Navigating the UK’s Overseas Funds Regime: A Practical Guide

Since this client note was published, the FCA updated its OFR webpage on 12 September 2024 with a series of additional documents to assist firms applying for recognition.

We have not updated the client note to take these documents into account as we anticipate further guidance will be published in the near future -- we will update the client note when there has been a significant change to any of its contents.

In the meantime, for further information on the guidance published on 12 September 2024, please see our article here.

The UK’s Overseas Funds Regime (OFR) offers retail-focused collective investment schemes – including, crucially, UCITS established in the EEA - a streamlined route for applying to the FCA for recognition under a set of new provisions in the Financial Services and Markets Act 2000 (FSMA 2000), which allows a scheme to be marketed to UK retail investors.

What’s the problem?

Only funds which are recognised by the FCA under FSMA 2000 can be marketed to retail investors in the UK.

Funds can apply for recognition under s.272 of FSMA 2000 but this is generally considered to be complex, time consuming and expensive as it requires an assessment by the FCA to ensure that each fund meets the prescribed tests.

While the UK was part of the EU, the UCITS ‘passport’ meant that an EEA UCITS could simply be notified to the FCA under s.264 of FSMA 2000 and it would automatically be recognised.

Following Brexit, though, the passport option is no longer available. This meant that EEA UCITS already marketing in the UK on 31 December 2020 faced two hurdles:

• from 1 January 2021, they would no longer be able to make use of the UCITS passport and would have to stop marketing to retail investors until they became “recognised”
• to become recognised, they would have to make an application under s.272 of FSMA 2000 (which could be a long drawn out process - even without potentially thousands of other such schemes having to apply at the same time).

What was the UK’s solution?

To avoid the cliff edge that funds already marketing in the UK faced, the UK introduced the Temporary Marketing Permissions Regime (TMPR).

This temporary solution allowed EEA UCITS that had applied to join the TMPR before 31 December 2020 to continue to be marketed in the UK (subject to the same UK rules that applied to them on 31 December 2020) without having to seek recognition.

The TMPR is currently due to end on 31 December 2025, although HM Treasury has previously stated that this would be extended until the end of 2026 to allow funds to transition to the OFR. So, while the legislation has not yet been laid and a new government has been elected since the HM Treasury statement, logically, it seems inevitable that an extension must be given - once the TMPR ends, a fund currently in it must either be recognised or stop marketing but funds in the TMPR whose operator’s name starts with the letter ‘O’ onwards – see below - will not be allowed to apply to transition to the OFR until after 1 January 2026.

The UK has therefore now introduced the OFR as a permanent solution. This offers EEA UCITS (whether currently in the TMPR or not), and potentially other schemes, a streamlined route to apply for recognition.

Legislation

As far as legislation is concerned, the main source of the OFR is the Financial Services Act 2021, which inserted a new ss.271A - 271S into FSMA 2000.

Among other things, these give HM Treasury the power (a) to approve a non-UK country and (b) to specify types of collective investment schemes from that country, so long as:

• HM Treasury is satisfied that the protection afforded to UK investors under the laws of the relevant country is at least equivalent to that offered to the equivalent type of fund under UK law and
• there are adequate supervisory cooperation arrangements between the FCA and the other country's regulatory authority.

A fund operator will then be able to apply to the FCA for recognition, provided the scheme is both:

• from a country that has been approved (i.e., deemed ‘equivalent’) and
• of a type specified in respect of that country.

Once recognition is granted, the scheme will be a recognised fund and so permitted to be marketed to UK retail investors.

The FCA rules

Putting the OFR into operation also requires FCA rules and guidance to be made.

The FCA’s proposals for these were set out in its Consultation Paper CP23/26, “Implementing the Overseas Funds Regime”, which ran from 4 December 2023 to 12 February 2024.

The FCA’s final rules were published along with feedback to CP23/26 on 17 July 2024 in PS24/7.

Guidance

On 1 May 2024, the FCA and HM Treasury published:

• a joint Roadmap on the implementation of the OFR
• an HM Treasury alert and
• an update to the FCA OFR webpage.

On 12 August 2024, the FCA further updated its OFR webpage to include:

• a Connect OFR Registration User Guide to help operators with how to submit the Overseas Operator Enrolment application and become the Principal User (PU) for their firm and
• a guide entitled Explanation of Key Terms used in the FCA OFR “How to guides”

On 30 January 2024, the UK Government announced that HM Treasury had found all EEA states* equivalent under the OFR in respect of UCITS schemes – whether the scheme is a standalone or an umbrella fund.

