UK Overseas Funds Regime

• The UK's Overseas Fund Regime ("OFR") went live in stages from 30 September 2024 allowing firms to apply for permanent recognition to sell UCITS (except money market funds) into the UK.

• The Financial Conduct Authority ("FCA") has recently published a series of updates to assist firms in submitting their OFR recognition applications, while the UK government's planned consultation on whether to extend its sustainability regime to overseas funds is delayed.

• The Central Bank of Ireland has issued a clarification on the options available to UCITS making changes to fund offering documents to comply with the FCA OFR guidance.

On 17 July 2024, the FCA published its Policy Statement (PS24/7): 'Implementing the Overseas Funds Regime (OFR)' (the "Policy"). The Policy sets out the final rules and guidance necessary to implement the OFR. The FCA also responded to feedback from its consultation paper (CP23/26). The FCA rules and guidance took effect on 31 July 2024. 

Reflecting the importance of access to EEA-domiciled funds for UK retail investors, the OFR introduced under the Financial Services Act 2021, enables a permanent route to the offer of non-UK funds to UK retail investors post-Brexit. As previously outlined, the UK Government has deemed European Economic Area ("EEA") states to be equivalent for the purposes of the OFR. The decision applies to EEA domiciled UCITS only and does not cover money market funds ("MMFs") (including those MMFs authorised as UCITS) because of ongoing MMF regulatory developments. The OFR provides a long-term marketing route compared to existing permissions granted under the temporary marketing permissions regime ("TMPR") and for a lighter-touch recognition process than is in place under the marketing route provided by section 272 of the Financial Services and Markets Act. There are currently upwards of 9,000 EEA-domiciled funds in the TMPR, with the majority of those funds expected to apply for permanent recognition via the OFR.

This advisory examines the recent FCA's publications on the OFR application process as well as guidance published by the Central Bank of Ireland (the "Central Bank") on post-authorisation changes to Irish UCITS' offering documentation to comply with the FCA guidance. We also outline certain practical steps for consideration by the fund operators (i.e. either the management company of a UCITS, or a self-managed investment company, as applicable) (the "Fund Operator"). 

FCA Update – September 2024

On 11 September 2024, the FCA published via its OFR webpage, a series of updates including documents to assist Fund Operators applying for recognition. 

Approach to Recognition 

The FCA's approach document summarises its expectations of recognised OFR schemes and their Fund Operators, as well as detailing certain key information which will be required when submitting an OFR recognition application, including: 

• scheme identification details;

• details on the profile of the fund, including: 
  - investment objective, policy and strategy, as stated in the fund offering documentation;
  - fund categorisation, the main categories of asset class and geographical location of assets (a full list of applicable options will be provided in the application form);
  - whether the fund follows an active/passive strategy and details of any benchmarks;
  - use of derivatives in the fund;
  - value of total assets under management ("AUM") at the most recent valuation date and the proportion of AUM specifically attributable to UK investors;
  - dealing frequency;
  - details of any dealing suspensions over the past five years; and
  - whether the funds has an ESG focus (as applicable)

• fees and charges at fund and share class level

• characteristics of unit/share classes;

• details of parties connected to the scheme; and

• information regarding marketing and distribution arrangements, including details on any promotional payments to associated entities. 

The application form data set provides an overview of the nearly 60 data entry points as part of the application and specifies what is required at each stage of the process.

The FCA cautions that some funds may exhibit certain features that the FCA considers are unlikely to be compatible with one or more of the FCA's standards and which may be considered as grounds for refusal of an OFR recognition application. Specifically, the FCA approach document notes these features include, but are not limited to, instances where funds:

• have unsuitable names;

• invest in or have:
  - economic exposure to cannabis-related investments;
  - exposure to crypto-currency. It may be possible for a fund to invest in transferable securities or units of other collective investment schemes which themselves reference crypto-currencies as an underlying asset, where appropriate risk disclosure has been included;
  - exposure to contingent convertible bonds – where a portfolio has significant exposure (exceeding 20% of net asset value) to this type of bond, the Fund Operator should ensure that any risks to consumers are mitigated;

• charge permanent redemption or exit charges;
  - In this regard if an overseas fund charges a permanent exit fee to investors (i.e. regardless of the length of time of the investor's holding), the FCA expects a share class to be made available to UK investors where a permanent exit fee is not levied. Liquidity charges payable to the fund itself to cover buying and selling costs at portfolio level are permitted.

• make promotional payments to third parties out of the fund property;

• have inappropriate charging structures subjecting investors to undue cost;
  - The FCA's expectation is that funds charge an appropriate level of fees and charges, so that investors are not subject to undue costs and that a fund’s charges are commensurate with the value the fund provides to investors.

• issue bearer shares;

• permit double-charging where there is investment in units / shares of another collective investment undertaking (a ‘second scheme’) managed by the same Fund Operator or an associated entity;

• deploy insufficient or inappropriate liquidity management tools to meet its obligation to manage fund liquidity effectively;

• cannot demonstrate Depositary independence;

• where segregation of liability between sub-funds is not ensured in umbrella schemes; or unitholder liability to pay is not limited; or

• where a fund application was previously refused by the FCA or where withdrawal was encouraged or where an individual/firm was prohibited from carrying out regulated activities in the UK.

