On 11 March 2020, HM Treasury (the "HMT"), the office responsible for financial services legislation in the UK, published a consultation paper on a new Overseas Funds Regime (the “OFR”). The consultation ended on 11 May 2020.
While the UK is part of the EU, retail investors in the UK can access other EU Undertakings for Collective Investments in Transferable Securities (“UCITS”) funds via a passport regime.
In the context of Brexit, the UK government created a temporary marketing permissions regime (“TMPR”) to allow EU UCITS to market in the UK until the end of the transition period, which is expected to expire on 31 December 2020.
HM Treasury propositions
The UK already has a regime pursuant to section 272 of the Financial Services and Markets Act (“FSMA”) which allows individual examination of non-UK funds to decide whether they can be marketed to retail investors in the UK. Since this regime would be rather cumbersome to apply for the thousands of EU funds that are expected to be marketed in the UK post Brexit, HMT, has proposed in the consultation two different regimes, based on the principle of equivalence:
- an equivalence regime for overseas retail funds to be able to market to UK retail investors;
- a separate regime for money market funds (“MMFs”) of which there are very few domiciled in the UK.
It is not proposed to repeal section 272. HMT proposes to amend section 272 to make it more efficient for the funds that are not eligible for the OFR.
The OFR will establish processes by which the UK government will be able to make an equivalence determination in respect of another country’s regime for retail funds or MMFs, respectively.
Once equivalence is granted to a particular country, funds wishing to market in the UK will need to register with or notify the UK’s Financial Conduct Authority (the “FCA”) for a formal ‘recognition’. Retail funds will need to be registered with the FCA to gain recognition. The process for MMFs gaining recognition will depend on whether they are being marketed to retail or professional clients. Those marketing to professional investors only will be required to submit a notification under the national private placement regime.
Although the recognized funds will not be under FCA’s supervision, they will have to pay fees and answer any queries raised by the FCA. If necessary, the FCA can suspend or revoke the recognition of a fund.