Guidance for specific trade sectors: finance: securitisation arrangements
Securitisation is a method of raising finance on the capital markets at advantageous rates of interest. Types of businesses likely to use securitisation are financial institutions, insurance companies, trading companies and any other type of business with a regular source of income. If these bodies borrow money from a bank the rate of interest charged will depend on their credit worthiness. Securitisation involves the transfer of their income into a separate trust. This enables money to be borrowed against the security of the income stream in such a way that, if the company goes bankrupt, the investor will still be repaid.
In the case of credit card securitisations, the arrangement involves the establishment of a receivables trust, often in Jersey (receivables are the payments due to the credit card company from its customers, including repayment of the principal on a loan or credit arrangement. This can also apply to interchange commission paid by the retailer).
The credit card company transfers the beneficial interest (not the legal interest) in the receivables on a block of accounts to the trust. This is done in return for payment of the principal amount of credit provided plus a proportion of the interest due (known as the excess spread). A separate company is then set up to issue debt securities on to the capital markets to third party investors. The issuer contributes the funds received from investors to trust assets and later receives funds from the trust as necessary when payments of interest and repayments of principal fall due to investors. In the meantime, the credit card company uses the funds received from the investors to fund its business.
The credit card customer is not informed of these arrangements and the contract between the company and the cardholder is unchanged (i.e. there is no novation of the contract). This means that the exempt supply is still between the credit card company and the cardholder.
This was confirmed by the Tribunal in Capital One Bank (Europe) Plc (COBE) [VTD19238] and the High Court in MBNA Europe Bank Ltd.
A number of credit card companies have argued that the interest on securitised accounts should be excluded from their PE calculations. This was not accepted in either of the above cases. The point is it remains the credit card company that provides the credit and therefore the interest is properly included in its partial exemption calculation notwithstanding the fact that it is required to pass receipts on immediately to the trust.
Treatment of assignments of receivables
In MBNA, the High Court regarded the assignment of receivables as merely a condition for receiving a securitisation service from the trust. There was no supply by the credit card company to the trust in respect of the assignment of receivables. Therefore the assignments should not feature in any partial exemption calculations.
Treatment of service fees
Because the credit card company continues to run the credit card accounts as part of its business it incurs some costs which it charges on to the trust through a service fee for collecting receivables and managing the monies received on behalf of the trust.
The Commissioners regard many of the costs of servicing the accounts as being incurred in setting up and administering those accounts, e.g. marketing costs, and not as relating to the collection and management of receivables. However, certain costs, such as the costs of collecting debts on behalf of the trust, are regarded as having dual use, i.e. as relating both to the provision of credit and the service fee charged to the trust. Officers should bear in mind that it is unlikely that all receivables will be transferred to the trust because of the requirements of the credit rating agencies. It is necessary therefore to agree an apportionment based on use of costs. However, the precise position will depend on particular arrangements in each case.