In Practice: Securitisation Shake-Up: Will Streamlined Due Diligence and New Sanctions Ignite or Inhibit the EU Market?
A fresh batch of securitisation reforms
The European Commission’s latest batch of draft amendments to the EU Securitisation Regulation (EUSR) is designed to streamline investor obligations and reduce operational headaches, all in the name of a more dynamic and resilient securitisation market. However, it is unclear if these benefits will be outweighed by the introduction of a new sanctions regime including fines of up to 10% of global turnover.
Focus on Due Diligence Requirements
The due diligence obligations for institutional investors under Article 5 EUSR have long been a source of operational headaches and compliance costs. The draft amendments purport to address these woes by making the process more proportionate, risk-sensitive, and principles-based. Key changes include:
- Streamlined obligations for EU transactions: Prior to investment, institutional investors would no longer need to verify that EU-based sell-side parties will retain the required 5% economic “skin in the game”, make available compliant templated reporting, and, for non-performing loan securitisations, apply sound standards in selecting and pricing the underlying assets. The logic is that EU supervision is so watertight that further verification is redundant. Of course, investors will remain on the hook for transactions involving third-country sell-side entities.
- Principles-based assessment: A more principles-based assessment would replace a prescriptive checklist. Investors would be expected to use their judgment to focus on material risks and structural features, which should help to avoid duplicative or overly burdensome diligence that may not be meaningful across different types of transactions. In theory, this should mean more flexibility and efficiency for lower-risk transactions. In practice, it could mean more debates with compliance.
- Clarity on “proportionate” due diligence: The draft amendments aim to clarify what a “proportionate” approach to due diligence means. For example, senior tranches, which benefit from substantial credit enhancement and pose lower risk, should require less extensive due diligence than junior or mezzanine tranches, which bear higher risk and greater exposure to losses. Additionally, investors should be able to conduct simplified diligence for repeat transactions where key risk characteristics are already well understood, such as when investing in similar securitisations from the same originator.
- Lighter diligence for public guarantees: If a securitisation position is fully guaranteed by a multilateral development bank, or if the first loss tranche (at least 15% of the nominal value) is held or guaranteed by the EU or certain public institutions, investors could skip most of the due diligence under the assumption that public entities have already done their homework.
- 15-day documentation period for secondary trades: A new provision provides institutional investors up to 15 calendar days to document their due diligence assessment and verifications for secondary market investments.
- Delegation of due diligence: While institutional investors could delegate due diligence tasks to another institutional investor, the legal responsibility would remain with the one who delegated — while you can outsource the work, you can’t outsource the blame.
Introduction of New Administrative Sanctions
New administrative sanctions would cover failures by institutional investors to comply with due diligence requirements — despite sanctions being available under existing sectoral legislation. Supervisors currently have the authority to enforce these due diligence requirements under the Capital Requirements Regulation for credit institutions, the Alternative Investment Fund Managers Directive regime for fund managers, and Solvency II for insurers, with the threat of punitive capital treatment and remedial measures such as forced divestment. The new measures would not replace these sanctioning powers, but rather add a direct enforcement mechanism under the EUSR itself. If adopted, competent authorities across the EU could impose administrative penalties up to 10% of global turnover when an investor falls short under Article 5.
Practical Impacts
The threat of administrative sanctions is expected to have a practical impact on institutional investors. First, it would raise the stakes for internal compliance systems and documentation. Investors would need to ensure their due diligence is not just proportionate and risk-based, but also ticks all the right regulatory boxes. Second, the clear assignment of legal responsibility, even when due diligence is delegated, would likely prompt institutional investors to revisit their oversight of delegated investment management. Investors can expect more contractual fine print, more audits, and increased checking up on third-party managers; they should trust, but verify — then verify again.
The proposal to allow a 15-day period for documenting due diligence in secondary market transactions was meant to offer additional flexibility. However, in practice, the main bottleneck is not the act of documenting due diligence, but rather the process of actually performing the required verifications. By focusing on the documentation timeline, the draft amendments may be perceived as adding an independent obligation to document, rather than addressing the substantive challenge of timely and thorough verification.
Impact on Investor Appetite and Market Development
By making due diligence more efficient and less of a bureaucratic slog — without (allegedly) sacrificing prudence — the reforms are meant to support the grand ambitions of deeper EU capital markets and better access to credit, especially for SMEs and other real-economy hopefuls. Simplified and clarified obligations should, in theory, lower barriers to entry and trim compliance costs, especially for smaller or less specialised investors.
However, the addition of pecuniary sanctions to an existing framework of sectoral sanctions may be seen as disproportionate for a due diligence regime that is ostensibly designed to “help” institutional investors. This move risks sending the wrong message to the market and could discourage new investors from entering the securitisation space. Furthermore, when combined with the removal of the ability to delegate primary regulatory responsibility to an asset manager (even when the asset manager is itself an institutional investor), the proposed reforms could have the unintended consequence of prompting some current investors to exit the market. Without the option to transfer primary regulatory responsibility along with investment management authority, boards and compliance functions may no longer feel adequately reassured, making continued participation less attractive. Asset managers themselves may be less affected, but the overall impact could be a contraction in the investor base rather than the intended expansion.
Ongoing Limitations for Third-Country Securitisations
This round of reforms fails to address a persistent concern among EU investors: the requirement to obtain EU-style templated disclosure for investments in third-country securitisations. This obligation places them at a competitive disadvantage, as it effectively restricts their ability to participate in non-EU securitisations. While the intention may be to ensure that European capital supports EU priorities, the practical effect is to curtail the flexibility of institutional investors to diversify geographically. As long as this requirement remains, European stakeholders are likely to find themselves constrained, with fewer opportunities to access global securitisation markets and the associated benefits of broader diversification.
Conclusion
By streamlining due diligence obligations while beefing up enforcement, the draft amendments are billed as a targeted and balanced response to market gripes, while also giving supervisors a new stick to wave at the market. Whether this will actually lure in a broader range of investors or just keep compliance officers busy remains to be seen.
Institutional investors may enjoy less operational complexity, but they’ll also need to get comfortable with a more muscular compliance regime. In the end, these changes could foster a more dynamic, competitive, and resilient market — or at the very least, keep everyone on their toes.
Originally published in the November 2025 edition of Butterworths Journal of International Banking and Financial Law.