Fund Distribution Alert 2024-08

On 17 July 2024, the Financial Conduct Authority (FCA) published the final rules and guidance for the implementation of the Overseas Funds Regime (OFR) by way of a Policy Statement (PS24/7), following a prior consultation (CP23/26).

The authority has designed the rules with a goal of enhancing investor protection and transparency, while furthering the objective of promoting effective competition by giving UK retail investors access to a wide range of funds, particularly the EEA UCITS currently in the temporary marketing permissions regime (TMPR).

To protect UK investors, the FCA will request information to identify outliers and unusual fund features. OFR fund operators must notify the FCA of specific changes to their funds to help assess potential risks. New measures will clarify whether an OFR fund is covered by the Financial Ombudsman Service (FOS) and the Financial Services Compensation Scheme (FSCS) and data collection rules will help identify and refuse harmful funds.

Below are the most important aspects of the final rules:

To recognize a fund under the OFR, an application must be made on the FCA’s Connect platform.

The FCA requires comprehensive information to be provided during the application, as per the below table:

• An application fee and an ongoing periodic fee will be charged, aligned with those for UK-authorized funds.
• The application fee is £2,720 for single schemes and £5,440 for umbrella schemes.

Several requirements apply to funds wishing to enter the OFR, such as:

• The fund and its jurisdiction must be deemed equivalent to the UK (such as the EEA UCITS in the TMPR).
• Fund names must be appropriate, clear, fair, and not misleading, accurately reflecting the fund's objectives and policies.
• Fund documents must be provided in English. In case of translations these must be certified by the operator as true copies of the originals.
• Facilities must be maintained for investors in the United Kingdom in regard to documents, orders, complaints and prices. This can be electronically but must additionally be at a place in the United Kingdom. Details are to be provided in the prospectus.
• Financial promotions by recognized funds are to be approved by an authorized person, unless an exemption applies.
• Exchange-traded fund (ETF) operators will use the same application form as other funds.

OFR fund operators must also ensure enhanced disclosures regarding the lack of access to the Financial Services Compensation Scheme (FSCS) and the Financial Ombudsman Service (FOS). This includes several key elements to ensure transparency and consumer protection:

• Disclaimer in financial promotions: All financial promotions must include a disclaimer informing investors about the lack of access to FSCS and FOS protections.
• Prescribed disclosures: Detailed disclosures on redress mechanisms must be included in a UK supplement to the OFR fund’s prospectus. This ensures that potential investors are fully aware of their rights and the limitations of redress mechanisms.
• Complaints information: Further information on how to lodge complaints must be provided during sales processes and included in the UCITS Key Investor Information Document (KIID).
• UK distributors: UK distributor firms are encouraged to assess the accuracy of the redress information provided. They should evaluate on a case-by-case basis whether there are reasonable grounds to question the information's accuracy, in line with existing rules.

These enhanced disclosures are designed to protect UK investors by ensuring they are fully informed about the limitations of redress mechanisms when investing in OFR funds.

Post-recognition, fund operators must notify the FCA of significant changes or events. The FCA has provided an indicative list of changes, but fund operators must judge what changes are “fundamental” or “significant”. Changes must be notified as soon as reasonably practicable after approval by the home regulator or after the decision/event occurs. Adequate notice should be given for fund or sub-fund terminations to address implications for UK investors.

Below are some examples of significant changes:

• Changes to the fund’s name or legal structure.
• Updates to LEIs and unique indicators at the fund level.
• Fundamental changes to the fund’s investment objective, policy, or strategy (e.g., change of predominant investment from equities to bonds).
• Changes to benchmarks against which fund performance is tracked or compared.
• Any significant negative effect on UK investors at the fund or class level.
• Changes in the fund’s target UK investors (retail, institutional, or both).
• Material changes to the fund’s minimum investment applicable to UK investors.
• Replacement of the fund operator or connected parties (e.g., depositary, delegated investment manager).
• Suspension of dealing in the fund’s units or shares.

Notifications should be made using the FCA’s Connect system or via email, depending on the type of change.

Following feedback from CP23/26, the FCA decided to:

• Remove the proposed 30-day notification period for changes.
• Clarify which changes should be notified.
• Include guidance on disclosures for fund prospectuses and point-of-sale information.
• Clarify UK fund prospectus requirements for OFR funds.

The new Handbook rules and guidance will be effective from 31 July 2024.

A "How-to Guide" will be published to provide further guidance on the application process.

The FCA has also announced an upcoming consultation on the applicability of UK sustainability requirements for overseas funds, expected to start in the third quarter of 2024. Other matters to be determined include operational rules, retail disclosures, and ongoing data collection.

The Policy Statement PS24/7 can be accessed here.

As already highlighted in our fund distribution alert from May 2024, funds which are not in the TMPR can begin applying for recognition under the OFR as of September 2024 and migration into the OFR of funds in the TMPR will start in October 2024.

Please feel free to contact us should you require any additional information.