The FCA will verify whether firms have the requisite permissions to lawfully approve financial promotions in the UK, where such approval is needed. With this, the FCA aims to minimise the risk of UK investors receiving a financial promotion that is unfair, unclear or misleading.

OFR ‘How to' Guides 

The FCA has also published the following OFR ‘How to’ guides on how to prepare and complete OFR applications depending on the nature of the scheme:

• connect user guide: Recognition of a qualifying standalone overseas collective investment scheme (CIS) under the OFR;

• connect user guide: Recognition of a qualifying standalone overseas CIS under the OFR (Temporary marketing permissions regime (TMPR) scheme);

• connect user guide: Recognition of a qualifying umbrella overseas CIS under the OFR;

• connect user guide: Recognition of a qualifying umbrella overseas CIS under the OFR (TMPR scheme);

• connect user guide: Recognition of a qualifying sub fund(s) of an umbrella overseas CIS under the OFR.

The FCA’s Collective Investment Schemes Sourcebook ("COLL") rules for the OFR, require the prospectus of an OFR recognised scheme to contain the same information as the prospectus of a UK authorised fund (required by COLL 4.2.5R), to the extent this is compatible with the basis of home state approval (COLL 9.5.5R). 

The FCA has published information on pro forma disclosures relating to consumer redress schemes and potential lack of access to the UK's Financial Services Compensation Scheme and Financial Ombudsman Service. These sample disclosures will guide the drafting of the relevant updates to UCITS offering documents. 

Application supporting documents

The OFR webpage confirms that for all scheme or sub-fund application forms, the following supporting documents should be included:

• the latest UCITS prospectus and any relevant addendum/supplements;

• instrument constituting the fund, as amended;

• the latest annual report and (if more recent) the half-yearly report;

• key investor information document/consumer composite information document; and portfolio statement for the fund(s) (noting the fund profile data which is required as part of the application process as referred to above 'Approach to recognition').

The detailed requirements contained in the final OFR guidance documents underline the importance of Fund Operators engaging early with relevant advisers and their service providers to ensure their OFR applications are complaint.

Documentation update process

As regards the process for making the enhanced disclosures, the FCA notes that where required, approval from the national competent authority responsible for authorising and supervising the fund must be applied for and obtained in advance of making the OFR application to the FCA. 

In this regard the Central Bank in its recent Markets Update (Issue 7 of 2024) for regulated firms and other market participants notes that Irish authorised UCITS (with the exception of MMFs) wishing to avail of the OFR may be required to make changes to fund offering documents in accordance with the FCA guidance.

The Central Bank notes amendments must be made to the prospectus and submitted to the Central Bank as a post-authorisation update. There are two options which a UCITS may avail of in this regard, and these are as follows: 

1. the relevant disclosure may be added to the UK country supplement and filed via the Central Bank's online portal (the "Portal") using the "UCITS/AIF Country Supplement" Request Change; or

2. by submitting the amended documents to the Funds Post-Authorisation team via the Portal using the "UCITS/RIAIF: Prospectus/Supplement review – No new sub-funds" Request Change. This option can only be used if the main body of the fund offering document is amended. 

As the Central Bank does not prior review country supplements, option 1 is essentially a fast-track filing. However, as option 2 involves amendments to the main body of the prospectus, as opposed to just the country supplement, any such submissions will be subject to prior review and will therefore be a lengthier process. This timing should be factored into timelines for the submission of the OFR application to the FCA.

Timing and next steps

On 30 September 2024, the OFR gateway opened for non-TMPR funds to apply for recognition. Accordingly, new funds not in the TMPR, may apply as soon as the gateway is open. 

For those funds currently in the TMPR landing slots will be allocated alphabetically according to the Fund Operator name, with a duration of 3 months to complete applications for all the TMPR funds managed by the Fund Operator. The OFR gateway for TMPR stand-alone schemes opened on 1 October 2024 and will open for TMPR umbrella schemes (where the Fund Operator name begins with 'A') on 1 November 2024.

The final landing slot for non-MMF TMPR schemes is expected to close by September 2026, with the TMPR ceasing in December 2026 (subject to any further extensions as may be enacted by the UK Government). 

It is apparent from the FCA guidance that an OFR recognition application is likely to be an involved process involving compiling data from various fund service providers. The following steps can be taken by Fund Operators anticipating making an OFR recognition submission early in the window: 

• for funds currently in the TMPR, Fund Operators should ensure that any contact information previously provided to the FCA is up-to-date and check that its fund population on the FCA register is accurate; 

• compiling all of the information and supporting documents that are outlined in the FCA’s guidance;  

• identifying any funds that have the characteristics that will typically constitute grounds for refusal;

• verifying that a UK authorised firm will approve the fund’s financial promotions (unless an exemption applies);

• ensure an appropriate method of paying the application fee is in place;

• registering on the FCA’s Connect system. This will create a principal user for the firm who, once assigned, will be able to delegate access to other people (either within the firm or at an external firm). Anyone who has registered / been delegated will be able to submit applications on behalf of the firm. A third party is not able to enrol on behalf of a firm.

Once a complete OFR recognition application has been submitted, the FCA have two months to reach a decision. Once recognition is received following a successful submission, the FCA automatically updates its Financial Services Register and will issue Product Reference Numbers that uniquely identify the OFR-recognised funds.