Article 5 Issues Report: Due-diligence requirements for institutional investors under Article 5 SECR

AFME published a report highlighting the challenges faced by investors in complying with the due-diligence requirements under Article 5 of the SECR in the EU and UK. The report emphasizes that these requirements are limiting the growth of the ABS investor base.
According to the report, investors tend to interpret the ambiguous provisions of Article 5 conservatively, resulting in disproportionately high costs for businesses. Moreover, the regulation reduces flexibility and agility in the investment process, which diminishes investment opportunities for new investors and negatively impacts liquidity in secondary markets. This, in turn, leads to a less efficient market overall. As a result, the barriers to entry become so high that even seasoned credit investors struggle to build a business case for participating in the ABS market.
The press release includes statements from industry professionals who support the need for reforms in the interpretation of Article 5. They highlight the lack of risk sensitivity in certain areas of the legislation and the detrimental effects on market confidence. The report suggests that targeted changes to the SECR and corresponding prudential frameworks are necessary for the revival and growth of the securitisation markets.
AFME gathered feedback from a working group composed of non-bank investors from various sectors to produce the report. The findings of the report align with industry feedback submitted to the EC in September 2021, emphasizing the need for reform to widen the investor base and reduce barriers to entry.
In addition to the press release, AFME plans to publish a second report later in the summer, proposing guidance and clarifications in the form of Q&As. These recommendations could serve as a starting point for relevant competent authorities to provide clearer interpretations of the requirements and improve transparency in compliance supervision.