Debunking the Myths of the UK Overseas Fund Regime

For years, the UK has been holding out hopes that the European Union would grant equivalence and, with that, a continued access to its markets. In a twist of events following Brexit, the UK government deemed member states of the European Union equivalent instead.

The pronunciation of equivalence made by the UK government was the missing piece in the architecture of the UK Overseas Fund Regime, which had been designed to replace the marketing passport for European UCITS wanting to access the UK retail fund market.

There seems to remain some misconception surrounding the fact that European funds now have an easy route into the UK retail fund market with the UK Overseas Fund Regime.

Reality is far more complex.

Financial Promotions and the UK Overseas Fund Regime

While the UK created on paper a path for European UCITS to enter or remain on its retail fund market post Brexit, numerous are the hurdles on the way to market UCITS to UK retail investors again.

The UK financial promotions regime represents one of the biggest challenges European UCITS managers will face. Financial promotions are tightly regulated in the UK. In simple terms, financial promotion is a wide encompassing concept that includes any communication that seeks to solicit an investment. In real life terms, financial promotions will typically include UCITS funds’ factsheets, marketing materials, advertisements and even social media content. Under a main prohibition, financial promotions and their content must be approved by a UK authorised person.

Due to concurrent tightening of the UK financial promotion regime, UK authorised persons will have to seek a specific permission to approve financial promotions of third parties. Unlike the previous regime, where UK authorised persons could per se approve financial promotions of unauthorised persons. One exemption is represented by instances where the unauthorised person is part of the group of the UK authorised person. In this case the latter does not need a specific permission to approve the financial promotion of the unauthorised person. Under the UK Overseas Fund Regime, UCITS are considered non-authorized persons.

For third-party UCITS managed by independent management companies, thing will not get necessarily easier either. Even though some of these management companies might have a UK authorised person in their group, third-party UCITS – i.e. with an independent promoter – will not be part of that group. Hence the group exemption will not be applicable to them.

Third-party firms with specific permission from the FCA to approve financial promotions of third parties are usually small, specialized in digital assets or crowdfunding and unlikely to have the expertise to work with UCITS. The few ones that might consider approving with financial promotion of UCITS may as well want to charge a premium.

Costs and Value for Money

In addition to financial promotions, costs and fees are another crucial area for UCITS managers to address when applying for marketing recognition under the UK Overseas Fund Regime. The FCA requires funds to provide detailed information on their cost structures, including:

• Fees at both the fund and share class levels.
• Initial and exit fees.
• Ongoing charges and performance fees.
• Management fees and payments made to third parties for marketing and distribution.

However, the challenge is clearly not gathering this information, rather the use that the FCA will make of it. The FCA has been evaluating UK funds for several years under its value for money regime, which holds fund managers accountable for the value they offer to investors. As of late the FCA has confirmed its expectation that European UCITS applying under the UK Overseas Fund Regime will have to comply with similar principles.

Disclosures and UK Investor Redress Requirements

Another area to address when applying for marketing recognition under the UK Overseas Fund Regime is investor redress disclosures. UK funds will typically offer investors access to two forms of redress. The Financial Ombudsman Service and the Financial Services Compensation Scheme. These help investors when a fund failed to resolve their complaints or is unable to meet related obligations after a claim is successfully made against it. European member states so far do not offer the same remedies to UK investors. This means that as part of the application process, UCITS will have to disclose the lack of UK-style redress and provide information about the redress mechanisms available in their home state.

The key here is to ensure that your prospectus details the remedies available to UK investors in the home state of the UCITS. Moreover, UCITS KIIDs and other marketing materials shall disclose that UK-style redress is not available.

The Role of the UK Facilities Agent in the UK Overseas Fund Regime

Finally, one more requirement that European UCITS will need to meet when applying for marketing recognition under the UK Overseas Fund Regime is the appointment of a UK Facilities Agent. The requirement per se is not new. Many UCITS already marketing in the UK will have one appointed already. In the past, these facilities were typically physical addresses in the UK where investors could access documents and submit complaints.

Today, with the rise of digitalization, it will be possible to offer facilities to UK investors also online, provided services are in English, offered free of charge and the prospectus states that communication with investors shall take place through electronic means.

It remains a good idea to continue offering a physical address for the time being, especially for as long as digitalized point-of-sale documentation is not fully introduced also in the UK.

Conclusions

The challenges posed by the UK Overseas Fund Regime to European UCITS willing to enter the UK market are real. From securing financial promotion approvals to disclosing costs and ensuring value for money, European fund managers need to become aware of the real meaning of equivalence. That is not a free pass for European UCITS to the UK market and will require considerable adjustment and compliance with an increasing number of UK regulations and customs.

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About Veneziano and Partners

Veneziano and Partners is an international consulting boutique specialised in the European regulation of cross-border fund distribution. In catering to a selected group of investment managers, hedge fund managers and financial institution worldwide, the firm offers a custom-made service that is unique and allows its clients to gain competitive advantage in an ever increasingly regulated environment for global registration of UCITS and AIFMD funds.

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