FCA seeks views on regulatory approach for overseas funds

In view of the government’s intention to eliminate EU retained regulation (REUL) and replace it with meaningful, proportionate, and commensurate legislation that suits the UK financial market, the Financial Conduct Authority (FCA) has launched a consultation (CP23/26) on a new regulatory regime for overseas funds, that is investment funds issued in countries other than the UK that seek distribution in the UK. The key provisions of the proposed new regime are briefly described below; for more detailed, comprehensive information, please refer to the enclosed consultation.
#### Information requirement
Specifically, as noted already in the proposal for a new „Money Market Fund Regulation“ (EventID 24215), an overseas collective investment scheme would be able to apply to the FCA for recognition following a positive equivalence determination of the HM Treasury as to the supervisory regime of the home jurisdiction of the scheme. Once this determination has been made, such fund may apply to the FCA, thereby providing the following key information:
– Information identifying the scheme such as its name and sub-fund names, LEI, home jurisdiction, fund type, and address of scheme operator;
– Information on the scheme’s profile such as its investment objective, policy & strategy, value of AUM in £ sterling, benchmarks, use of derivatives, target investor, minimum investment amount, ESG focus – each if applicable;
– Information of a fund’s fees and charges at fund and share class level;
– Information on unit and share classes;
– Information on parties connected to a scheme such as information on the portfolio manager, any subdelegates, authorized person approving financial promotions on behalf of the scheme, sponsors, etc.; and
– Information in relation to marketing and distribution.
#### Fees
The fees for application to have an overseas fund recognized in the UK would be £2,500 for a „stand-alone scheme“ and £5,000 for an umbrella scheme, in line with those of UK UCITS.
#### Notifications
Recognized overseas funds would have to notify the FCA of certain changes or events that could impact the recognition status or affect investors in the UK. Examples of such changes include modifications to the scheme’s name, its legal structure, termination, regulatory sanctions, suspension of dealings, alterations in investment strategy, fees, redemption terms, or any other events likely to have a significant effect on UK investors. Certain changes would have to be pre-notified at least 30 days before such changes come into effect (e.g. a change of a fund’s name, its legal structure, or its termination). Others need to be notified within 30 days following the modifications.
Furthermore, the FCA would require recognized funds to annually confirm their particulars to ensure that the data held by the FCA is up to date. This process enables the FCA to maintain an accurate and current understanding of the recognized schemes and their activities in the UK.
#### Disclosures
As Investors in a recognized overseas fund will have NO access to the Financial Ombudsman Service (FOS) or the Financial Services Compensation Scheme (FSCS), which are UK-based protection mechanisms, overseas schemes will be subject to enhanced disclosure requirements concerning this fact. Specifically, they will have to disclose this fact in any promotional material, in the fund prospectus, and in the Key Investor Information Document (KIID). It shall be noted in this context, that the non-coverage only concerns fund operations themselves (e.g. fund management), but not regulated activities that may be performed in relation to such funds, for instance investment advice provided by a UK based financial advisory firm.
#### Refusal of recognition or revocation of a license
Under the new overseas funds regime and in alignment with the rules and regulations for locally issued investment funds, the FCA would have the power to refuse, suspend, or revoke recognition orders for various reasons, including the safeguarding the interests of UK investors, or to issue public statements (public censures) in cases of regulatory breaches. Accordingly, the FCA would make conforming adjustments to its Handbook to reflect these powers.