UK Government Urged To Rethink Covered Bond Regime

by Phillip Morton, Investors Offshore.com

29 October 2007

The Investment Management Association (IMA) has called on the Treasury and the Financial Services Authority (FSA) to re-consider their proposals for a UK Recognised Covered Bond regime, to ensure that investors are not put at risk through exposure to low quality assets such as sub-prime products.

In its response to government proposals, the IMA stated on Friday that it favours the introduction of a well thought out Recognised Covered Bond regime, and the potential it has to offer investors more choice and aid portfolio diversification. However, as Recognised Covered Bonds will become UCITS eligible assets, the IMA added that it is important that the UCITS brand is not put at risk by potentially exposing investors to lower quality assets than they would expect.

A covered bond is a secured loan. It is a corporate bond which is usually issued by banks, and generally backed by assets such as mortgages or public sector loans.

There is currently no formal UK regime for covered bonds. The Treasury is now consulting on a legislative framework for covered bonds, and the FSA is consulting on its proposals for implementation of such a regime.

IMA has three key concerns about the proposals:

Firstly, the timetable for implementing the legislation is unworkable, it argues. More time needs to be taken to ensure rigorous controls are in place to ensure a high quality regime. In addition, it is important that all stakeholders are equally consulted on the proposals and that investor protection remains at the forefront.

Secondly, the proposed regime is too liberal and risks compromising its quality, as the range and quality of eligible assets for covered bonds are too wide to ensure the appropriate level of protection for UCITS eligible assets.

Thirdly, the proposals may not give investors the required protection in the event of a bond issuer becoming insolvent.

Richard Saunders, Chief Executive of IMA, explained that:

"As currently formulated, these proposals could allow sub-prime assets into funds designed for sale to UK investors. The Treasury and FSA should take time to rethink key aspects of the proposed regime to ensure the necessary quality and oversight in the interests of investor protection."

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