On 4 December 2023, the FCA published consultation paper CP23/26 on the implementation of the Overseas Fund Regime (OFR). The OFR, when operational, will provide for a more streamlined route for overseas funds to market to UK retail investors. The paper sets out the FCA’s proposals on:
- The application process for recognition under the OFR.
- Ongoing notification and disclosure requirements for recognised funds.
- The process for FCA refusal, suspension or revocation of recognition, and public censure of the operator of an OFR recognised scheme.
- Application and periodic fees applicable to recognised schemes.
The Treasury is considering the equivalence of overseas regimes, including the EU, with technical advice from the FCA. Once it has made a determination of equivalence of a particular jurisdiction, scheme operators from that jurisdiction will be able to apply to the FCA for a scheme to be recognised under the OFR. The Treasury has not yet made such a determination.
The CP does not include a date for the start of the new regime, although the FCA previously indicated it expects to start processing applications in Q2 2024.
Separately, the Treasury published a draft SI and policy note providing for a similar regime for money-market funds (MMFs). The FCA is not currently consulting on the information requirements for MMFs.
The current position on overseas funds marketing to UK retail investors
Before the end of the Brexit transition period, EEA Undertakings for Collective Investment in Transferable Securities (UCITS) were able to passport into the UK and market their funds to the UK market, including to retail investors. Since then, two alternative routes have been available for overseas funds. These are set out in more detail in our earlier article but are summarised as follows:
- The Temporary Marketing Permissions Regime (TMPR): A transitional arrangement only available to previously-passported EEA UCITS. No new applications can be made to the regime, although additional sub-funds of an existing registered umbrella can be added. This regime is set to expire at the end of 2025.
- Individual Recognition under section 272 Financial Services and Markets Act 2000 (FSMA): An onerous route to recognition, involving an in-depth FCA assessment of the current legal and regulatory regime applying to the overseas fund, its operator and the depositary.
The OFR: 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 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.
The Consultation Paper (CP 23/26)
Timings and scope
The CP sets out how the FCA intends to exercise its powers under FSMA once the Treasury makes equivalence determinations under the OFR, as well as draft handbook rules including amendments to COLL.
The consultation closes on Monday 12 February 2024. Subject to the responses, the FCA aims to publish a final policy statement and final handbook rules in the first half of 2024 (though, as noted above, this will not necessarily mark the start of the regime’s operability).
The FCA has flagged certain actual and potential limits to the proposals’ scope:
- ETFs: The FCA acknowledges that proposals on application and ongoing notification requirements may not be suitable for ETFs, and seeks feedback from respondents on this point.
- Money Market Funds: These are currently out of scope and so the consultation does not cover additional information the FCA may need to obtain in future should the Government make an equivalence determination in relation to MMFs. As noted above, the Treasury is currently consulting on a new legislative framework for MMFs, Part 2 of which provides for an overseas MMFs regime which mirrors that set out in FSMA.
Under the proposals, operators seeking recognition of a scheme under the OFR will need to submit a set of prescribed data in their application to the FCA.
This includes information about:
- The identity of the scheme (such as its name, Legal Entity Identifier, domicile, and confirmation of home-state authorisation from its operator). The FCA notes that were an application to involve a scheme with a name identical to an existing UK authorised scheme, the FCA is unlikely to approve the application. The FCA requirements in relation to the names being clear, fair, and not misleading must also be met.
- The scheme’s profile, including investment objective, policy and strategy, value of assets under management, fund category) and main category of asset class, use of derivatives and whether this is for efficient portfolio management only, use of benchmarks (if any) and whether actively or passively managed. In addition, any focus on environmental, social and governance factors.
- Available liquidity management tools and dealing frequency.
- Target investor and minimum investment amount.
- Fees and charges at scheme and share / unit class level.
- The name or designation, and unique identifier (eg ISIN), of each share / unit class.
- Parties connected to the scheme (eg the depositary or management company), especially any entity or individual acting as sponsor, playing a key role in establishing the scheme, or likely to have ongoing influence on management.
