What You Need to Know about Marketing UCITS in UK Post Brexit
Discussions abound on the consequences of Brexit for UK market participants. Most of the focus so far has been on the access to the EU 27 – or loss thereof – once the EU passport was no longer a possibility (see more on the subject here). However, there is inevitably a flipside to Brexit and a set of consequences for EU market participants intending to access the markets in UK.
Indeed, the fact that the UK is no longer part of Europe means, conversely, that EU market participants will have to follow a different route to access UK markets as of January 2021. This is the case especially for what concerns marketing UCITS in UK post Brexit.
The regimes and rules applicable going forward to marketing UCITS in UK post Brexit will be different depending on the particular circumstances of each UCITS manager. Nevertheless, whilst it will be possible for UCITS managed by EU managers to have exposure both to UK institutional and retail investors, such access will be subject to different – and slightly more nuanced – processes for local marketing authorisation.
Get in touch here with your contacts at Veneziano & Partners to see how we can help with Marketing UCITS in UK post Brexit.
Scenario One – UCITS already authorised for marketing in UK
The easier scenario is the one where, before the end of the so-called Transition Period (i.e. 31st December 2020), a UCITS has already obtained a marketing passport authorisation in the UK for one or more of its existing sub-funds. The requirements and the process for marketing authorisation in this scenario are introduced as part of the Temporary Marketing Permission Regime recently established in the UK and will be applicable to marketing authorisations of subsequent sub-funds or compartments of the same UCITS umbrella already authorised for marketing in the UK under the passport.
The Temporary Marketing Permission Regime will be in force for a maximum period of three years from the end of 2020, with the possibility of an extension for two more years. Before its expiration, the FCA will direct UCITS management companies to apply for a local recognition in order to continue with marketing their products in the UK.
In order for any new sub-funds of an existing UCITS to be authorised for marketing in the UK, the only requirement is that any such new sub-fund is authorised by its home state authority anytime after the end of the Transition Period (i.e. 31st December 2020) and before the end of the Temporary Marketing Permission Regime. Any sub-funds already in existence under a UCITS umbrella before the end of the Transition Period, for instance, but not authorised for marketing under the EU passport, will not be eligible for this process.
In order to obtain marketing authorisation for any such new sub-funds or compartments of a UCITS, the FCA has created an ad-hoc notification letter, similar in its contents to the typical notification letter used for marketing authorisations under the EU passport. Besides some additional confirmations and documentation, required mainly to confirm the eligibility of the specific sub-fund or compartment under the Temporary Marketing Permission Regime, the application is relatively straightforward.
It is important to note that this application shall be made directly to the FCA and not via the home state authority of the UCITS. Also, it is noteworthy to mention that as part of the process, in addition to a UK facilities agent (read more about it here), the UCITs will be required to identify an entity in charge of the marketing and distribution activities in the UK and with related permission.
Scenario Two – UCITS not previously authorised for marketing in UK
The second scenario for marketing UCITS in UK post Brexit is the one of UCITS intending to enter the UK market for the first time after the end of the Transition Period. The requirements and the process in this scenario also apply to sub-funds of UCITS umbrellas already authorised for marketing in the UK before the end of the Transition Period, yet not eligible for the process described under the scenario above because in existence before the end of the Transition Period and not authorised for marketing under the EU passport until then.
For the time being, the available avenue for marketing UCITS in UK post Brexit towards retail investors is the one under article 272 of the Financial Services and Markets Act (FSMA). This framework was used in the past mainly by schemes established in the Channel Islands seeking to obtain recognition in the UK. With some adaptations, the process designed under article 272 FSMA will be used for UCITS marketing in the UK post Brexit before the new legislation on the UK Overseas Scheme will be introduced.
Here we have again a direct application with the FCA, with an ad-hoc notification form. Contrary to the process described in the first scenario, in this case the recognitions are not at all instantaneous and might take up to six months for complete applications to be processed. The form used for these applications is more extensive as it requires detailed information not only on the funds, but also on the manager, the depository trustee or custodian, investment advisors and so on. The most crucial point under the article 272 FSMA recognition has historically been to prove that the foreign scheme can ensure an adequate level of protection for investors. It seems to be a realistic expectation that for UCITS funds this task might be eased by the strength of the brand and the related regime.
Also, as part of the application, the fund promoter is required to provide additional supporting documentation, like a legal comparison of the scheme with the nearest comparable scheme authorised in the UK as well as a business and marketing plan.
FSMA article 272 will undergo some changes as part of the introduction of the UK Overseas Fund Regime and will still remain the avenue for funds overseas funds which cannot avail themselves of the new regime to be recognised for marketing in the UK.
UK Overseas Fund Regime
Lastly, the UK Overseas Fund Regime represents a proposal for an equivalence-based mechanism to allow for recognition of so-called overseas retail investment funds to be sold to UK investors. As already anticipated under the first scenario, there will be a point in time, nearing the end of the Temporary Marketing Permission Regime, where UCITS authorised for marketing under the EU passport, which have added or not new sub-funds for marketing, will have to transition to a local recognition for marketing in the UK. Given the large amount of UCITS currently authorised for marketing in the UK under the EU passport, it was necessary to have a more streamlined process in order to manage the transition. Also, the new UK Overseas Fund Regime will introduce an equivalence mechanism for overseas schemes.
The approach of the HM Treasury with the UK Overseas Fund Regime is to make comparability of investor protection a country wide discretional exercise, rather than focusing on the individual product or the category, like in the process under article 272 FSMA. For this purpose, the proposal for the UK Overseas Fund Regime envisages that an equivalence assessment is introduced, very similar to the one currently existing in Europe. The main actor of this UK inward equivalence assessment is the HM Treasury, which will decide whether to initiate considerations of new equivalence determinations both for any third country and for any specific regime within a third country. The UK regulators – BoE, FCA and PRA – will also play a pivotal role in the process, by providing support and advice to HM Treasury for all the matters pertaining to their regulatory function. The regulators, upon request of the HM Treasury, will assess the implications of any equivalence determination requested.
The inward equivalence assessment is an outcome-based type of equivalence assessment. In line with the outward assessment carried out by the EU Commission, the aim of this assessment is to grant equivalence to overseas funds not when they are regulated by a regime that is exactly the same compared to the UK regime, rather when the home state regime of a specific overseas country can ensure the same outcome of investor protection, even via slightly different rules.
The inward equivalence assessment has also a distinctive feature from the EU version, in that it allows for the imposition of additional requirements as part of the equivalence assessment. These additional requirements will cater for specific shortcoming identified in the system and will allow to address related inconsistencies in the overseas regime.
Get in touch here with your contacts at Veneziano & Partners to see how we can help with Marketing UCITS in UK Post Brexit.