Last week, the government announced its first equivalence decision under s271A of the Financial Services and Markets Act 2000 (FSMA), finding the EEA states to be equivalent under the Overseas Funds Regime (OFR).
The equivalence decision will apply to undertakings for collective investment in transferable securities (UCITS), except those which are also Money Market Funds (MMFs), as there is ongoing regulatory development in this area.
Quick refresher for those unfamiliar with the TMPR and OFR
Pre-Brexit, managers were able to market EEA UCITS to retail investors in the UK using the UCITS marketing ‘passport’. That ability was revoked when the UK withdrew from the EU. The Temporary Marketing Permissions Regime (TMPR) was created in the UK to allow EEA UCITS that were using their marketing passport to market to UK retail investors pre-Brexit to continue to do so for a limited period post-Brexit.
To transition to the new post-Brexit regulatory landscape, the UK government legislated in 2021 to create the OFR, the new streamlined process to recognise overseas schemes, in s271A FSMA. The OFR is the gateway through which collective investment schemes domiciled in jurisdictions deemed to be equivalent by HM Treasury will be able to market to retail investors in the UK.
Overseas schemes which are not in the TMPR, including those in non-EEA countries, can already be recognised in the UK under the process set out in s272 FSMA. The OFR is intended to be a more efficient route appropriate for recognition of significant numbers of funds, compared to the time-consuming and administratively onerous recognition process under s272 FSMA.
End 2026: End of TMPR / Start of OFR
To help funds transition to the OFR, the government has announced its intention to extend the TMPR, currently due to expire at the end of 2025, to the end of 2026.
Funds currently in the TMPR will need to apply for recognition under the OFR by the end of 2026 in order to continue marketing in the UK without interruption.
The FCA will in due course issue information about allocating ‘landing slots’ in which fund operators can apply for recognition of their funds under the OFR.
Operators of EEA UCITS that are not in the TMPR but wish to market to retail investors in the UK will also be able to apply to the FCA for OFR recognition under s271A with effect from the expiry of the TMPR.
What should EEA UCITS operators do now?
Operators of EEA UCITS in the TMPR should ensure the FCA holds the correct contact email address as this will be used by the FCA to contact them with details of the process and landing slot for applying for recognition under the OFR. This email address should be for the operator and not an external consultancy firm or other third-party. Any updates to the firm or fund details should be emailed to firstname.lastname@example.org. If funds registered under the TMPR are no longer marketing in the UK they should be removed via Form TMPR CH.
Operators of EEA UCITS that are not currently in the TMPR, but that would like their funds to be marketed to retail investors in the UK, should, for now, keep an eye on further information on the OFR application process.
What is the OFR application process likely to look like?
The FCA is currently consulting on the implementation of the OFR (FCA CP23/26).
At the moment, firms submitting information about collective investment schemes to the FCA either send hard-copy documents by post or attach electronic copies to an email. The FCA has said it plans to create a new online application form for overseas firms to apply for recognition of a scheme under the OFR. More information on when the new system is to become operational will be provided by the FCA in due course.
In assessing applications for recognition, the FCA is likely to focus on the following information:
- areas linked to the scheme’s identification and eligibility (e.g. name, legal structure);
- investment proposition (e.g. investment objective, policy and strategy);
- fees and charges;
- parties connected to the scheme;
- marketing and distribution strategy; and
- characteristics of the units or shares that will be made available to UK investors.
Where an overseas scheme is constituted as an umbrella, the FCA will request information about both the umbrella as a whole, and the specific sub-funds which the operator seeks to market in the UK. The FCA will also ask, for each stand-alone scheme or sub-fund, which classes of unit or share are to be promoted and how they are differentiated from one another
See table 7 of Annex 4 of FCA CP23/26 for the full list of information expected to be required as part of the registration process.
Can an application for recognition be refused?
Although this is expected to be rare, the FCA will refuse an application if it considers it desirable to do so to protect the interests of investors or potential investors in the scheme.
Will OFR recognised schemes be required to comply with additional UK requirements?
No additional UK requirements other than possibly SDR in future (but also see below): Under the OFR, HM Treasury may in its equivalence decisions specify additional requirements as a condition of marketing in the UK. The government has confirmed it does not intend to require the funds assessed (i.e. EEA UCITS) to comply with any additional UK requirements as part of this equivalence determination at this time. However, separate to the assessment of the EEA, given ongoing regulatory developments in relation to sustainable disclosure requirements (SDR) (see our briefing here), the government intends to consult on whether to broaden the scope of SDR to include funds recognised under the OFR. The SDR sets rules that, among other things, seek to stop firms from making exaggerated or misleading sustainability-related claims about their investment products. This regime aims to ensure consumers trust and understand the sustainability credentials of funds marketed in the UK. The government has said that it will ensure that there is adequate time for industry to adapt to any future requirements.
Physical presence in the UK: In line with the changes to the UCITS Directive in the EU, which allow facilities to be provided within the EEA without a physical presence in the host state (Article 92 (2) as amended), the FCA is considering allowing OFR recognised schemes to adopt a similar policy in the UK in most cases, or at least where the terms and conditions of investment foresee all interactions taking place via electronic media, or where the customer has individually consented to such arrangements.
Financial promotions: Asset managers will need to be mindful of the financial promotion regime and how it applies to different persons and distributors in the value chain, post OFR. At the very least there will need to be additional disclosures in marketing materials, prospectus and point of sale disclosure eg regarding the scope of FOS (complaints) and FSCS (UK compensation scheme) in relation to the scheme.
The OFR should be up and running by the start of 2027. In the meantime, both the government and FCA will need to do the following to operationalise the OFR:
FCA: Comments on FCA CP 23/26 must be submitted by 12 February 2024. The FCA is expected to publish a final policy statement and final Handbook rules in the first half of 2024. Operators of EEA UCITS in the TMPR should expect to be emailed with details of landing slots soon after the equivalence decision is in the statute book.
- When Parliamentary time allows, the equivalence decision under s271A will be formalised in secondary legislation.
- Secondary legislation to operationalise the OFR will also be passed. The draft Financial Services Act 2021 (Overseas Funds Regime and Recognition of Parts of Schemes) (Amendment and Modification) Regulations 2024 (together with an explanatory memorandum) was published on 31 January 2024 and comes into force on 26 February 2024. The Regulations make consequential amendments across the statute book to insert references to s271A FSMA. It also makes modifications to some of these new amendments and existing references to recognised funds where relevant, to ensure that such references account for recognised sub-funds.