement, but the rules still need to be implemented in Norway. We expect a framework for securitisations to be in place in Norway from 2025. The securitisation rules are expected to be an important addition for both lenders and investors. 

What is securitisation? 

In practice, securitisation involves a transfer of risk from the original creditor (originator) to external investors by transferring pools of loans or other income-generating assets to a securitisation special purpose entity (SSPE), which in turn issues financial instruments that are sold in the capital markets. Typical originators of securitisation are (i) banks and other financial institutions with loans and receivables on their balance sheet and (ii) various industrial companies with significant outstanding sales receivables. Typical sponsors will be credit institutions and investment firms and typical investors are life insurance companies, pension funds, investment funds and other institutional investors. In other words, it is not only financial institutions that can securitise their receivables - non-financial companies can also do this by engaging credit institutions or investment firms to establish and manage the securitisation.

Securitisation is defined as a transaction or arrangement whereby the credit risk associated with an exposure or a pool of exposures is divided into tranches, i.e. different categories with different priorities and risk profiles, and where payment to the investors follows specific terms and conditions. There are two main types of securitisation: Traditional and synthetic.  In traditional securitisations, a portfolio of loans is sold to an SSPE, which issues bonds. In synthetic securitisations, the loans remain on the originator's balance sheet. The synthetic securitisation occurs when the originator transfers the credit risk to investors by purchasing protection against losses from investors using financial guarantees or credit derivatives. 

A number of service providers are involved in a securitisation, including originators, sponsors, servicers, underwriters, credit rating agencies, calculation and reporting agents, liquidity providers, legal advisors, etc. The process is relatively extensive and typically takes up to six months from start-up to closing. In other words, securitisation requires a portfolio of a certain size to be cost-effective. On the other hand, you can expect better terms than with ordinary factoring or portfolio sales. 

After the previous rules on securitisation were repealed in 2015, securitisation is currently not practically possible in Norway, among other things because the special purpose entity is considered to be conducting financing activities, which is subject to licencing and capital requirement. 

What's coming?

Securitisation regulation

The Securitisation Regulation provides a common regulatory framework for securitisations throughout the EEA. The regulation covers both traditional securitisations and synthetic securitisations. In addition to a general framework for securitisations and regulation of the various actors involved, the regulation also contains rules on a standardised traditional securitisation product, so-called STS securitisations ("simple, transparent and standardised"). Securitisations that meet the requirements to be marketed as an STS securitisation qualify for lower capital requirements for banks and insurance companies that invest in them. 

Legislative rules implementing the Securitisation Regulation in Norwegian law have already been adopted by the Norwegian Parliament (Norwegian), but the rules have not yet entered into force. In addition to incorporating the regulation into Norwegian law, the following legislative amendments have been adopted to adapt Norwegian law to the regulation:

• Exemption from licence requirements for securitisation special purpose entities 
• Exemption from the requirement for consent under the Financial Contracts Act when transferring loans to the special purpose entity
• When a financial institution securitises a loan portfolio, the servicer must be a bank or other credit institution or a financing company.

Amendments to the Securitisation Regulation to facilitate synthetic securitisations and securitisation of non-performing loans

In addition to the main securitisation framework regulation, an amending regulation has also been adopted in the EU, which will be incorporated into the EEA Agreement at the same time. This amending regulation facilitates standardised synthetic securitisations (synthetic STS securitisations) and the securitisation of non-performing loans.

Investments in synthetic STS securitisations will qualify for lower capital requirements than other synthetic securitisations. The regulation set out more detailed requirements that must be met in order to qualify for the STS label, and are divided into requirements for simplicity, transparency and standardisation. In addition, the regulations contain provisions on requirements for credit risk protection agreements, third-party monitors and synthetic excess spreads.

The amending regulation also provides rules to make it easier to securitise non-performing exposures (NPEs). Problem loans can be securitised in the traditional way using a securitisation special purpose entity, or through a synthetic securitisation where the loan remains on the bank's balance sheet.

The Ministry of Finance has consulted on a proposal from the Financial Supervisory Authority of Norway to implement the amending regulation in Chapter 11 of the Financial Undertakings Act. In the consultation paper, the Financial Supervisory Authority of Norway proposed a provision on passive consent for the securitisation of problem loans, i.e. that borrowers should be able to refuse to transfer the loan agreement to the special purpose vehicle. A similar proposal for passive consent for ordinary securitisations was not followed up by the Ministry. 

The Ministry has announced that a proposal for legislative amendments will be submitted at the same time as the consent of the Norwegian Parliament is to be obtained for the incorporation of the regulations into Norwegian law, i.e. probably in autumn 2024.

Changes in the capital requirement rules

In addition to the securitisation regulation and the amending regulation, there will also be two changes to the capital requirement regulations: 

• Regulation (EU) 2017/2401 of the European Parliament and of the Council amending Regulation (EU) No 575/2013 on requirements for credit institutions and investment firms 
• Regulation (EU) 2021/558 of the European Parliament and of the Council of 31 March 2021 amending Regulation (EU) No 575/2013 in line with the changes to the securitisation framework to support the economic recovery in response to the COVID-19 crisis

The amending regulations make changes to the Capital Requirements Regulation (CRR) and regulate capital requirements for securitisation positions. The regulations introduce lower capital requirements for positions in STS securitisations and set requirements that must be met to achieve the lower capital requirement. They also introduce different floors for the capital requirements for securitisation positions and stricter capital requirements for re-securitisation positions. 

When are the regulations expected to apply in Norway?

Even though the regulations have now been incorporated into the EEA Agreement, it will still be some time before this enters into force and becomes applicable law in Norway. Firstly, the parliaments of Norway, Iceland and Liechtenstein must consent to the EEA Committee decision. According to the EEA Agreement, this should take a maximum of six months, but experience shows that there may be delays. Secondly, the amending regulation to the Securitisation Regulation must be implemented in Norwegian law. 

The Ministry of Finance has previously informed that it intends to submit a Prop. LS where the amending regulation is proposed to be implemented in the Financial Institutions Act and associated regulations, and where the Norwegian Parliament's consent to the approval of the EEA Committee's decision is requested. We expect that a proposition to the Norwegian Parliament can be submitted in the autumn of 2024, so that the rules can enter into force on 1 January 2025 .

The changes in the capital requirement regulations can be implemented in the CRR/CRD4 regulation and the Solvency II regulation when the regulations enter into force in the EEA agreement.

Other changes in Norwegian regulations

In the case of securitisation of loans secured by a mortgage, the transfer to the securitisation special purpose entity must be registered in the property registry in order for the securitisation special purpose entity to have legal protection for the mortgage security. Registration in the movable property register (for example, when securitising car loan portfolios) triggers a registration fee per transfer. The working group report that investigated the implementation of the Securitisation Regulation in Norwegian law estimated that the securitisation of a car loan portfolio of 50,000 car loans could incur a registration fee of just over NOK 52 million under the current rules. 

The Ministry of Trade, Industry and Fisheries has consulted on a proposal that only one fee should be paid for the joint electronic registration of several mortgage documents (with authorisation for the Ministry to set a maximum limit for the number of documents in each notification). The fee was proposed to be set at NOK 483 per notification. Based on estimates in the consultation paper of a maximum of 500-1000 documents per notification, the expected maximum fee for securitisation of a similar portfolio will be reduced to an estimated NOK 25000-50000. 

The proposal has been submitted for consultation, but has not yet been followed up.