Overseas Funds Regime: final rules and approach document published

Introduction

In July 2024, the FCA published Policy Statement PS24/7, which included its final rules on the Overseas Funds Regime (OFR) ahead of them coming into force on 31 July 2024. The FCA had previously consulted on these rules in December 2023 (for more information, please see our briefing here). The FCA has taken industry feedback on board in a continued attempt to balance investor protection with avoiding overburdening fund operators with extra requirements, given that they will already be regulated by their home-state regulator.

The new rules set out:

• The information the FCA will require in order to determine an application for recognition.
• The requirement for fund operators to notify the FCA of certain changes to the fund.
• Measures relating to the information UK consumers should be given in relation to FOS and FSCS coverage of their investment, along with other prescribed disclosures.
• Rules relating to the FCA’s powers to make a public statement about breaches of the OFR rules, or to suspend or revoke a fund’s recognition.
  
  

In September 2024 the FCA published a document setting out its approach to the recognition of funds under the OFR, alongside a suite of related documents, including suggested formats for the required enhanced disclosures, and detailed Connect User Guides.

The FCA has also published detailed timings for the OFR application process, including landing slots.

Legislative background

In March 2020 the Treasury consulted on a proposed new overseas funds regime. The concern was that once EU-domiciled funds could no longer passport into the UK, it would create operational issues for the FCA if it had to undertake the required in-depth assessment of individual funds under s.272 FSMA. At the time there were around 8,000 funds (including MMFs) entering the temporary marketing permissions regime (TMPR). The government therefore decided to establish a more streamlined for recognising overseas retail funds, including EU UCITS.

The government provided for the introduction of the OFR in the Financial Services Act 2021, by introducing a new section 271A-S FSMA 2000. This came into force in February 2022 and sets out the requirements for a scheme to be recognised, as well as the respective powers of the Treasury and FCA to make rules and regulations for the operation of the regime.

In May 2024 the government passed legislation to give effect to the Treasury’s decision that the EEA gave equivalent investor protection to the UK within the meaning of FSMA.

The Policy Statement: what has changed?

The FCA has mainly followed its approach in Consultation Paper CP23/26, with the following changes:

• The FCA has provided further explanation and clarification as to which categories of changes should be notified, ensuring that those changes which are most likely to have an impact on UK investors are disclosed, but without removing any of the potential changes on the indicative list. Firms will need to make their own decisions on what is ‘fundamental’ or "significant".
• As noted above, the FCA has taken on board industry feedback that fund operators are already subject to home-state supervision. They have therefore removed the proposed 30-day period between notifying the FCA of changes to OFR funds and when those changes could take effect in the UK. Firms will not now require FCA approval for the change, and will not need to give prior notification of the change if this would be impractical.

Firms will still need to notify the FCA of changes as soon as possible, ideally prior to the changes taking place. If it needs to be approved by their home-state regulator, then as soon as possible after that, otherwise as soon as possible after the change has been made.

• The FCA has included further guidance relating to the information that needs to be disclosed in the prospectus and supplementary point-of-sale information, including relating to FSCS and FOS coverage. The FCA notes that as part of the Future Disclosure Framework they may make further changes to disclosure requirements.
• The FCA clarified which UK requirements concerning the fund prospectus also apply to the prospectus of an OFR fund.

The FCA approach to recognition document

The FCA published an "approach document" in September 2024, which is intended to assist firms in making applications to be recognised under the OFR. The document provides more details about the application procedure, and also sets out the FCA’s expectations for funds and their decision-making process, including what may be grounds for refusal of recognition.

The stages of the application:

• Pre-application: Includes all the information that needs to be submitted as part of the application, so that firms can prepare this before logging into Connect.
• After submitting the application: A case officer will be assigned to assess the application, who may have follow-up questions or require further information. Firms will be able to track the progress of their applications in Connect. A decision will be made on completed applications within two months.
• Incomplete applications: If the application does not include the minimum information required, it may be rejected. An application can be resubmitted with the required information at any time.
• Successful applications: The details of the funds will be published on the FS Register.
  
  

The FCA reminds firms to ensure that their current information on the FS Register is correct.

FCA expectations and approach:

The FCA aims to provide clarity on what it considers to be the standards with which funds should comply, and what may be grounds for refusal. An application will be rejected if the FCA considers it is desirable in order to protect the interest of investors and potential investors in the UK.

The FCA expects funds to:

• Be managed in the best interests of investors.
• Hold appropriate investments that align with a clear investment objective and policy.
• Be subject to good governance.
• Have appropriate and transparent costs and charges.
  
  

The FCA expects the fund manager to ensure there is:

• Appropriate management of conflicts of interest.
• Appropriate risk management.
• A process to value assets appropriately.
• Effective liquidity management.
  
  

The FCA sets out a number of potential reasons for refusal, along with the rationale, and its expectation for what would be acceptable. This includes examples relating to the names of the funds, or the type of investments in which the fund invests, and is worth reading in full.

FCA document on enhanced disclosures

The new COLL rules for the OFR, which came into force in July, require the prospectus of an OFR recognised scheme to contain the same information as the prospectus of a UK authorised fund (to the extent this is compatible with the basis of home state approval), with regard to the availability of consumer redress schemes.

To assist applicants, the FCA has set out some example disclosures for firms to use, depending on their individual circumstances, such as being a UCITS with a management company and depositary all established and authorised in the same EEA member state.

Timings for the OFR

The FCA has also updated its OFR website pages with landing slots for funds to transfer out of the temporary marketing permissions regime (TMPR) into the OFR:

• For operators of stand-alone EEA UCITS, their slot will be from October to December 2024.
• For operators of umbrella UCITS, the FCA will issue landing slots, in alphabetical order by operator name, over a two-year period starting from November 2024.
• New EEA-based schemes will be able to apply at any time from 30 September 2024 and will not need a landing slot.
  
  

There are currently over 8,000 funds in the TMPR, including sub-funds, but the FCA does not expect all of them to apply for recognition under the OFR.

Next steps

Firms in the TMPR should ensure that they have registered with Connect, if they have not already done so, and have made a note of the date on which their landing slot opens. The FCA has published the application form on Connect, along with a User Guide, so that firms in the earlier landing slots can start preparing their applications. Firms may find the "How to" guides for specific types of funds helpful too (available on the FCA’s OFR webpage).

Fund operators will be issued with a binding direction eight weeks prior to their landing slot, and if they miss this slot they will be removed from the TMPR, so should check timings carefully.

In particular, fund operators which are considering making any changes to their funds during this period should be aware that some information will be reproduced in their application form in advance of their landing slot, and will not be editable. Fund operators wishing to change operator, or add sub-funds, will not be able to do so for a period of time, and so should plan accordingly.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, September 2024