On March 11, HM Treasury (HMT), the office of the United Kingdom (UK) government responsible for financial services legislation, published a consultation paper on a regime which would allow overseas retail funds to access the UK (the Consultation).
When the UK was part of the European Union (EU), retail investors could access third country Undertakings for Collective Investments in Transferable Securities (UCITS) funds via a passporting regime. Upon Brexit, the UK government created a temporary marketing permissions regime (TMPR) to allow EU UCITS to market in the UK until the end of the transition period, which is expected to expire at the end of December 31. After the end of the TMPR, funds would have to apply under section 272 of the Financial Services and Markets Act (FSMA) to become recognized.
In the Consultation, HMT proposed an equivalence regime for overseas retail funds to be able to market to UK retail investors. HMT also proposed a separate regime for money market funds (MMFs) to be able to market to all investors, noting that the process will be different if the fund wants to market to retail or professional investors.
These equivalence regimes will function similarly to the existing EU approach to equivalence. Once a jurisdiction is determined to be “equivalent,” funds will be able to apply to the UK’s Financial Conduct Authority (FCA) for “recognition.” Retail funds will need to be “registered,” but MMFs for professional clients will only need to “notify” the FCA using the existing National Private Placement Regime. The FCA will also have the ability to impose “additional requirements and obligations” on overseas retail funds.
In making their equivalence determination, HMT will consider whether the overseas jurisdiction is able to offer “equivalent investor protection” for retail investors. HMT will make this determination using evidence from the FCA and will also consider other factors, such as market stability, competition and preventing financial crime. HMT emphasized that this will be an “outcomes-based” regime.
Once recognized, the fund will not be subject to the FCA’s usual supervisory regime but will have to pay fees and respond to information requests. The FCA will also be able to revoke or suspend recognition, if necessary. (Any such suspension would mean that the firm would no longer be eligible to be marketed in the UK). HMT are consulting on whether these funds should fall under the scope of the Financial Ombudsman Service (FOS) and the Financial Services and Compensation Schemes (FSCS).
Finally, HMT also proposed amendments to section 272 of FSMA to “make it more efficient” for the funds who will have to use it because they are not eligible for these regimes.
The Consultation is available here and closes on May 11.