Formal Regulations confirming this decision were published on 14 May 2024, and these come into force on 16 July 2024.

Note:

1. The HM Treasury equivalence decision does NOT cover EEA UCITS which are money market funds (MMFs), as HM Treasury is in the process of reforming the UK framework for these funds.
   For the time being, any MMF which entered the TMPR can continue to market until either an equivalence decision is made or the TMPR closes (currently, 31 December 2025).

2. Funds which are not eligible to use the OFR must apply for recognition under s.272 of FSMA 2000 if they are to be marketed to UK retail investors.

3. Funds which are not marketed to retail investors can use the UK’s National Private Placement Regime, under the Alternative Investment Fund Managers Regulations 2013 as amended.

*The EEA states are the 27 EU Member States plus Iceland, Liechtenstein and Norway.

Timeline diagram

The basics of the application procedure

(a) How to apply

The operator of an EEA UCITS (i.e., the UCITS ManCo or self-managed investment company) must

• complete an application form and
• pay the FCA a one-off application fee.

Applications must be made online using the FCA Connect system.

The operator will need to register a user on FCA Connect in order to complete an enrolment form. This will give access needed to submit forms for OFR funds and to pay the application fee.

(b) Further guidance

The FCA has now published:

• a Connect OFR Registration User Guide to help operators with how to submit the Overseas Operator Enrolment application and become the Principal User (PU) for their firm and
• a guide entitled Explanation of Key Terms used in the FCA OFR “How to guides”

Before the OFR gateway opens, the FCA will also publish details of additional documentation that will need to be submitted as part of the application.

(c) Application fee

An application fee will need to be paid - PS24/7 has confirmed that these will be in line with fees for UK authorised funds at:

• £2,720 for a standalone fund and
• £5,440 for an umbrella fund.

The relevant fee will be fixed for all TMPR funds that apply for OFR recognition, even if there are further increases in application fees during the period when funds are transitioning from the TMPR to the OFR.

(Note that, once recognised, ongoing periodic FCA fees will also be payable – these will be in line with fees which UK UCITS have to pay - these can be found in the FCA’s Rulebook at FEES 4 Annex 4.)

(d) The FCA’s decision

The FCA has two months in which to decide whether to recognise (or refuse to recognise) the scheme.

It will make its decision using a risk-based approach, focusing on areas of highest risk of consumer harm.

The FCA must refuse an application when it considers it necessary to protect the interests of UK participants (or potential participants) but it has said that it expects refusals (as well as revocations or suspensions, once recognition has been granted) to be rare.

(e) Once your scheme is approved

On recognition, the operator will be able to access the UK retail investor market immediately under the OFR.

Stand-alone funds and new (i.e., not in the TMPR) umbrella funds

• These can apply at any stage after the gateway opens on 30 September 2024.

Funds in the TMPR

• For funds in the TMPR, the fund operator will receive a binding 'direction' from the FCA, giving it a three-month “landing slot” and telling it how to apply.
• The fund operator will have to apply for recognition for all its (non-MMF) TMPR funds at any point during the applicable landing slot but no later.
• Landing slots will usually be allocated by alphabetical order of the fund operator’s name.
• New landing slots will open each month in an overlapping sequence.
• The landing slot for TMPR standalone schemes runs from 1 October 2024 to 31 December 2024.
• The landing slot for fund operators whose name
  • begins with 'A' will open on 1 November 2024 and close on 31 January 2025. (Note that this period covers the Christmas and New Year holidays and, for many firms, it may coincide with their FYE.)
  • begins with 'B' will open on 1 January 2025 and close on 31 March 2025 and so on to
  • begins with W, X, Y or Z or a digit will open on 1 July 2026 and close on 30 September 2026.

See the timetable for the landing slots in the Annex below.

Funds which fail to apply during their allocated landing slots will be removed from the TMPR.

These funds will then no longer be recognised funds and so cannot be marketed to UK retail investors until a successful application has been made under the OFR.

What can you be doing now?

1. With regard to EEA UCITS currently in the TMPR, before the fund operator can transition funds from the TMPR to the OFR, the FCA will email details of the applicable landing slot to the compliance contact that it has on its record for that operator.

