There are around 2,600 UK-domiciled Ucits funds, while over 8,000 currently passport into the country from the European Economic Area (EEA).
There are also very few money market funds (MMFs) domiciled in the UK, with the bulk coming from the nearby continent.
On top of that, UK asset managers often base collective investment vehicles offshore and sell to investors in Britain and internationally.
Passporting will continue until the end of the Brexit transition agreement, which is set for 31 December 2020, but what happens afterwards?
Budget update
Amid a flurry of cash giveaways, freshly minted chancellor Rishi Sunak published a consultation to ensure that funds are still available to UK retail investors from 2021, onwards.
Concerns were raised about the Financial Conduct Authority’s (FCA) initial strategy, which saw funds required to apply under section 272 of the Financial Services and Market Act (FSMA) if they wanted to continue marketing into the UK.
As of January 2020, around 8,000 had done so, the chancellor confirmed.
Given the importance of EU funds to the UK market, some have questioned if the section 272 regime is proportionate and viable.
Overseas funds regime
In one of the consultations published on budget day, 11 March, the UK government set out its proposal for a more streamlined system.
To be known as the overseas funds regime (OFR), it will introduce two avenues for equivalence – one for retail funds and the other for MMFs.
Two conditions must be met before HM Treasury can grant equivalence to a fund:
First, it must be satisfied that the regulatory regime of the other country meets the required standard on an outcomes basis.
- It must have the same or similar investor protection to comparable UK authorised funds; and,
- With respect to MMFs, the regulatory regime must be at least equivalent to the UK.
Second, Treasury must be satisfied that there are, or will be, adequate supervisory cooperation arrangements between the FCA and other country’s regulator.
Notification
Once equivalence is granted, retail funds will need to register with the FCA to gain recognition.
The process for MMFs will depend on whether they market to retail or professional clients.
MMFs that are structured as retail funds (such as Ucits) and wish to market to both retail and professional clients must either:
- Be located in an equivalent country for both retail and MMFs and register for recognition under the OFR; or,
- Be located in an equivalent country for MMFs only and be recognised under section 272 of FSMA.
What does it all mean?
The UK is an important market for EEA-domiciled funds, which will want to keep the door open after the end of the Brexit transition period.
As outlined in the consultation, the majority of funds passporting into the UK notified the FCA of their intention to continue marketing their funds into the UK during the transition period.
“This is a good indication of the number of funds that could be expected to make applications for recognition”, the consultation document stated.
Current market conditions aside, it appears that there could very well be a similar number of EEA-domiciled funds available in the UK after 31 December 2020.
However, it will become even more important for financial advisers and investment professionals to ensure that funds they are recommending to clients are authorised for sale to UK retail investors.
