Background to marketing of overseas funds
On 11 March, the Treasury published its proposals which will regulate the marketing of overseas funds in the UK post Brexit https://www.gov.uk/government/consultations/overseas-funds-regime-a-consultation The new regime would take effect for existing EU funds after the existing temporary regime expires. The temporary regime will become effective at the end of the Brexit Transition period. The Treasury Consultation notes that as of January 2020 over 8,000 funds had applied to take advantage of the temporary permission regime. In effect the Treasury are proposing two regimes. One for overseas investment funds and one for money market funds.
How the regime will work
The regime will focus on equivalence and whether a country has an equivalent level of protection to the UK. This will determine if retail investment funds and money market funds (“MMF funds”) may be marketed in the UK. For retail investments funds, equivalence will mean that operators can market funds to all investors. In the case of MMFs, there will be different regimes to allow promotion to retail and professional investors. The FCA will take the lead in determining equivalence.
Basis for equivalence.
There are two conditions set for an equivalence determination to allow the marketing of overseas funds. Firstly, the Treasury must be satisfied that the regulatory regime of the other country meets the required standard on an outcomes basis. This means overseas regulatory and supervisory regimes will be assessed against the regulations that apply to comparable UK authorised funds. This is intended to ensure that:-
- with respect to retail funds, the regulatory regime must achieve at least equivalent investor protection to comparable UK authorised funds;
- with respect to MMFs, the regulatory regime must be at least equivalent to the regulations that apply to UK MMFs.
Secondly, the Treasury needs to satisfy itself that there will be adequate supervisory co-operation agreements. These arrangements will apply between the competent authorities of the overseas jurisdiction and the FCA.
However, the Treasury may require that despite an equivalence determination, certain categories of funds meet additional requirements. These “additional requirements” will depend on the type of fund and will not apply to all retail funds. The Treasury notes that this may be used to ” refine the equivalence determination, addressing potential inconsistencies that have been identified when compared to the UK regime.”
In making an equivalence determination, HM Treasury will also be able to take other factors into consideration. These factors include potential impacts on UK financial stability, market integrity, competition and preventing financial crime.
Role of FCA in marketing of overseas funds
If a jurisdiction meets the equivalence determination, individual retail investment funds will need to register with the FCA. However, the registration process should be simple and straightforward. It will not be reviewing the role of the overseas regulator. The FCA will have a greater role in enforcing the “additional requirements” specified. The FCA will also have information gathering powers and the power to suspend or revoke rights.
Specific regime for MMFs
In the case of MMFs, a different regime will apply depending on the target market.
MMFs that are structured as retail funds and wish to market to both retail and professional clients should:
- be located in a country with equivalence determinations for both MMFs and retail funds and register for recognition under the same regime for retail investment funds.
- be located in a country with an equivalence determination for MMFs and be recognised under section 272 of FSMA. A recognition path that already exists.
In the case of MMFs marketed to professional funds, if there is an equivalence determination then they will notify using the National Private Placement Regime.
Firms which are marketing in the UK will need to comply with disclosure obligations, maintenance of investor facilities and reporting obligations to the FCA. Operators of overseas funds will not qualify as authorised persons for the purposes of the UK financial promotion regime. Therefore an authorised person in the UK must issue or approve financial promotions.
The FCA is considering whether investors should have a right to complain to the Financial Ombudsman, effectively bringing the overseas funds into that regime. The alternative under consideration is that investors use any dispute resolution procedure available in the home country. In the latter case, complaints relating to distribution activities in the UK would continue to be dealt with by Financial Ombudsman.
On March 31, 2020