The UK's new Overseas Funds Regime Published

Financial Markets and Products partner, Kirstene Baillie, recently spoke with Tim Hitchcock at Thomson Reuters –Regulatory Intelligence about the Financial Conduct Authority’s new Overseas Funds Regime. Below is the full article that was first published on the Thomson Reuters website.

This summer, the UK Financial Conduct Authority (FCA) introduced the Overseas Funds Regime (OFR), which grants qualifying foreign investment schemes easier access to UK consumers. The move recognises asset management's international nature and should increase competition and consumer choice. Conversely, it exemplifies how post-Brexit regulatory equivalence decisions have largely flowed in one direction.

The Overseas Funds Regime (OFR), outlined in FCA PS24/7, arises from inserting section 271A into the Financial Services and Markets Act 2000 (FSMA) in 2021. This states that a collective investment scheme under non-UK law will be recognised if it is from a jurisdiction and of a type approved by HM Treasury and has sought and obtained recognition from the FCA. Section 271A-recognised funds can be marketed to UK consumers essentially like domestic funds.

Equivalent protection

FSMA section 271B says the Treasury may not make a section 271A country and scheme-type approval unless a jurisdiction provides participants with "equivalent protection" to the UK. HM Treasury made its first, and so far only, equivalence approval in January, covering all European Economic Area (EEA) countries in relation to standalone undertakings for collective investment in transferrable securities (UCITS) schemes and UCITS umbrella sub-funds. Money market funds were excluded.

The OFR governs the procedure for funds covered by a Treasury equivalence approval to seek and obtain FCA recognition. It will replace the FCA's Temporary Marketing Permissions Regime (TMPR), which allows EEA firms promoted in the UK under pre-Brexit passporting rights to continue marketing in the UK, on December 31, 2024. Firms operating under the TMPR must apply for recognition under the OFR.

"The TMPR was a temporary arrangement for funds which had exercised UCITS passporting rights by making appropriate notifications," said Kirstene Baillie, a partner at the law firm Fieldfisher specialising in asset management and funds. "Under the OFR, the FCA can refuse an application and there will be an assessment process. While the FCA do not expect to reject many applications, the nature of the OFR regime is quite different from TMPR and the previous passporting arrangements."

Application process

The rules governing OFR applications are in the FCA handbook COLL 9.5, but when firms can apply for recognition varies. The gateway for operators of "new" EEA UCITS schemes, meaning those not currently under the TMPR, opens on September 30. There are so many TMPR funds that the FCA is running a "landing slot" system, under which fund operating firms are assigned a period in which to apply for OFR recognition.

The landing slot for all TMPR standalone UCITS funds is from October 1 to December 31. Slots for TMPR UCITS sub-funds are assigned alphabetically by operating firm name and run in three-month tranches from November 1, 2024, to September 30, 2026. The FCA will send each firm's chief compliance officer a "direction" eight weeks before its slot opening, telling the firm how to apply for OFR recognition.

Applications must be made using a form on the FCA's Connect system and accompanied by an application fee — £2,720 for standalone TMPR funds and £5,440 for umbrella sub-funds — and an annual recognition charge. This has caused complaints because the fees are higher than those charged pre-Brexit for passporting, and TMPR funds do not pay fees.

Under COLL 9.5.1(3), firms' applications must provide information falling into six general categories, more detail of which is in PS24/7 annex 3, table 2. The categories are:

• Scheme identity

• Scheme profile

• Fees and charges at the fund and unit or share-class level

• Scheme unit characteristics

• Name and legal entity identifier of parties connected to the scheme, including the UK-authorised person that will approve financial promotions

• Proposed marketing and distribution arrangements for the scheme.

Although operators of new entrants will have to complete the forms in full, certain data will be automatically reproduced on operating firms' OFR applications for funds currently under the TMPR, Baillie said.

The FCA will decide whether to grant an application within two months. PS24/7 clarified that applications will not be rejected if a fund's name is identical to a UK one, but firms are expected to make clear that the two have different legal domiciles. Even with the two-month period for FCA decision-making, the landing slot system means some TMPR sub-fund operators face a long wait for OFR recognition.

"There are some constraints while funds transition from the TMPR to the OFR," Baillie said. "The FCA have requested operators not to make any changes to the fund population data before the allotted landing slot and encourage firms to plan accordingly. This might prevent firms changing the operator, adding new sub-funds, until recognition has been achieved under the OFR."

Fund prospectus and financial promotions

After a successful application, OFR operators must publish a fund prospectus complying with parts of COLL 4.2.2- 4.2.4 and containing information required by COLL 4.2.5. The prospectus must warn UK investors if a fund is not covered by the Financial Ombudsman Service or the Financial Services Compensation Scheme and inform them of any dispute resolution or compensation scheme available in the fund operator's home state. The same warning must appear in financial promotions and supplementary point-of-sale information.

OFR financial promotions must be approved by a UK authorised firm that is a permitted approver under COBS 4.10.1B and was identified in the recognition application. Under passporting, fund operators could approve their own promotions. OFR operators must provide UK investors with facilities to obtain information about a fund and submit orders and complaints, but this can be done electronically.

"OFR fund operators can use pre-existing contractual consents for communicating with investors through electronic media," Baillie said. "The FCA does not intend to require OFR fund operators to ask for explicit individual consent from new investors before providing online facilities where the operator is already communicating electronically with existing investors."

Operators are required to notify the FCA of certain types of post-recognition changes to funds and other events, an indicative list of which is provided in PS24/7 annex 3, table 3. These divide into two groups: changes to fund features, such as its name or the financial promotions-approving firm, and events affecting a fund, such as sanctions imposed by the home state regulator or suspension from dealing in a fund.

No reciprocal arrangement for UK funds

The OFR may not be as easy as pre-Brexit passporting, and operators have griped about the amount of data they must provide. Still, it is streamlined compared with FSMA's section 272 procedure for recognising individual overseas schemes. There is no existing or proposed reciprocal arrangement giving UK UCITS easier access to EU consumers.

"The UK counts as a 'third country,' and its UK UCITS schemes count for EU purposes as alternative investment funds or AIFs," Baillie said. "Promotion of AIFs into the EU is restricted, even to professional investors, and certainly they cannot generally be accessed by EU retail investors."