A recent Financial Conduct Authority (FCA) consultation paper (CP) provides clarity on upcoming changes to the regulation of overseas investments in the UK.
The consultation paper sets out draft rules and guidance that will support the overseas fund regime (OFR) – the new statutory framework which will provide funds domiciled outside of the UK with a streamlined process to apply to the FCA for recognition. The OFR, which is contained in sections 271A-271S of the 2000 Financial Services and Markets Act, will replace the short-term temporary marketing permission regime (TMPR) that was put in place during the transition period following the UK’s exit from the EU.
The paper sets out details of the streamlined process and the way the FCA intends to use the powers provided by the regime. For example, the CP lists details of the data that will be collected by the FCA as part of the application process, anything that must be disclosed to the FCA upon application, the reasons an application may be rejected or revoked, and any fees applicable.
The new regime is subject to HM Treasury reaching ‘equivalence’ decisions on the jurisdiction that the fund is established in. EU member states are likely to be the first jurisdictions assessed for equivalence, as the majority of overseas funds offered in the UK are EU UCITS within the TMPR – opening the opportunity for funds currently in the TMPR to apply for OFR recognition. Fund managers with funds in the TMPR are asked to ensure that their information is up to date to enable the FCA to communicate with them and to allocate the ‘landing slot’ within which they will be expected to make their applications.
Fund managers currently marketing their funds into the UK will also need to take into account restrictions on marketing.
“One key point from the CP is that EU fund managers will now need an FCA authorised person to approve any financial promotion. This is in contrast to the current position which permits EU fund managers in the TMPR to market into the UK and make financial promotions without the need to be FCA authorised,” said investment funds expert Elizabeth Budd of Pinsent Masons.
According to the FCA, one of the measures of success of the new scheme is that the OFR will ensure that funds currently marketed under the TMPR, and that wish to continue to market to UK investors, have been transitioned over to the OFR in advance of the statutory deadline for the end of TMPR at the end of 2025. However, the application process will also identify those funds that could potentially cause harm to UK consumers, which will not be recognised and will have to cease to market.
However, the FCA hopes that by offering UK investors a broad choice of investments funds, it will in turn increase competition.
The CP provides welcome clarity, following a lack of permanent procedures in place for overseas investors following the UK’s exit from the EU, Budd said.
“This CP is long awaited and helps EU UCITS managers to start to prep for the transition out of the TMPR to the OFR. To a certain extent we have been treading water with the ability to launch new overseas funds into the UK,” she said.
“But it is worth noting the emphasis that the FCA is putting on consumer protection and the reference that as part of an equivalence determination under the OFR, the government and FCA may decide to impose additional requirements for recognised schemes to comply with which would require further consultation. This could be a reference to how the consumer duty and value assessments might be applied and even in this consultation there is a focus on cost and value.”
On the impact the consultation paper and the subsequent implementation of the OFR, Dublin-based financial regulation expert Conor Durkin said: “The UK market is an extremely important market for the distribution of Irish UCITS, and according to Irish Funds more than 4,000 Irish UCITS fund are distributed in the UK.”
“Ensuring continued access to the UK market is a top priority for many managers. Although the types of overseas funds that may avail of the OFR is subject to an equivalence decision of the UK government, the FCA’s consultation on the OFR is welcomed by industry, which is hoped will streamline access of overseas funds, such as Irish UCITS, to the UK market,” he said.
Expert in Luxembourg investment regulation Mark Shaw added: “This is a welcome development for promoters of EU UCITS, though the real sigh of relief will come when the rules are actually in force.”
The consultation will close on 12 February 2024 with the FCA looking to publish a final policy statement, as well as the new rules, in the first half of 2024.
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