UK financial regulator the Financial Conduct Authority has announced plans to introduce a new overseas fund regime in April 2024. The FCA has also said it will hold a consultation in advance of the new system taking effect. Investment Officer asked Simon Wright, a London, UK-based Dechert LLP lawyer specialising in UK and EU financial services regulatory matters, for his views on how this will work and affect Luxembourg-based funds.
The new regime will be a key part of an update of the country’s post-Brexit rules covering how non-UK funds can be marketed to British investors.
“The introduction of the overseas funds regime will put all Luxembourg UCITS on the same regulatory footing and remove the current inconsistencies caused by the post-Brexit temporary regime,” he explained, adding that it was relevant to Luxembourg funds targeting UK retail investors.
“However, it is not yet clear how involved the registration process under the overseas funds regime will be and whether there will be additional requirements imposed on UCITS looking to avail of the new regime.”
“The new rules require HM Treasury to make an assessment of the regulatory ‘equivalence’ of the laws and regulations of the jurisdiction of the overseas fund (e.g. Luxembourg) to those of the UK,” Wright said. “A fund in a jurisdiction that is not deemed to be equivalent to the UK will not be able to be registered for marketing under the overseas funds regime.”
No-one in particular
However, he stated that Dechert does not “anticipate HM Treasury taking the approach of finding one EU member state to be equivalent, but not another.”
In a separate interview, CSSF director Marco Zwick, in charge of supervising investment funds, told Investment Officer that Brexit has not significantly shifted the regulatory landscape. “In terms of portfolio management, for example, delegation of that function by Luxembourg investment fund managers or funds is still possible and in substance under the same conditions” as was possible pre-Brexit, he said.
He submitted that while cooperation with the FCA no longer operates as it did prior to the UK departure, it does now in European fora on a bilateral basis. Post-Brexit, he said “such cooperation remains very effective in practice”.
Conditional delegation
In fact, to the extent that UK managers are carrying out portfolio management on a delegated basis for Luxembourg investment fund managers or funds, Zwick explained that “the CSSF continues to rely on its cooperation with the UK FCA,” since any such delegation is conditional on it first being subject to the UK regulator’s authorisation and supervision.
This raises optimism that the reciprocal offer could also be true. However, the FCA has faced speculation over how much more information it will require from on overseas funds under the new regime, which has the potential to impact different jurisdictions differently.
The value assessment element in particular has raised concerns the FCA could impose additional informational requirements on overseas funds. The FCA is subject to a new “Consumer Duty” mission requiring it to ensure that asset managers assess whether their products offer value for money for investors.
Ongoing value
“There has been some speculation in the market that fund operators wishing to register under the overseas regime may be required to produce and provide value assessments as part of the application process and/or on an ongoing basis.”
The FCA has yet to confirm the registration requirements, he said. “The FCA has not given much, if any, indication as to the level or quantity of information which will need to be provided, although we suspect that it will be more involved than the existing regime under which a non-UK AIFM notifies the FCA of its intention to market an AIF to professional investors, where the information requested by the FCA is very light-touch.”
Many Luxembourg-based UCITS mutual funds are currently using the temporary marketing permissions regime, known as TMPR. This was made available to UCITS that were passported to the UK under the provisions of the EU’s UCITS directive prior to the end of 2020, he explained.
TMPR exceptions
UCITS umbrella funds operating under the TMPR can add newly launched sub-funds to their temporary permission. This does not apply to “any Luxembourg UCITS umbrella that was formed after the TMPR registration period or any UCITS umbrella or sub-fund of a UCITS umbrella that was formed before the end of the TMPR registration period, but was not registered under the TMPR before the deadline.”
Wright added that in those cases, funds must either be marketed as an alternative investment fund under the UK’s national private placement regime (what was Article 42 of AIFMD) or register for marketing under a different statutory regime.
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