Background

The UK already has a recognition process for overseas schemes (which exists under the Financial Services and Markets Act 2000 (FSMA)), but the procedure for such recognition is cumbersome, unpopular in practice, and not generally a practical option for non-UK funds being marketed in the UK. Accordingly, in 2021, the UK Government legislated to create the new streamlined process to recognise overseas schemes, the OFR.

The OFR is an equivalence regime, and as such, jurisdictions can be approved by the UK Government if they: (i) are assessed as offering adequate arrangements for co-operation between the FCA and the relevant jurisdiction's regulator; and (ii) provide equivalent consumer protection outcomes for particular categories of scheme. Once a jurisdiction has been approved, scheme operators must apply individually to the FCA for recognition of their schemes, which the FCA will grant if the scheme meets the relevant conditions set out by the UK Government.

The OFR, once operational, will therefore allow streamlined access for overseas schemes to be freely marketed to UK retail investors.

The consultation

The FCA is consulting on the implementation of the OFR.

The CP aims to operationalise the OFR by:

• Consulting on information the FCA will need to obtain from scheme operators (management companies) to inform its recognition decision;
• Setting out proposals for regulatory notification requirements for an OFR recognised scheme (so that the FCA can understand if and how it changes over time);
• Proposing new measures so that consumers are given a clear explanation about whether the schemes they invest in are covered by the UK's Financial Ombudsman Services (FOS) or the Financial Services Compensation Scheme (FSCS); and
• Clarifying how the FCA intends to use the powers given to it under the OFR legislation, which includes proposals for:
  • data the FCA proposes to collect as part of the OFR application process, in addition to information the FCA intends to collect on an ongoing basis if recognition is granted;
  • requirements for pre-sale disclosure, including the lack of, or limitations on, FOS and FSCS coverage for UK investors;
  • how the FCA plans to refuse applications for recognition or suspend or revoke a scheme’s recognised status, where necessary;
  • facilities to be in place so UK investors can access "physical facilities" in the UK (or an online service if all of the scheme operators' UK investors consent to this);
  • the process for public censure of the operator of an OFR recognised scheme; and
  • application and periodic fees applicable to OFR recognised schemes.

The CP will therefore be of particular interest to:

• Operators of EEA UCITS that currently market funds to UK investors or plan to do so;
• Distributors of EEA UCITS marketed to UK investors;
• Investment advisers;
• Firms providing facilities to UK investors in EEA UCITS;
• Firms approving financial promotions on behalf of EEA UCITS; and
• Fund managers.

Some interesting points from the CP to note:

• The CP does not give any indication as to when scheme operators will be able to start using the OFR.
• The FCA aims for all funds that are marketed to UK investors to be subject to the same requirements. Therefore, the FCA has said it will work with HM Treasury to understand the options for extending the UK's Sustainability Disclosure Requirements to overseas recognised schemes, including those marketing under the OFR.
• The FCA would be unlikely to approve a recognition application where a fund has an identical name to the name of an existing authorised UK fund.
• Financial promotions relating to units in an OFR recognised scheme will need to be communicated or approved by a UK authorised firm unless a financial promotion exemption applies. This differs from the position for EEA UCITS in the Temporary Marketing Permissions Regime under which they can communicate financial promotions themselves, because they are deemed to be authorised persons under FSMA.
• The FCA considers ETFs that are marketed and distributed to investors are different to other OFR recognised schemes, and therefore is seeking to assess whether its proposals are appropriate for ETFs.
• The FCA will revisit UK fund reporting requirements generally in the future.
• The FCA proposes to require notifications from OFR recognised schemes either before changes take place (so that the FCA can assess the impact of such changes taking place) or within 30 days of changes taking place (depending on the severity of the changes, and whether it goes to the OFR recognised scheme's most important characteristics). This is in addition to an annual confirmation that all the data the FCA holds on its system is up to date.
• The FCA clarifies how the existing rule concerning mergers between UK UCITS and overseas schemes through a scheme of arrangement would work in relation to OFR recognised schemes.
• While the FCA intends to require the operators of OFR recognised schemes to continue providing facilities in the UK, they note that few (if any) OFR recognised schemes will have unitholders who may require physical UK facilities to be available to them (and that, therefore, the need for physical office facilities is likely to disappear).
• The FCA is not consulting on any information they would need to collect should the UK Government make an equivalence determination in relation to the recognition of Money Market Funds.
• The FCA is interested in assessing whether fees and charges at the scheme and share class level are clear, transparent and do not expose investors to undue costs.

The CP closes for feedback on the above proposals by 12 February 2024. Subject to the responses the FCA receives, it intends to publish a final policy statement alongside final FCA Handbook rules in the first half of 2024. 

Authors: Simon Crown and Joseph Paddon