On 4 December 2023, the Financial Conduct Authority (FCA) published a consultation (CP23/26) on the implementation of the UK’s overseas funds regime (OFR). The OFR is a new statutory framework that is intended to provide non-UK domiciled funds with a more streamlined route to become eligible to be marketed to UK retail investors. 

Background

There are currently two potential routes available for overseas funds to market to UK retail investors. 

1. European Economic Area (EEA) undertakings for collective investment in transferable securities (UCITS) which were passported into the UK and which marketed their funds to the UK market (including to UK retail investors) before the end of the Brexit transition period (i.e., prior to 31 December 2020) were able to apply to enter the temporary marketing permission regime (TMPR). The TMPR was only available to previously-passported EEA UCITS and is set to expire at the end of 2025.
2. Other non-UK funds can seek “individual recognition” under section 272 of the Financial Services and Markets Act 2000 (FSMA). In practice, this is an onerous route to recognition that is rarely used. 

Once EU-domiciled funds could no longer passport into the UK through the TMPR, there was a concern that it would create operational issues for the FCA if it had to undertake the required assessment of funds under section 272 of FSMA. To address this, the OFR has been introduced to allow investment funds domiciled overseas to be marketed and sold to UK retail investors. The OFR aims to provide a streamlined process for offering non-UK domiciled funds to UK retail investors where there has been an equivalence determination by HM Treasury (HMT). 

Proposals in CP23/26

HMT is currently considering granting equivalence to UCITS that are authorised and supervised in the EEA. Therefore, CP23/26 proposes changes to the FCA’s rules that will allow overseas schemes to be recognised under the OFR, should HMT make any determination on equivalence.

CP23/26 also clarifies how the FCA intends to use the powers given to it under the OFR. Notably, CP23/36 focuses on:

• the categories of information that overseas schemes will need to submit to become recognised by the FCA under the OFR, as well as the information the FCA intends to obtain on an ongoing basis if recognition is granted. The former includes key information about a fund’s investment objective and policy and the main categories of assets that it invests in;
• notification requirements for OFR recognised funds, which will enable the FCA to oversee all OFR recognised funds effectively throughout their lifecycle, to maintain an up-to-date register of OFR schemes and to assess whether they continue to meet the recognition conditions;
• requirements for pre-sale disclosures to ensure UK investors are aware of available protections, such as measures to provide consumers with a clear explanation about the lack of, or limitation on, Financial Ombudsman Service or the Financial Services Compensation Scheme coverage for UK investors; 
• how the FCA plans to refuse applications for recognition or to suspend or revoke a scheme’s recognised status, where necessary, e.g., the FCA has an obligation to refuse an application for recognition if it is desirable to protect the interests of investors;
• the process for public censure of the operator of an OFR-recognised scheme; 
• application and periodic fees applicable to OFR-recognised schemes; and 
• proposals for maintaining UK facilities for investors in OFR-recognised schemes.

CP23/26 also requests that operators of UCITS in the TMPR 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 under the OFR.

Separately, HMT published draft legislation and policy note providing for a similar regime for money-market funds (MMFs). The FCA is not currently consulting on MMFs’ information requirements. 

HMT equivalence determinations

HMT is currently considering the equivalence of overseas regimes based on technical advice from the FCA. It is expected that EU member states will be the first jurisdictions assessed for equivalence, as many overseas funds offered in the UK are EU UCITS within the TMPR. Once HMT has made an equivalence determination in a particular jurisdiction, scheme operators from that jurisdiction will become eligible to apply to the FCA for a scheme to be recognised under the OFR. HMT has not yet made any such determinations.

As the OFR allows HMT to recognise any overseas jurisdiction as equivalent, the FCA may consult in relation to additional investor protection requirements following each decision by HMT as necessary. 

Next steps

The consultation period for CP23/26 closes on 12 February 2024. The FCA intends to publish a follow-up policy statement and final Handbook rules in the first half of 2024. 

CP23/26 is available here.