Softening of the borders for Irish and Luxembourg UCITS marketed in the UK

HM Treasury (HMT) yesterday launched a consultation on a proposed new framework for the post-Brexit marketing of non-UK funds to retail investors in the UK. The proposed new framework – called the overseas funds regime (OFR) – will apply at the end of the Brexit transitional period and following the end of the temporary permissions regime for funds. The OFR will allow overseas funds, in particular Irish and Luxembourg UCITS, to be marketed to UK retail investors, so long as certain conditions are met.   

The OFR will work broadly as follows:

• Jurisdiction level determination – On the advice of the Financial Conduct Authority (FCA), HMT will make: (i) an “outcomes based” equivalence determination in relation to the regulatory regime of the country in which the fund is authorised; and (ii) a determination as to whether any “additional requirements” might be necessary.

The equivalence determination will be based on whether the regulatory regime of the country in which the fund is authorised achieves “at least equivalent investor protection” as compared to the UK authorised funds regime. It will also require “adequate supervisory cooperation agreements” to be in place between the FCA and the regulator in the relevant jurisdiction. We would expect equivalence decisions in respect of Luxembourg and Ireland to be the priority.

HMT may, on the advice of the FCA, also conclude that the category of funds covered by the equivalence determination must comply with “additional requirements” as a condition of being recognised in the UK. There are a number of unanswered questions around the level and types of “additional requirements” which might be imposed. Whilst HMT is clear that the overseas fund does not need to be subject to exactly the same requirements as a UK authorised fund, no clear examples of “additional requirements” are given; it is therefore not clear, for example, whether the FCA would ever recommend the imposition of an obligation on the boards of Irish or Luxembourg UCITS to carry out a value for money assessment.

If there is no favourable equivalence determination for the country in which the fund is authorised, the manager may apply to the FCA for recognition through (a modified version of) s272 FSMA, as is currently the case. We assume the s272 regime is unlikely to be used very often in practice.

• Fund level registration – The manager will self-certify that its overseas funds are eligible for recognition and then apply to the FCA for registration. This process will take up to two months. 
• Ongoing requirements – The FCA will have supervisory responsibility for ensuring the “additional requirements” are met. As with the current UCITS passporting process, the FCA will expect appropriate disclosures to be made to investors, facilities to be maintained in the UK, regular reporting to the FCA and the payment of periodic fees. 
• Investor redress – HMT is considering whether UK investors in funds registered under the OFR should have recourse to the Financial Ombudsman Service and/or the Financial Services Compensation Scheme. 

As part of the consultation HMT is also undertaking an information gathering exercise to better understand the nature and extent of current cross-border marketing activity. 

The consultation runs until 11 May, with the Government intending to legislate for the OFR in a Financial Services Bill in due course.