Following Brexit, non-UK domiciled UCITS funds (“funds”), including Irish UCITS funds, can no longer make use of the UCITS passport to market to UK retail investors. To provide a backstop, the UK Financial Conduct Authority (“FCA”) established a Temporary Permissions Regime (“TPR”) to allow funds which were passporting into the UK when the Brexit transition period ended (December 2020) to continue operating temporarily in the UK once the passporting regime had fallen away. The TPR is scheduled to run until the end of December 2025. It was estimated that there were in excess of 8,000 EEA UCITS marketed in the UK when the passporting regime ended.
Following the end of the TPR, funds who wish to target UK retail investors can establish a UK authorised fund or utilise the more user-friendly Overseas Fund Regime (“OFR”). The OFR was introduced in the UK government’s Financial Services Bill 2020 (“the Bill”). The OFR introduces two new equivalence regimes, one for retail investment funds and one for money market funds. The vast majority of money market funds are EEA-domiciled and the UK government was keen to ensure that they still have access to the UK market.
The Bill gives HM Treasury the power to approve a non-UK country for equivalence. HM Treasury must satisfy itself that the protection afforded to UK investors under the laws of the given country is at least equivalent to that offered to the same type of fund under UK law. In addition, there must be adequate supervisory cooperation arrangements between the FCA and the other country’s regulatory authority. HM Treasury might offer equivalence to a country but may put in place additional conditions. For example, the UK authorities have focussed heavily on their assessment of value regime. HM Treasury may require funds using the OFR to carry out an annual assessment of value.
If a fund is from a country that has been approved by HM Treasury, the operator of the fund can apply to the FCA for recognition.
OFR – February 2022 Update
In February 2022, the UK Government published the regulations that brought the OFR into effect. While the OFR is now enshrined in law, there are a number of other steps the UK Government and the FCA must undertake before it is operational.
Currently the UK authorities are giving consideration to an EU-wide equivalence for UCITS collectively. However, for political reasons the UK may not wish to do this. The EU has been reluctant to grant the UK equivalence and the UK for example may wish to use EU-wide UCITS equivalence as leverage in the negotiations on the Northern Ireland Protocol. It should be noted however that HM Treasury could grant equivalence to specific members states such as Ireland or Luxembourg and not others. In summary, the timeline on equivalence is not yet clear.
As mentioned above, if a fund is from a country that has been approved by HM Treasury, individual firms can apply to the FCA for recognition of their funds. It is intended that funds will be given landing slots in quarterly windows. The reason for the landing slots is because the FCA estimates that it will have in the region of 8,000 funds to consider. The FCA believes that the timeframe to work through this level of applications will be two years. Given the TPR regime is due to end in December 2025, the OFR process for individual fund applications would need to begin in December 2023. It remains to be seen whether this indicative timeframe for the OFR is accurate.
Regarding AIFs registered under the TPR, the period under which AIFMs were allocated landing slots to apply for full permissions to market in the UK via the FCA’s Connect system closed on 1 November 2021.
Download a copy of the UK Overseas Funds Regime – 2022 Update
KB Associates’ Services
KB Associates provides a range of services to investment funds including:
- The provision of UCITS management company/AIFM services.
- The provision of designated persons to perform UCITS business plan/AIFMD programme of activity functions.
- The provision of operational and compliance services to both UCITS and AIFMD compliant structures.
If you would like to discuss this note or KB Associates’ services in general, please contact:
- Mike Kirby (+353 1 667 1980), email@example.com
- Andrew Kehoe (+353 1 613 6396), firstname.lastname@example.org