EUROPE: UK’s Overseas Funds Regime Moves a Step Closer with Confirmation that Most EEA UCITS Will Be Deemed Equivalent

By: Shane Geraghty, Aoife Maguire, Andrew Massey, Philip Morgan, and Courtney Hunter

The UK’s overseas funds regime has been in development for several years and is finally close to becoming a reality. It will create a more streamlined method by which non-UK funds given “equivalence” status may be marketed to UK retail investors.

Although there is still no clear start date, the recent UK Government statement is a significant milestone. It confirms that European Economic Area Undertakings for the Collective Investment in Transferable Securities (UCITS) funds (other than money market funds) will be treated as being equivalent for the purposes of the Overseas Funds Regime (OFR). This decision now needs to be enacted by secondary legislation.

The statement expresses an intention not to impose additional UK requirements as a condition to the equivalence determination. This is subject to ongoing discussions on the possible application of UK sustainability disclosure requirements to overseas funds. Future divergence, for example from ESMA’s ongoing review of the UCITS Eligible Assets Directive, may also demand a re-think.

Despite the stated intention not to impose UK requirements, some existing UK requirements will apply. For example, where a non-Financial Conduct Authority (FCA) authorised fund operator wishes to communicate a financial promotion relating to an OFR qualifying fund to UK retail investors, the promotion will need to be approved by an FCA authorised person. There will also be a degree of indirect application of UK rules through requirements imposed on FCA authorised distributors, such as the consumer duty and the mandatory disclosure requirement for non-UK OFR funds that use a sustainability-related term: “This product is based overseas and is not subject to UK sustainable investment labelling and disclosure requirements”.

The FCA is currently consulting on OFR mechanics, including the application process, ongoing obligations, and certain mandatory disclosures. That consultation closes on 12 February 2024, with final rules expected in H1 2024. The OFR should then be able to “go live” when FCA systems are ready.