The future UK overseas fund regime
In case a trade agreement between the UK and the European Union (“EU”)1 is not reached by the end of the transition period on 31 December 2020, passporting of EEA UCITS will be able to continue into the UK for a limited period of time under the temporary marketing permission regime (“TMPR”), provided that the management company or the self-managed UCITS has notified the Financial Conduct Authority (“FCA”) by 30 December 2020. In the absence of such notification, passporting firms will automatically enter the Financial Services Contracts Regime (“FSCR”) to allow them to wind down their UK business in an orderly fashion.
The Financial Services Bill 20202 (“the Bill”) introduced a new overseas fund regime and will provide for recognition by the FCA of EEA UCITS so that they can continue to be marketed in the UK following the end of the TMPR. As a prerequisite, the UCITS home country must provide at least equivalent investor protection outcomes and HM Treasury3 must be satisfied that there are adequate supervisory cooperation arrangements between the FCA and the national competent authority in the home country. This retail fund equivalence regime will be introduced through a new section 271A of the Financial Services and Markets Act 2000 (“FSMA”) and will provide a more streamlined and simplified process compared to the existing individual fund recognition system under section 272 of the FSMA.
However additional requirements specified in separate legal instruments may apply to certain categories of overseas funds.
The Bill will extend the TMPR from three to five years to allow sufficient time for the UK government to complete any equivalence assessments and for funds to apply for recognition, either through the OFR or section 272 as appropriate.
Recognition and notification process
The FCA will rely on self-certification from the notifying funds that they are eligible for recognition. Recognition is to be made at both the fund and sub-fund level. The time limit for the FCA to require further information or confirm recognition is two months.
For a money market fund (MMF) marketed to retail clients, an equivalence determination is required under both section 271A FSMA, and the MMF equivalence regime4. In case no equivalence is granted under section 271A FSMA, MMF must apply for individual recognition under section 272 FSMA to be able to be marketed to UK retail clients.
Additional requirements for overseas funds
Additional requirements imposed by separate legal instruments may apply for certain categories of funds but are not designed to address fundamental shortcomings in an overseas regime. Proportionality and a level playing field is supposed to be achieved through a provision which requires HM Treasury to have regard to what is required of comparable UK authorized funds when specifying these additional requirements.
Withdrawal of equivalence
HM Treasury may modify or withdraw equivalence in response to material changes in the regulatory regime in either the UK or the overseas countries. In such circumstances, investors should not be forced to divest and the fund should continue to service them.
Under a transitional provision, HM Treasury can specify a period during which affected funds can apply for individual recognition under the FSMA section 272 regime or modify or disapply the time limits for the FCA to determine a section 272 application.
Suspension or revocation of individual funds
The FCA has the power suspend or revoke recognition of an individual fund. Fund operators will be required to notify the relevant persons as directed by the FCA. The FCA will also have a power of public censure to inform investors of any wrongdoing by an operator of a recognized overseas fund.