To minimise the risk of any problems, you should prepare by:

• reviewing your firm’s record on the FCA’s register – the FCA register shows the details the FCA holds about you

• making sure the FCA has the correct contact details, as it will use the address it holds on the register for the fund operator when emailing the firm

• reviewing the fund population the FCA holds for you as fund operator, to check that the list of funds they have recorded in the TMPR matches your own records.

  If your contact details are wrong, you should email: recognisedcis@fca.org.uk.

2. Assess which of your funds is eligible to make use of the OFR, and when you can apply.

From the timetable above and the Annex below, you can also work out which landing slot you will be given, based on the fund operator’s name.

If your name beings with ‘A’, take into account that your landing slot will fall over the Christmas and New Year period, when fewer staff may be available to assist with the application.

3. Complete a gap analysis of your fund’s arrangements and documentation against the FCA’s rules set out in PS24/7 making sure, for example, that the fund prospectus will comply with the FCA’s requirements in COLL 9.5.

These requirements include measures to ensure that UK consumers are given a clear explanation as to whether the fund is covered by the UK’s Financial Ombudsman Service and Financial Services Compensation Scheme in relation to their investment decisions. The FCA notes, in PS24/7 that it would be ‘reasonable’ for any such disclosures to be contained in a supplement to the prospectus.

(Bear in mind that you may need to obtain approval from your home NCA if you need to amend the EEA UCITS prospectus or prepare a supplement.)

4. As applications will need to be made through FCA Connect, you should ensure that you have available:

• your Firm Reference Number (FRN)
• your Individual Reference Number (IRN)
• the name of your firm’s Connect Principal User.

Contact the FCA on 0300 500 0597 if you cannot access any of these details.

If you need to register to access Connect, you can do so via this FCA webpage.

5. Start gathering the information for each umbrella scheme and sub-fund that you will need to submit as part of the application for recognition (see the section What information will you need to submit? below).

What else should you be thinking about before you apply for recognition?

Operational rules for the OFR

Fund operators will be subject to certain operational rules under the OFR, some of which will even be new to funds which have been operating under the TMPR.

The final rules and guidance, published in PS 24/7, come into force on 31 July 2024, in good time for when the OFR opens to receive applications for recognition.

Disclosure rules

Fund operators in the OFR which are marketing a recognised scheme must comply with certain rules, including new disclosure rules.

The UK Government intends to consult on the application of SDR and labelling for OFR funds in H2 2024 and to lay the relevant legislation in Parliament by the end of the year.

Financial promotions

Under the OFR, there will be a significant difference from the rights which operators of recognised schemes using the UCITS passport could enjoy while the UK was a member of the EU.

At the moment, EEA UCITS in the TMPR can communicate financial promotions themselves, as they are deemed to be authorised persons under FSMA 2000.

However, once recognised, fund operators will only be able to lawfully issue a financial promotion in the UK if:

• they can make use of an exemption in the Financial Promotions Order 2005 or
• a UK authorised person approves the promotion for issue in the UK on their behalf

We strongly recommend that you review any marketing material that is issued as part of your UK marketing efforts to ensure that you comply with the new rules.

Money Market Funds

MMFs are not in scope of the UK Government’s equivalence regime for the OFR and a more permanent access route for overseas MMFs is in the process of being developed.

MMFs in the TMPR can continue to market while it is in place.

Although the TMPR is due to end in December 2025, the UK Government may extend it further in order to avoid any potential ‘cliff edge’ risks for these products.

AIFMD National Private Placement Regime + s272 FSMA 2000

These existing UK frameworks remain in place for overseas funds that are not available for recognition under the OFR.

UK facilities

CP23/26 included proposals regarding the provision of facilities to UK investors so they can make an initial investment in a recognised fund and maintain ongoing contact with the fund operator afterwards.

The FCA’s proposals were made final ‘broadly as consulted on’, though re-worded slightly to clarify that OFR fund operators can rely on any pre-existing contractual consent for communicating with investors through electronic media.

Fund operators will be able to provide such facilities within the EEA without needing a physical presence in the UK, so long as

• the prospectus states that the operator will normally communicate with all investors through electronic media and
• the customer has consented to such arrangements.

Where these conditions are not fulfilled, the operator can still provide the facilities through an electronic medium but must additionally provide the facilities at a physical location in the UK (either at the operator’s own place of business or via a person appointed to provide the facilities on its behalf.

