FCA sets out its expectations for fund authorisation applications

On 14 February 2025, the FCA published a document, "Authorised fund applications - our expectations" (the Guidance).

The Guidance is aimed at businesses applying for collective investment schemes (CISs) to be authorised as

• authorised unit trusts (AUTs)

• authorised contractual schemes (ACSs) or

• authorised open-ended investment companies (ICVCs).

Note that, where an application does not contain the necessary detail or the required documents, the FCA is likely to consider it incomplete (meaning, among other things, that it would not be subject to the FCA's normal time limits and could, ultimately, be refused).

One consequence is that a failure to include the KIID is now likely to mean that the application is incomplete - this makes the regime somewhat stricter than has been the case, when KIIDs could be submitted later than the main application.

Looking at some of the main points arising in the Guidance

Fund names

• a fund that identifies 'UK' in its name (e.g., 'ACB UK Growth Fund') should identify that the fund will invest in companies that are either domiciled in, incorporated in, or have a significant economic exposure to, the UK

• a fund that will invest in UK equity markets with no regard to a company's domicile should identify this in the fund name (e.g. 'ACB UK Listed Equity Growth Fund') and its policy should state that investment may not be limited to UK companies

• the name of a proposed fund should not be identical to that of another UK authorised fund or of a fund in the AFM's range which is marketed to investors in the UK.

  Where an identical name is chosen, the FCA will require an explanation of why the duplicate name is essential and the AFM will have to confirm

  • it is comfortable that all the fund's distribution channels make the fund name and domicile sufficiently clear and

  • it has taken reasonable care to prevent a UK investor from mistakenly selecting either the other AFM's fund or the already-authorised fund rather than the intended one.

Investment strategies

• the information provided in the application form must enable to FCA to understand the strategy that the manager uses to select the assets the fund will hold - simply telling the FCA of the types of assets that may be held is not sufficient

• details should be given of any elements of the strategy which are not included in the investor-facing information, along with an explanation for the non-disclosure and how the strategy may affect investors' likely outcomes

• the details in the application should enable the FCA to see how the fund's strategy aligns with the fund's objective and how it supports the objective as an outcome that investors could reasonably expect

Benchmarks

• where a fund has no benchmark(either target, constraining or comparator) the application should detail why the manager has decided not to use one

• the application and fund documentation must show how investors can assess the fund's performance.

• for UK UCITS and non-UCITS retail schemes, the prospectus must include an explanation of how investors can assess the fund's performance, rather than it being left to investors to decide how they should do so. A statement such as 'An investor can determine if we have done well by the return we provide' will be insufficient.

Stress testing

• the application form should contain details of the stress testing carried out to support the development of the fund - as a minimum, stress testing should be accompanied with commentary giving details including:

  • why any historical or hypothetical stress tests used were chosen

  • the basis for the testing and why this is appropriate and fair to all investors

  • whether the results were in line with expectations and, if not, what was done to change the product design

  • how the stress testing aligns with the fund's investment objective

• where the FCA receives the results of stress testing without the information indicated in the Guidance, it will not have sufficient information to begin its review.

Model portfolios

• the FCA sets out the minimum information for each individual asset in the model portfolio provided

• this includes

  • the name of the asset

  • its ISIN

  • the asset class (e.g. equity, Emerging Market equity, High Yield Bond etc)

  • the asset type (e.g. transferable security, collective investment scheme etc)

  • where the fund has an ESG strategy, identification of any applicable scoring or rationale for including the holding with reference to the ESG strategy.

• a separate portfolio should be submitted for each investment manager where multiple managers are responsible for different proportions and then a combined  portfolio bringing all the investment managers' assets together

ESG related strategies

• where a fund's documents refer to ESG-related strategies, the fund application should include "as a minimum" information specified in the Guidance, including:

  • an explanation of why any ESG-related terms in a fund name is appropriate and links to the outcomes the ESG policy aims to achieve

  • a detailed description of how the ESG assessment is part of the investment process, along with full details of any sustainable/exclusion policies in the investment policy and strategy

  • details of ongoing reporting to investors, focusing on how investors will be able to assess whether the fund has invested in line with the ESG-related strategy described to investors

• where an existing fund is repositioning its portfolio to follow an ESG / sustainable strategy, the application should additionally include information on the portfolio realignment and information being given to investors about the process.

Investor communications due to changes to authorised funds

• it should be clear in the application form how each proposed change will be treated for investor notification purposes and why this is appropriate

• where a change is considered to be significant, the minimum notice period for investors is 60 days for UK UCITS and non-UCITS retail schemes

• the FCA notes that it is "unlikely to be appropriate to reference FCA approval" for the changes being proposed. - instead any such reference should reflect that the FCA has confirmed that the change will not affect the scheme's ongoing authorisation

• where reference to FCA approval is appropriate (e.g. where a scheme will be wound up so the approval will affect the scheme's ongoing authorisation), any statement should be limited in its scope with reference to the specific approval provided by the FCA.

LTAFs

• an application for an LTAF should be sufficiently developed that full details can be provided in the application, with questions being answered through the review.

• "as a minimum" this means

  • if the portfolio is to be valued internally, the depositary's sign off has been received

  • all material policies relevant to the fund are fully finalised

  • where the LTAF is a feeder fund, that the Master fund is authorised or that the features of the Master fund are finalised and are appropriate for a UK authorised LTAF

  • the subscription and redemption processes are accurately described.

  • full information about the skills and knowledge and experience of the AFM's governing body and day-to-day employees must be included, covering the specific asset classes in which the LTAF intends to invest

• a pre-application meeting with the team must be held before submitting an LTAF application -- the date of this pre-meeting should be included as part of the application

• where an AFM submits several LTAF applications, these questions must be answered for every application.