- Any promotional payments to entities associated with marketing or distributing the scheme. Under the OFR, most recognised schemes will need to have financial promotions approved or communicated by a UK authorised firm.
Applications for umbrella schemes must provide this information for both the umbrella itself and each sub-fund that for which UK marketing is sought.
Ongoing Notification requirements
If recognition is granted to a scheme, the FCA will require further information to be provided on an ongoing basis.
This information includes:
- Changes of scheme name or legal structure,
- A suspension of dealing in the units / shares of the scheme,
- A material increase in fees or change in redemption terms,
- A fundamental change to the scheme’s investment policy or objective,
- Changes to connected parties to a scheme.
Generally, the operator will need to notify the FCA of the change 30 days before it takes effect in the UK. Some other changes will only be subject to a notification deadline of 30 days post-change.
Pre-sale disclosures on the availability of complaints and compensation schemes
While UK regulated firms (such as UK based advisers or execution-only service providers acting in relation to an OFR scheme) will be subject to the jurisdiction of the Financial Ombudsman Service (FOS) and Financial Services Compensation Scheme (FSCS), OFR schemes will not be covered. To mitigate the resulting risk to consumers, the FCA has proposed a set of disclosures applicable to recognised schemes at various pre-sale stages, including financial promotions, the scheme prospectus, and at the point of sale. Some of the key requirements are:
- To varying extents, all three stages must feature statements warning UK investors that they may not be able to seek redress under the UK regulatory system if the operator and depositary are not covered by the FOS or FSCS.
- Both the prospectus and point-of-sale supplementary information must provide information on what ADR or compensation arrangements are in place, if any, in the scheme’s home state(s), which a UK investor could use to seek redress.
- Financial promotions must state that the fund is authorised overseas and not in the UK. The must also state that investors may wish to get financial advice before investing, ask for more information, or see the scheme prospectus.
Refusal of recognition, suspension or revocation of recognition and public censure
Under s. 271L FSMA, the FCA has the power to refuse to make a recognition order, suspend, or revoke recognition orders. This can be done on various grounds, including the protection of UK investors. The FCA can also make a public statement if it deems that there has been a breach of the regulatory requirements under the OFR. When using any such powers, the FCA will be required to issue notices to the scheme operator(s) concerned.
Application and ongoing periodic fees
Under the proposals, application charges and periodic fees will be aligned with those of UK authorised schemes.
Facilities in the UK
As was the case under the pre-Brexit passporting arrangements, the FCA proposes that UK investors should be able to access a UK representative of the overseas fund operator to obtain information and submit requests. However, following the approach recently adopted under the UCITS Directive, the FCA has said it will no longer generally be necessary for the UK representative to have a physical office or presence in the UK, at least in those cases where the terms and conditions foresee all interactions taking place using electronic means or where the customer has consented to such arrangements.
Schemes of arrangement involving recognised schemes
UK Authorised Fund Managers are able to invite unitholders to vote on proposals to merge with another scheme under COLL 7.6, but whereas previously the FCA considered a merger with EEA UCITS to be in principle compatible with the best interests of UK UCITS investors, this assumption will no longer be made by default. Instead, it will be made only if the Government decides to make an equivalence determination for a relevant set of EEA UCITS. For now, the FCA does not propose to extend the merger rules to other categories of overseas funds that might in future be recognised under the OFR, but they would consider this again if and when a non-EEA jurisdiction is designated as equivalent. The rules will also be modified to allow mergers involving schemes recognised under s272 FSMA.
We understand that the FCA will shortly publish information on its website regarding landing slots for firms which intend to apply for recognition.
Following a Treasury decision on equivalence, the FCA will then publish information about the application process and their plans for managing an orderly transition of schemes from the TMPR to OFR. The FCA expects to receive new applications from EEA-domiciled UCITS as well as applications from schemes currently in the TMPR.
As part of an equivalence determination under the OFR, the Treasury may decide to set conditions by imposing additional requirements for recognised schemes, in accordance with s. 271E. As these requirements could be applied through further Handbook amendments, the FCA would need to consult again on these.
The FCA will also need to consult separately on any necessary handbook amendments for the overseas MMFs regime.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, January 2024