What information will you need to submit?

PS24/7 sets out (see Table 2 in Annex 3) what information a fund operator must submit as part of an application for recognition.

1. Information identifying the scheme
This will include the scheme’s

• name (including sub-fund names)
• Product Reference Number (or ‘PRN’)
• Legal Entity Identifier (‘LEI’), including sub-fund LEIs
• domicile
• legal structure and fund type
• name and address of scheme operator

2. Information on the scheme’s profile
This will include the scheme’s:

• investment objective, policy & strategy
• value of AUM at a recent date
• proportion of AUM specifically attributable to UK investors
• reasons for any suspension of dealing in the past five years
• fund category and main categories of asset class
• use of derivatives
• geographic location of portfolio assets
• use of benchmarks, and whether actively/passively managed
• status as an ETF or not
• dealing frequency
• target investors (whether retail, institutional or both)
• minimum investment amount
• particular ESG focus (if any)

3. Fees and charges at scheme and share class level
Specifically:

• initial and exit/redemption charges payable to scheme operator/its associate
• ongoing charges figure
• performance fees
• any other relevant fee or charge
• amount of annual management charge retained by the management company

4. Characteristics of unit/share classes
Including the unit or share class’s:

• name/designation
• ISIN
• minimum initial investment amount
• tokenisation or otherwise
• being accumulation or income

5. Name and LEI of parties connected to the scheme
Specifically:

• the management company / operator
• the depositary
• the delegated portfolio manager, and any sub-delegates appointed
• UK representatives
• UK authorised person approving financial promotions on behalf of the scheme
• any sponsor or other person influencing the scheme’s design or management

6. Information about marketing and distribution
Required information will include:

• details of any promotional payments to entities associated with marketing or distributing the scheme.

Once your scheme is recognised

As the FCA’s OFR webpage explains, OFR fund operators will be subject to certain rules when marketing a recognised scheme (including new disclosure rules that will come into effect in the future).

Since the fund operator may not be familiar with some, or all, of these, the FCA suggests that it may need to seek professional advice to ensure it complies with the UK’s rules.

Key issues include:

Notification of changes following recognition

• Once a fund is recognised under the OFR gateway, its operator will need to notify the FCA of subsequent changes which affect its status. This enables the FCA to assess whether the scheme, and/or its operator, continues to meet the conditions for recognition.

• In CP23/26, the FCA proposed a 30-day period between notifying the FCA of certain changes to the fund and those changes being able to take effect in the UK.

  Following feedback, the FCA has amended this so that changes, instead, need to be notified ‘as soon as reasonably practicable’

• after the home regulator of the fund or its operator has given its approval to the change or

• after a decision to make a change has been taken (if no home regulator approval is required for that change).

  In either case, the FCA should be notified, if possible, before the change takes effect in the UK.

Notification of some changes will be required using the FCA Connect system.

These include the following changes:

• to a scheme’s name
• to a scheme’s legal structure
• LEI and unique indicators at fund level
• a ‘fundamental change’ to a fund’s investment objective, policy or strategy (such as a change of the predominant investment from equities to bonds)
• to a benchmark against which fund performance is tracked or compared
• any matter that would be likely to cause a significant negative effect on UK investors at fund or class level
• to a fund’s target UK investors – whether retail, institutional or both – at fund or class level
• a material change to fund’s minimum investment applicable to UK investors at class level (specifically, if the minimum investment will equal or exceed £50,000)
• the replacement of the fund operator
• the appointment or replacement of connected parties (these will include the depositary, delegated investment manager, fund sponsor, UK representative of the operator or the UK financial promotions approver)
• to the name of the fund operator or any connected party
• to the address of the fund operator, depositary, the UK representative of the operator or the place in the UK for services of notices
• a request to de-recognise the stand-alone scheme / umbrella / sub-fund where the scheme will remain in existence but no longer be marketed in the UK
• the termination of a stand-alone scheme / umbrella / sub-fund in its home jurisdiction. (A separate form will be required when notifying the FCA of a termination of a fund or sub-fund in its home jurisdiction. Further detail will be published on the FCA website in due course.)

