The UK’s latest financial regulatory update, the Overseas Fund Regime (OFR), considers linking market access for foreign investment funds to stringent sustainability reporting requirements. Such a move, which could enter into force in 2025, would require all funds entering the UK market adhere to high environmental and social governance standards, including its sustainability labeling rules.
Underlining the importance of offering investors choice in a competitive investment landscape, the UK government on Wednesday laid out plans to make it easier for investment funds from Europe and other overseas territories to be sold to UK investors after Brexit.
The new rule is known as the Overseas Fund Regime, or OFR, and will replace an older, temporary system. It is meant to streamline things by simplifying how these foreign funds can operate in the UK.
One aspect that remains unclear for now is how funds would have to handle sustainability disclosure requirements, given that the approaches in the UK and the EU on this particular topic still diverge. The FCA, which last year made its national funds subject to stringent rules under its Sustainability Disclosure Requirement, or SDR, has announced a new consultation for the third quarter, with a decision on legislation foreseen by the end of the year. It mentioned the second half of 2025 as a moment when this may enter into force for overseas funds.
‘Closely monitor,’ says CSSF
In Luxembourg, the legal domicile for more than 10,000 Ucits funds offered to investors across Europe, supervisor CSSF has told fund managers to pay special attention to these UK changes. “The CSSF invites Luxembourg domiciled UCITS and management companies to closely monitor any implications deriving therefrom with a view to ensuring a smooth continuity of their marketing activities towards UK investors,” it said in a statement on Thursday, a day after the new regime was announced by the UK.
Legal specialists noted the significance of the UK’s new regime. “This is an important development for all firms looking to market their non-UK domiciled Ucits funds in the UK,” commented Camilla Jessel of Simmons & Simmons, along with similar comments from other law firms on LinkedIn.
The new regime may also have significant implications for the ETF market, as it could open the doors for US-based ETFs to directly enter the UK market, instead of entering the European market via Ireland or Luxembourg.
‘Landing slots’
Starting in September 2024, European funds that haven’t been sold in the UK before can start applying to be recognised under this new system. Funds that are already being sold under the temporary system will begin their applications in October 2024. The FCA is organising this application process in stages, giving each fund a specific three-month period, called a “landing slot,” to submit their applications.
If a fund misses its assigned slot, it will need to reapply and won’t be able to be marketed in the UK until it’s recognised under the new system. The FCA said this is intended to ensure a smooth transition to the OFR and keep the fund market stable.
“We want to make sure that consumers have as much choice as possible,” said Sarah Pritchard, the FCA’s executive director of markets and international, in a statement. “That’s why we are investing in our systems to make sure that the overseas funds recognition process is smooth and efficient.”
‘Pivotal moment’
The British government and the FCA stated their commitment to maintaining the UK’s global leadership in financial services by promoting competition, innovation, and investor protection. “The OFR stands as a testament to this commitment, heralding a new era of industry competition and consumer choice,” its announcement said.
“This new regime represents a pivotal moment for UK investors and marks a significant step forward in bolstering the UK’s investment landscape,” said Bim Afolami, economic secretary to the Treasury. “By streamlining the process for overseas investment funds, we are offering UK investors more choice in a more competitive investment landscape. This is all part of our plan to maintain an open and dynamic financial market.”
Money-market funds, which are a type of investment fund, are not included in this new rule yet and will continue under the old system until the end of 2026. The UK government is looking at how to integrate these types of funds into the new system in the future.
Consultation on sustainability disclosures
The UK government plans to ask for opinions during the third quarter on whether to apply UK rules on sustainability disclosures to these European funds. This could lead to new laws by the end of 2025, affecting how these funds disclose sustainability issues. If enacted, fund managers will need to report transparently on how their investments align with sustainability goals, influencing both investor decisions and fund management strategies.
This UK’s consultation timeline seems to be aligned with the discussions in the EU on the Sustainable Finance Disclosure Regulation, or SFDR, which is currently under review. The UK at the end of last year outlined its own Sustainability Disclosure Requirements, or SDR, ensuring that investments not only yield financial returns but also contribute positively to societal goals.
Implementation timeline for the Overseas Fund Regime:
Further reading on Investment Officer Luxembourg:
- UK rules for overseas funds still require ironing out
- Luxembourg funds to become subject to new regime in UK
- FCA proposes three ESG labels, sets threshold at 90%