The UK has taken a further cautious step towards the permanent regime which will govern access to its market for EU-based Ucits funds. This came with the introduction of regulations establishing the Overseas Funds Regime (OFR) on 23 February. This gives a clearer but still incomplete picture of how Luxembourg-based retail funds could access UK-based investors over the long term.
Under the OFR, EU-based Ucits will be able to register with the UK regulator, the Financial Conduct Authority (FCA), enabling them to be marketed to UK retail investors. Currently, asset managers have three ways to reach UK investors: redomiciling their EU funds to the UK; using the relatively costly, cumbersome S272 regime; or having signed up before the 30 December 2020 deadline to the temporary marketing permissions regime (TMPR) which replicates the pre-Brexit passporting set-up.
“Most Luxembourg funds adopted the TMPR, with S272 being used by only a handful of mainly non-EU funds – this latter process can take six months,” said Camille Bourke, a partner and head of the London office with the law firm Arendt & Medernach.
But, the OFR will not be operational until the UK finance ministry grants regulatory equivalence, either to the EU as a whole, or one-by-one to each of the 27 jurisdictions.
Hope for equivalence
“There is hope in the industry that the FCA will grant equivalence to the whole EU, or at least to Lux and Ireland-based funds in short term,” said Bourke. “Yet there is no clarity and this is likely to be a politically influenced decision.”
The UK authorities indicated their willingness to use an outcome-based approach to ensure sufficient regulatory rigour. Yet at the same time, the UK Treasury has been given powers to request additional regulatory and administrative steps for funds to go through. It remains to be seen the extent to which decisions of this nature will be largely technocratic in nature (if so, expect few caveats), or if politics will intervene, with different levels of equivalence used as a bargaining chip in UK-EU negotiations.
There is no timeline attached to these announcements. Hence funds using the TMPR wishing to regularise the situation, or new funds wishing to passport in the UK will have to wait for these negotiations to conclude. Further question marks hang over this regime as, the Treasury has been given the power to modify or withdraw the equivalence determination at any stage, even if existing investors in affected funds would not be required to divest their funds. As regards marketing in the UK, this would normally be carried out by a UK-based legal person, unless an exemption is applied.
Quarterly windows
Applications to the TMPR will be managed through quarterly windows, assigned by the FCA. This is designed to help the workflow of processing applications from a large number of funds.
“There are 167 stand-alone funds and 801 umbrella funds using the TMPR, so with the sub-funds this adds up to around 8,000 funds that would need to be approved,” said Bourke. This could take years to process.
There is no point applying now as no procedures have been put in place. The decommissioning of the current TPR is currently due in 2025, “so it is believed that there will not be more clarity on this for about a year,” she added.
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