Other changes will need to be notified by email, including:

• where the fund operator becomes aware that it has contravened any requirement imposed on it by FSMA 2000 (or expects to do so)
• any supervisory sanction imposed on the operator / fund itself by the home state regulator(s), once this is in the public domain or any restrictions on their activities that have been voluntarily agreed by them
• suspension of dealing in fund’s units / shares

The lists above are indicative and not exhaustive – this means that a fund operators will need to make judgments about what changes are ‘fundamental’ or ‘significant’. For UK authorised funds, these terms are defined in the FCA Handbook at COLL 4.3.4R and 4.3.6R, while guidance is given in COLL 4.3.5G and 4.3.7G. Although these rules and guidance do not apply to funds in the OFR, they can serve as a useful framework for operators to determine whether or not a change should be notified to the FCA. Fund operators may need to obtain UK regulatory advice where it does not have experience of these rules and guidance.

Fees

• Recognised funds must pay ongoing periodic fees to the FCA as a requirement of continued recognition. If the fee is not paid, the recognition order may be revoked.
• Application and ongoing periodic fees under the OFR are aligned with the equivalent fees for UK authorised funds.
• Currently, the application fee for a standalone fund is £2,700 and for an umbrella fund £5,440.

Financial Promotions

• As mentioned above, an unauthorised person cannot lawfully issue a financial promotion in the UK unless an exemption in the Financial Promotions Order applies. Otherwise, the fund operator will have to arrange for a UK authorised person to approve the promotion in the UK.
• Otherwise, the fund operator will have to arrange for a UK authorised person to approve the promotion in the UK.
• Since February 2024, a UK firm must have specific permission from the FCA to approve financial promotions, unless an exemption applies.

Money Market Funds

• As we mention above, EEA MMFs were specifically not included in HM Treasury’s equivalence decision regarding EEA UCITS so will not be able to apply tor recognition under the OFR for the time being.
• Where an EEA UCITS umbrella contains an EEA MMF, the umbrella fund will be able to transition to the OFR but the EEA MMF will remain in the TMPR.
• At the moment the TMPR is due to close on 31 December 2025, but the UK Government has indicated that it may further extend this deadline to avoid any ‘cliff edge’ risks for MMFs.
• Under certain circumstances, it will be possible to add new MMF sub-funds to the TMPR. However, no new sub-funds can be added to umbrella funds where all the other sub-funds have exited the TMPR or once their landing slot has begun.

Sustainability Disclosure Requirements (SDR) and labelling rules

• At the moment, the UK’s SDR and labelling rules only apply to UK firms and their UK investment products. The UK Government intends to consult in Q3 2024 as to whether to extend these rules to OFR funds.
• If it is decided to extend the SDR regime to OFR funds, current expectations are that the relevant legislation would come into force in the second half of 2025 to be followed by the publication of FCA rules.
• Please contact us if you require information about the SDR and labelling rules and how they may affect you.

Ongoing data collection

• The HM Treasury / FCA Roadmap notes that certain information will need to be collected from funds in the OFR in order for the regulator to carry out its functions effectively.
• A wider review of data reporting for funds is planned in due course and this will include a public consultation .for industry participants to give their views.
• The FCA specifically notes that:
  • it would publish a public consultation on its proposals
  • it would not expect to implement any new requirements ‘for some time’ and
  • it would allow sufficient implementation time.

• If you would like to discuss this with us in more detail, please either:
• speak to one of our listed contacts on this page, or
• email us at OFRTaskForce@simmons-simmons.com.

S&S Insights

17 July 2024 The UK Overseas Funds Regime – the FCA sets out its final rules
15 May 2024 OFR – UK publishes Regulations confirming equivalence of EEA UCITS
3 May 2024 The UK Overseas Funds Regime - HMT and FCA publish a Roadmap
30 January 2024 UCITS deemed ‘equivalent’ for UK’s Overseas Funds Regime
4 December 2023 The FCA consults on rules for the UK OFR
23 February 2023 UK’s Overseas Funds Regime comes into force
10 November 2020 The Overseas Funds Regime – one step closer
18 March 2020 A new Overseas Funds Regime for the UK – HM Treasury consults

Other sources

17 July 2024 PS24/7, “Implementing the Overseas Funds Regime. Feedback to CP23/26 and final rules”
01 May 2024 Joint HM Treasury and FCA Roadmap on the implementation of the OFR
01 May 2024 HM Treasury alert
01 May 2024 FCA OFR webpage
4 December 2023 CP23/26, "Implementing the Overseas Funds Regime"