Regulated Covered Bonds (RCB) - questions and answers

An RCB is a covered bond or covered bond programme (programme) that complies with the Regulated Covered Bonds Regulations 2008 (the RCB Regulations) and Regulated Covered Bonds Sourcebook (the RCB Sourcebook) and is registered by the FSA .

The Regulations came into force on 6 March 2008. They make us responsible for supervising the RCB regime (the Regime) and implement Article 22(4) of the UCITS Directive, Article 22(4) of the Third Non-Life Directive and Article 24(4) of the Consolidated life Directive.

All RCBs are listed on the RCB register on our website. There may be a short delay of up to seven days between an RCB registering and us publishing it on the RCB register.

Increased investment limits

UCITS schemes and non-UCITS retail schemes can be permitted to hold up to 25% of their assets in RCBs issued by one issuer, but only 5% in structured (unregulated) covered bonds issued by one issuer (COLL 5.6.7R).

Insurers (non-directive friendly society, an incoming EEA firm or an incoming Treaty firm) can invest up to 40% of their assets in RCBs, but only 5% in structured (unregulated) covered bonds. For more details on the higher limits for covered bonds into insurers' counterparty exposure limits see INSPRU 2.1.22R (3)(b).

Preferential prudential risk weighting

Investors subject to the CRD with an exposure to covered bonds which meet the requirements in BIPRU 3.4.106R to BIPRU 3.4.109R may benefit from a preferential regulatory capital requirement reduction in risk weight of up to 60% (BIPRU 3.4.110R).

Under the regime, the:

• issuer must be a UK authorised credit institution;
• asset pool must be of sufficient quality;
• asset pool can only hold eligible property as defined in RCB Regulation 2(1);
• location of eligible property is restricted to the EEA states, Switzerland, the US, Japan, Canada, Australia, New Zealand, the Channel Islands and the Isle of Man;
• RCB is subject to our special public supervison. We have enforcement powers that include the power to make directions and remove issuers from the RCB register.
  

See the RCB Regulations 2008 and our RCB Sourcebook.

Consistent with our objectives of protecting consumers and ensuring market confidence, we will supervise the prudential risks associated with covered bonds (e.g. encumbrance of issuers' assets). We see the notification thresholds of 4% and 20% of total assets primarily as triggers for discussion between us and the issuer about the encumbrance of assets. One of our main concerns is the risk to the issuer’s unsecured creditors, in particular depositors, having available a smaller, and potentially lower quality pool of assets to meet their claims. This may also result in a change to the issuer’s individual capital ratio or Pillar 2 requirements, but we are likely to consider this only when issuance nears the 20% threshold.

A firm who holds a permission under part 4 of the Financial Services and Markets Act 2000 to carry on the regulated activity of 'accepting deposits', and who has its registered office in the UK can apply to become a regulated covered bond issuer.

You need to complete the application form RCB 2 Annex 1 D. It covers registration of issuers, covered bonds and programmes. We will normally not consider applications for issuer registration separately from the application for registration of a covered bond or programme.

If you are already registered as an issuer, you must complete the same form (RCB 2 Annex 1 D) to register any subsequent covered bonds or programmes.

The application form can be submitted electronically or in hard copy. It is available in the forms section of our website.

The information in the application form must demonstrate the ability of the issuer and the covered bond or programme to comply with the Regime.

As part of the application process, applicants must obtain written advice and reports from suitably qualified and experienced independent third-party advisers, such as lawyers and asset pool accountants, which consider compliance with the relevant requirements of the Regime. The RCB Sourcebook provides examples of what, as a minimum, we would expect such advice and reports to cover.

The issuer's senior management must confirm that they comply with the Regime's requirements. We will publish these confirmations on our RCB register.

Under the RCB Regulations we have up to six months to register an issuer, covered bond or programme but we will try to make a decision earlier. If we need to ask for more information, we will consider the application as incomplete until we receive all the necessary information.

We will notify applicants of our decision in writing and, where appropriate, update the RCB register within seven days of making a decision.

Senior management annual confirmation

Senior management must confirm the issuer's compliance once a year, using form RCB 3 Annex 1 D. As part of the annual confirmation, senior management must have obtained appropriate written advice and reports from suitably qualified and experienced independent third parties on compliance with the Regime.

Each asset pool accountant report should address the same aspects as at registration of the covered bond or programme. If the asset pool has not materially changed since the previous asset pool report was compiled, the issuer may decide that it is appropriate to issue a new report based on the previous work. You should be able to justify this decision to us.

We also expect the issuer's senior management to make sure that legal advice obtained at registration is reviewed when necessary -eg if a relevant statutory provision is amended, or where a new decision or judgment of a court might have a bearing on the conclusions that are material to compliance with the Regime.

You can choose the date of the first confirmation, for example to match the date when you review your offering circular, provided it is within the first twelve months of registration. You must make any subsequent confirmation on the anniversary of the first confirmation.

Quarterly asset pool notification

An issuer should submit information on its asset pool every quarter using form RCB 3 Annex 2 D.

Series issuance notification

An issuer should inform us in advance of any plans to issue a series of covered bonds from a regulated programme, using form RCB 3 Annex 3 D. At or before the issue, you must give us the following information: issuer name; LLP name; programme name; series number; issuance size; ISIN number; issue date; legal maturity; coupon; listing authority (if applicable); and credit rating (if applicable).

Changes to a programme

An issuer must seek our approval when considering any material changes to the contractual terms of a RCB. An owner must also seek our approval when considering transfer of the asset pool to another owner.

The issuer or owner must tell us of the proposed change, its impact on the RCB and confirm it has obtained appropriate advice to ensure the RCB continues to comply with the Regime.

Yes, at registration and once a year after that.