Committee highlights uncertainties over post-Brexit overseas funds regime

Out-Law News | 18 May 2020 | 4:04 pm | 3 min. read

The UK’s Financial Markets Law Committee (FMLC) has pointed to a number of legal uncertainties over whether investment funds domiciled overseas will be able to access the UK market at the end of the post-Brexit implementation period.

The FMLC was responding to HM Treasury’s consultation on a proposed overseas funds regime (OFR) to replace the current one after the Brexit transition period ends. The current regime allows both EU and non-EU funds to access the UK through the Financial Services and Markets Act (FSMA) 2000.

The proposed OFR would establish equivalence regimes for EU member states and other third countries for overseas retail funds and money market funds to allow funds domiciled in those countries to market in the UK.

The FMLC said “much of the specificity around the criteria, timing and process of the equivalence assessments remains unknown” and the uncertainties surrounding EU Undertakings for Collective Investment in Transferable Securities (UCITS) funds in particular could lead to business interruption.

In its response (4 page / 111KB PDF) to the consultation the committee noted that the current regime governed by sections 264 and 272 of the FSMA will cease at the end of the Brexit implementation period. After that, EU UCITS funds which have been marketed in the UK before the end of the implementation period will have access to a temporary marketing permissions regime, with the OFR becoming available after that.

The FMLC said it was currently unclear whether the regimes would overlap, or when funds would need to stop using the temporary marketing permissions regime and start using the OFR.

The committee added that the consultation did not set out what areas of a third country’s funds regime would be examined by the ‘outcomes-based equivalence’ determinations currently proposed. It also did not explain how new rules introduced in the UK in the wake of the Financial Conduct Authority’s (FCA) Asset Management Market Study last year requiring authorised fund managers to have an independent non-executive director on the board and to carry out value assessments would affect the equivalence determination.

The FMLC said it welcomed the proposal to set out “additional requirements” for funds domiciled in countries which meet a baseline standard of investor protection, but called on the Treasury to clarify the areas of law which it might consider including as an additional requirement.

It also said greater clarity was needed as to which type of fund vehicles would be eligible for the OFR and whether certain fund types would be treated as a broad equivalence standard.

The committee questioned the proposal to require the operators of funds marketing under the OFR to have a UK ‘authorised person’ making or approving financial promotions.

It suggested that a more seamless transition could be achieved by requiring operators under the OFR to meet the standards applying to UK authorised persons, such as those set out in the FCA’s Conduct Business Sourcebook (COBS), and said greater clarity might be achieved if the status of recognised funds under the new regime from a financial promotions perspective were made clear within the COBS rules, incorporating any differences between different types and classes of recognised funds.

The committee also welcomed proposed changes to section 272 of the FSMA, including providing clarity as to what changes to overseas funds are viewed as material and requiring notification and approval from the FCA. However, it suggested that further clarity on the timeline of the recognition process under section 272 would be helpful.

Asset management regulation expert Elizabeth Budd of Pinsent Masons, the law firm behind Out-Law, said: “Having recognised that the currently available section 272 process was not really fit for purpose in this context, the OFR is to be welcomed, but as the FMLC response shows the devil really is in the detail."

“The ‘outcomes based’ assessment of equivalence needs to give sufficient certainty in order for fund managers to feel confident in relying on it. In addition, as we have seen with other transitional arrangements, clarity, earlier rather than later, is needed so that overseas managers can understand and take any necessary action in good time to register their funds and to address any areas where they may need to take additional action,” Budd said.

“As noted in the FMLC response the financial promotion regime of the overseas funds could be improved so that a fund manager can promote more easily without having to appoint an intermediary,” Budd said.

Budd said the OFR would not help UK-domiciled UCITS funds.

“The OFR is of course only one side of the coin. UK UCITS funds wanting to access the EU will be treated as alternative investment funds and therefore restricted from accessing the retail market subject to any local jurisdiction exemption,” Budd said.