After the transition period concludes on 31 December 2020 following the United Kingdom’s (UK) departure from the European Union (EU) and the European Economic Area (EEA), asset managers distributing undertakings for collective investments in transferable securities (UCITS) and alternative investment funds (AIFs) in the UK can expect major changes and a new framework.
We know that the use of UCITS and AIFM passports in the UK will be replaced by the temporary marketing permissions regime (TMPR), allowing EU/EEA firms to continue their UK business with limited disruption. This regime will tentatively be in place until the end of 2025.
As it currently stands, the UK and the EU have not bilaterally decided how cross-border fund distribution will work in the future. In case there is no agreement, or the agreement does not cover this area, the UK is planning to unilaterally introduce an appropriate legal framework.
What could the UK’s post-Brexit UCITS regime look like?
The UK is planning to roll out what will be known as the Overseas Funds Regime (PDF, .8MB)(OFR) — a specific and streamlined regime to recognize retail investment funds in overseas countries with equivalent investor protection rules. More specifically, this relates to the over 8,000 EU UCITS currently distributed in the UK.
The UK is currently finalizing these rules in Parliament. However, to give you advanced notice, here are the broad strokes of the current draft OFR rules and how they differ from the current rules, as of the date of this article and as we understand them.
| Current rules — UCITS passporting | Notification via home state authority |
|---|---|
| Draft rules — OFR | Registration with the Financial Conduct Authority (FCA) |
| Current rules — UCITS passporting | Ten working days to verify compliance (home state authority) + Five working days to acknowledge receipt (FCA) |
|---|---|
| Draft rules — OFR | Two months (following receipt of a completed registration form) for the FCA to either confirm a fund’s recognition or provide reasons why the fund is not eligible This time limit applies to new products only and not to funds under the TMPR that are transitioning to the OFR |
| Current rules — UCITS passporting | The FCA must be informed of any material changes and provided with any updated documents |
|---|---|
| Draft rules — OFR | The FCA should be informed of any changes that may affect the fund’s eligibility — in case of breaches, the FCA must be informed immediately Furthermore, regular and ongoing confirmations that recognition conditions are being met may be required Further requirements are currently not known |
| Current rules — UCITS passporting | EEA UCITS are regarded as authorized persons who can issue financial promotions without the approval of a UK-authorized person |
|---|---|
| Draft rules — OFR | Recognized overseas funds will not be considered as authorized persons, meaning that a UK-authorized person (e.g. a distributor) must carry out or approve any financial promotion |
| Current rules — UCITS passporting | EEA UCITS are required by the FCA to have an appointed UK-based agent to ensure facilities services |
|---|---|
| Draft rules — OFR | The FCA will be able to require that recognized overseas funds have an appointed UK-based agent to ensure facilities services (i.e. no change) |
| Current rules — UCITS passporting | N/A |
|---|---|
| Draft rules — OFR | The FCA will have some (but limited) ability to impose additional information requirements to determine equivalency For example, the FCA may require further information on the fund’s investment powers and limits, redemption frequency, investment restrictions, and details of the independence of the board. These additional requirements must be proportionate to the requirements of UK-authorized funds |
| Current rules — UCITS passporting | Registration and periodic fees set by the FCA apply |
|---|---|
| Draft rules — OFR | The FCA will have the ability to set registration and periodic fees (i.e. fees may change) |
| Current rules — UCITS passporting | UK investors can access the dispute resolution service in the fund’s country |
|---|---|
| Draft rules — OFR | UK investors will continue to have access to the dispute resolution service in the fund’s country |
Based on our analysis, the most disruptive change is likely to be in financial promotion, as you will need to team up with a UK-authorized person to promote and sell your fund before entering the OFR.
However, it is worth restating that these draft rules are not final and, therefore, may be subject to change.
Moreover, the UK is expected to distinguish somewhat between overseas retail funds and money market funds. If you would like further information about the latter, please get in touch.
What could the UK’s post-Brexit AIF regime look like?
The TMPR will also apply to AIFs for a limited time (most likely until the end of 2025 as mentioned previously) to avoid any disruption. After the TMPR, EU AIFs can be marketed in the UK through the National Private Placement Regime (NPPR) — introduced in Article 42 of the Alternative Investment Fund Managers Directive (AIFMD) — which is already in place for non-EEA funds.
The TMPR’s provisions will end when the fund’s AIFM notifies the FCA under the NPPR, or when the TMPR expires, whichever comes first. Based on our understanding, here are the main differences between the current passporting rules and the UK’s NPPR.
| Current rules — AIFM passporting | UK NPPR | |
|---|---|---|
| Authorization procedure | Notification via home state authority | Registration with the FCA |
| Timeline | Twenty working days to verify compliance (home state authority) | Compliance is verified immediately upon submission |
| Maintenance/ material changes | Notify home authority | Notify host authority |
| Regulatory fees | No fees | Notification fee: GBP250 per fund Periodic fee: GBP337 per fund |
| AIFM reporting | Home state only | Annex IV reporting under AIFMD Article 24 Notification of major holdings and control in EU companies under AIFMD Articles 27 and 28 |
Based on the above, it appears that registering AIFs under NPPR will be more straightforward and quicker than under the current rules. However, it is worth restating that the above may be subject to change.
