Authorised funds – FCA introduces a number of rule changes

New rule changes for authorised funds have been announced by the FCA, across a range of issues, including the holding of general meetings, clarifying the allocation of payment rules and widening the investments into which a Qualified Investor Scheme (QIS) can enter.

What's the background?

In December 2023, the FCA's Quarterly Consultation Paper CP 23/25 set out proposals for adjustments to its authorised funds rules in a number of areas. Limited commentary on the feedback received can be found in Handbook Notice No. 117 (March 2024).

The new rules can be found in Handbook Instrument FCA 2024/10.

What changes have been made?

The rule changes include:

• Enabling virtual or hybrid general meetings

The FCA rules will be changed to allow hybrid and virtual meetings to be held where this is provided for in the instrument or is otherwise not inconsistent with the instrument.

The aim of this change is to provide additional options for holding general meetings in a virtual or hybrid format, if firms choose to use this. There is no requirement to update the instrument if holding a virtual or hybrid meeting is not in conflict with any provision in the instrument.

To give firms time to make any necessary adjustments, the new rules will apply only to meetings held on or after 3 June 2024.

From 3 June 2024, managers must also publish minutes of meetings on a website no later than five business days after the meeting.

• Giving notice to joint unitholders

The FCA's rules in COLL have been amended to clarify that, if a notice or document is served on one joint unitholder at a registered address, it is considered served on other joint unitholders registered at the same address.

• Shariah compliant funds

Sharia-compliant funds may now make payments for Sharia compliance purposes to registered charities out of scheme property.

• Clarifying the allocation of payment rules

AFMs must allocate payments out of scheme property (such as the management charge) to a fund's income account in the first instance. In certain circumstances, though, the manager may determine that it should be made, instead, from the fund's capital account.

CP 23/25 considered whether to allow the fund manager to allocate payments differently for different unit classes of the same fund.

The FCA's view is that, where a manager has decided that investors in income classes may prefer charges to be taken from capital, it is nevertheless reasonable to assume that investors in accumulation classes of the same fund may prefer charges to be taken from income.

Following consultation, COLL 6.7.10R has been amended to state that, where there is at least one accumulation share class and one income share class in the same fund, the manager may decide to take charges to capital for the income share classes, and to income for the accumulation share classes.

This would, though, be subject to disclosure in the prospectus of the fund, and to the appropriate investor notification procedure under COLL 4.3 should the AFM decide to change the charging basis of an existing fund.

• QIS - broadening the range of investments available

Until now, the QIS rules have imposed limits on the types of investments which can be held by a QIS - in particular, QIS were not permitted to hold interests in loans to the same extent as LTAFs.

COLL 8.4.4(R) has now been amended to allow QIS to invest in the same types of investments as the LTAF, including investments in loans, subject to certain conditions.

COLL 8.4.5R has also been amended to remove the prohibition on QIS investing in funds that invest more than 15% in other funds, to align with the equivalent rule for LTAFs. The rule has, instead, been changed to prevent circularity of investment.

The FCA notes that it is open to considering allowing additional investments in QIS in future, although its view is that "there is a case for going further based on responses to this consultation".

• QIS - clarifying comprehensive cover requirements for global exposure in transactions in derivatives and forward transactions

In order to make the QIS more attractive as a fund vehicle, the FCA has clarified how it expects a QIS to maintain cover for transactions in derivatives and forward transactions.

Under the previous rules, it was felt that the determination of cover for such transactions could be read as preventing the use of value-at-risk (VaR) methodologies, even though such methodologies are widely used across the fund management industry, including by UCITS and NURS.

As the FCA's view is that, as QIS are predominantly used by professional investors, such a scheme should not be subject to any more restrictive requirements when investing in derivatives than either a UCITS or a NURS.

New guidance has now been added at COLL 8.4.7-AG, setting out the FCA's expectations for how cover for transactions in derivatives and forward transactions can be determined for a QIS - this includes the use of a VaR methodology.

• Changing the term 'IMA SORP' to 'SORP' in COLL

'IMA SORP' is a defined term in the FCA Glossary, despite the Investment Management Association (IMA), which was responsible for the SORP setting standards for the financial reporting of authorised CIS, having changed its name to the Investment Association (IA).

As a result, the FCA has renamed the 'IMA SORP' as just the 'SORP' - documents using the old term should be updated at the next opportunity.

CP23/25 also consulted on correcting the rules around investment in second schemes. These rules aim to ensure there is an appropriate spread of risk and that there is no circularity of investment.

Having reviewed the responses to the CP on the ability of a fund of fund to invest in second schemes, the FCA has concluded that its proposed rules in COLL 5 and COLL 8 need further consideration. Consequently, it has decided against making changes now but, instead, will decide whether to consult on revised versions of its proposals in due course.