In the case of the collapse of UK based mortgage provider Market Financial Solutions, the same underlying loans were allocated to more than one funding trust, overstating collateral and undermining the integrity of investor reporting.
While this has not yet been observed in the Australian market, the reaction from funders, trustees and governance stakeholders has been immediate, highlighting the importance of interconnectedness between key stakeholders. Stakeholders now expect that asset allocation and cash flows behave as intended across the entire enterprise, while issuers who can respond clearly are finding that it supports confidence and continuity. Those who cannot may face questions about how their structures operate in practice.
Where existing frameworks leave a gap
Most securitisation assurance frameworks were designed to provide confidence at the level of an individual trust – primarily at their creation – through eligibility criteria engagements. There is an inherent assumption that the loans within the trusts exist and meet the requirement to be pledged to the trusts in question. While they are effective in that context, they are not typically built to identify inconsistencies that emerge across multiple funding vehicles.
While each trust may reconcile internally, and reporting and controls may seem appropriate, duplication or misallocation can still exist at an enterprise level if the underlying data, tagging or allocation processes are not aligned across the system.
In practical terms, this can arise through duplicated loan IDs, inconsistent tagging logic, or reallocation of loans between funding vehicles without appropriate reconciliation. Over time, these issues can compound without being visible through standard reporting.
The constraint in all of this is cash. A duplicated loan cannot generate duplicated cash. Unless supported by unusually sophisticated manipulation, any misallocation should ultimately surface through misalignment between loan balances, trust positions and borrower cash flows. The difficulty is that this only becomes visible if those relationships are tested.
A practical response: targeted, enterprise-wide validation
In response, domestic issuers are implementing targeted procedures designed to test three linked areas: the completeness of the loan population, the integrity of allocation across funding structures, and the alignment of cash flows with recorded positions.
The starting point is establishing a single, complete and internally consistent loan book. This involves reconciling the full loan population to independent sources such as the general ledger and applying analytics to identify duplication, anomalies, or inconsistencies in loan and borrower attributes.
Focus then shifts to allocation. Procedures are applied to identify loans that appear more than once, or that are associated with multiple funding trusts. Patterns in payment instructions or account linkages can also provide indicators of inconsistency.
The third element is cash and timely allocation of payments. Tracing payments from borrower to collection accounts, through to the relevant funding structures allows recorded positions to be tested against reality. Any inconsistencies that exist should be explained through timing differences, unallocated receipts or behaviour that does not align with reported arrears. A key area of testing is identifying and understanding any items that have not been reconciled in a timely manner.
Taken together these steps move the analysis beyond individual trusts and create an enterprise view that links loans, allocations, and cash.
Delivering evidence, not assumptions
In practice, this work is being delivered through agreed upon procedures engagements. This provides clear and transparent evidence over specific risk indicators. The advantage of this approach is that it is both targeted and scalable. Procedures can be aligned to the structure and complexity of the funding model, and results can be shared directly with funders, trustees, and other stakeholders as part of ongoing discussions
What this means for issuers, governance and external reporting
Trust-level comfort – while necessary – is no longer sufficient on its own. There is an increasing expectation that issuers can demonstrate how their structures operate in practice across the full portfolio, with this arising from internal and external stakeholders.
For many organisations, this is less about identifying a specific issue and more about addressing a visibility gap. Systems and controls may be operating as intended but have not previously been tested in a way that brings together loan populations, allocation logic, and cash behaviour. Issuers that can demonstrate practical testing clearly will be better positioned in an environment where scrutiny is increasing.
How we are supporting clients
Grant Thornton works with securitisation issuers to respond to these developments in a practical and commercially focused way. Issuers, service providers, and funders want evidence that can be used in discussions with funders and trustees, and that stand up to external scrutiny. Our approach centres on designing and executing targeted procedures that address these areas, supported by analytics and cash tracing that link loan data to observed outcomes.
Moving forward
There is now a clear market shift, and domestic expectations have moved from reliance on structure to a requirement for evidence – a shift unlikely to reverse. As a result, issuers are required to assess how quickly clarity can be established over how their structures behave in practice.
Addressing that question does not require a wholesale redesign of systems or processes. In many cases, a focused diagnostic or targeted validation exercise can be performed with limited disruption. The value lies in bringing together data, allocation and cash into a single, coherent view.
Organisations that take a proactive approach are already seeing the benefit in their funding discussions. Those that wait may find that the question is asked of them in a more formal setting.
Article contributed to by Nicholas Sandars - Audit
