How to Sell Funds under the UK Overseas Fund Regime 

 

The final rules on the UK Overseas Fund Regime are now out. The UK FCA finalised the guidance and amendments to the existing regulatory framework based on the feedback received on its first consultation paper issued in December 2023.  

The UK Overseas Fund Regime will change radically the way EU and EEA recognised funds will access the UK retail fund market. Changes are not limited exclusively to the newly introduced mechanism to approve marketing authorisation applications. Different areas of existing and forthcoming UK regulation will inevitably come into play in the dynamics related to the sale of EU and EEA funds in the UK retail fund market going forward.   

Application for Recognition and Ongoing Maintenance  

The recognition process of EU and EEA funds under the UK Overseas Fund Regime is inspired by a principle of investor protection, both at the stage of initial application and on an ongoing basis thereafter. By requesting specific information at the time of an initial application, the UK FCA will be able to identify funds with unusual features, whose access to market would not align with the best interest of UK consumers.   

With the ongoing notification of changes to the dataset provided in the initial authorisation phase, the UK FCA will be able instead to spot changes that could trigger suspensions or revocations. Changes notified to the UK FCA will be evaluated from the perspective of the risk of harm for UK consumers. Any suspensions or revocations of recognitions, where resolved by UK authorities, will be in the best interest of UK consumers. Considering that the UK FCA is not the home state authority of any EU and EEA funds recognised under the new regime, it is expected that its interaction with promoters of these funds will be limited. At the same time, instances of refusal or revocation of recognition are deemed to be exceptional, given that recognised funds will be by and large authorised under the UCITS directive.  

For what concerns the timing of the notification of changes, the final rules relax the stance adopted with the initial consultation paper issued in December 2023. On the understanding that the UK FCA is not the home state authority of the funds to be recognised and does not need to approve the proposed changes, the thirty days advance notice proposed has been removed. In general terms, notifications shall be made to the UK FCA before any changes takes effect in the UK. This is especially the case for termination of recognised funds or their sub-funds.  

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Enhanced Investor Disclosures for UK Overseas Fund Regime Recognised Schemes 

Investor disclosures will play a pivotal role going forward in the context of both marketing and selling EU and EEA recognised funds in the UK retail fund market. And the issue here remains one of investor protection. More namely, EU and EEA recognised funds shall disclose whether and which redress is made available to UK consumers, compared to both the Financial Ombudsman Service and the Financial Services Compensation Scheme remedies traditionally offered by UK funds.  

The final rules conclude that it is a workable approach to host this type of additional investor disclosure in the so-called UK country supplement to the prospectus. According to UK rules, a supplement is deemed to be an integral part of the prospectus also when published as a stand-alone document. Even though more succinct in nature, financial promotions too shall contain information on the redress available to UK investors.   

The issue of the investor disclosures has implications also for UK distributors. Under existing conduct of business rules, applicable in the context of financial promotions, when UK distributors communicate a financial promotion approved by a third party, they should be able to rely on the information provided by that authorised firm (approving the financial promotion). This approach should be extended also to the contents of the additional investor disclosures from EU and EEA recognised funds on the redress made available to UK investors. The final rules seem to suggest though that UK distributors shall not assume at all costs the accuracy of this information and that they shall assess, on a case-by-case basis, whether there are reasonable grounds to challenge it.   

Conclusions 

The final rules on the UK Overseas Fund Regime contain a word of caution directed to a specific cohort of foreign European funds, already available on the UK retail fund market. The ones authorised under the legacy European passport regime, but no longer actively marketed in the UK.  

Thinking that no active UK marketing might justify non-converting the legacy marketing authorisation in the new one under the UK Overseas Fund regime is an inappropriate approach according to the UK FCA. One with consequences for investors. The final rules seem to suggest that going forward eligibility of investment funds under ISA will be tied to the existence of a valid recognition under the UK overseas fund regime. Funds not seeking to convert their existing legacy marketing authorisation will see their existing investors being forced to disinvest. Cave canem.