Securitisation

Securitisation: What you need to know about the Moveable Transactions Act

The Moveable Transactions Act (the “Act”) was passed by the Scottish Parliament in May 2023 and will make fundamental, and very positive, changes to the commercial landscape in Scotland when it comes into force.

We expect that the Act will come into force in Summer 2024, although no date has been confirmed yet.  The Act makes it easier to take fixed security over moveable property (that is, property that is not land) and contractual rights in Scotland.

What is changing?

Commercial practice in Scotland has long suffered from the absence of the concept of ‘equity’, which recognises a duality of interests in moveable assets – both legal and equitable. Equity does a lot of heavy lifting in securitisation transactions, where Originators/Sellers seek to trade their interest in a portfolio of receivables without having to satisfy the commercially undesirable conditions associated with transferring legal title (that is, notifying the underlying counterparties of the sale).

Scots law takes a less flexible view: title is absolute and security interests over moveable assets can only be created where it can be sufficiently demonstrated that control of the asset (e.g. the interest in a debt) has passed to the beneficiary. This is typically achieved through intimation of the assignation (or assignation in security) to the relevant debt counterparty, thus mimicking the requirements of the English legal assignment. Furthermore, Scots law does not recognise the transfer of rights in future receivables, something that English law does permit and which securitisation sale agreements frequently purport to do.

The new Act will make certain changes, which will make it much easier to use moveable property as collateral in Scottish financing transactions:

1. It will create a new register, to be known as the Register of Assignations, which will be maintained by the Register of Scotland.
2. It will be competent to register an assignation against both present and future receivables and the assignation will be effective upon registration in the RoA, without any need to notify the underlying counterparty.
3. There will be a simplification of notification requirements where ‘traditional’ assignations in security are to be taken* - execution of the notice will no longer be required and it will be effective to intimate electronically or by way of a website or portal.

* Note that the existing law will not be overhauled in its entirety and it will still be possible to take security over moveable property in the traditional manner.

How will this impact on securitisation transactions?

To date, Scottish practitioners have sought to bridge the ‘equity gap’ in securitisation transactions with trusts, which allow an Originator / Seller to ringfence the traded receivables for the benefit of the Issuer, whilst still retaining legal title. Although it is a neat solution to the equity problem, the process is often unduly prescriptive and administratively burdensome, especially where further advances or futures contracts are purported to be sold. In such cases, the Originator / Seller is required to enter into supplemental ‘top up’ trusts on a periodic basis in order to bring the newly originated receivables within the scope of the Scottish trust property. These new trusts, in turn, are then secured by way of supplemental assignations in security by the Issuer in favour of the relevant Security Agent(s).

The changes made by the Act will streamline the process of securitising Scottish receivables in a number of ways:

• It will be competent for the Issuer / Originator to grant a Day 1 Assignation over the relevant Scottish securitisation assets. This will largely mirror the English equitable assignment and will replace the existing trust structure that is traditionally relied upon.
• The Day 1 Assignation will also be capable of extending to future receivables and therefore, there will be no need to enter into supplemental declarations of trust. This will be a welcome change, which will remove the inherent period of exposure between the date of origination of the receivable and the date that the supplemental trust is granted, which can be anything between a few weeks and months.
• The Issuer will grant a Day 1 Assignation in Security in respect of its interest in the relevant Scottish securitisation assets. Again, there will be no need for supplemental assignations to be taken.
• Intimation by way of reference to a website or portal will be possible and will be a significant commercial benefit. Registration in the new Register of Assignations can be used as an alternative to the  requirement to intimate.

Unfortunately, the benefit of the reforms will not be universally felt. Any transactions involving heritable interests, such as RMBS transactions, will not qualify under the new regime and the traditional approach and the prevailing approach should continue to apply. However, for those transactions that do qualify, the new Act represents a much welcome alignment of approach north and south of the border.