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Recent Changes to the Overseas Funds Regime: What You Need to Know

Updated: Oct 23, 2024

The Overseas Funds Regime (OFR) is a proposal laid out by the Financial Conduct Authority (FCA). It’s set to create some big changes in light of Brexit, targeting fund managers outside the UK.


Overview of Recent Updates 

Below, we’ll explore some of the recent OFR updates that have been made.


Decoding the Updated Framework

The OFR is expected to go live later in 2024, bringing about some updates aimed at enhancing operational efficiency and ensuring compliance with UK standards. A big part of this development is going to be the planned legislative incorporation, which enacts the equivalence decision for EEA UCITS funds, essentially paving the way for smoother integration into UK markets.


The revised regime introduces a staggered application gateway


  • September 2024: applications open for non-Temporary Marketing Permissions Regime (TMPR) funds.

  • October 2024: stand-alone schemes under TMPR may start their transition.

  • November 2024: TMPR umbrella schemes begin their application process.


To accommodate these transitions, the TMPR will be extended until the end of 2026, allowing for continued marketing for recognised funds.


Sustainability Disclosure Requirements

The Government plans to consult on applying the UK Sustainability Disclosure Requirements (SDR) to OFR funds in Q3 2024. Any SDR requirements for OFR funds are likely to come into force in the second half of 2025. Industry experts are now pointing to the UK's commitment to becoming the world's first Net Zero Aligned Financial Centre.


Application Process and Eligibility

The OFR will be available to most funds established in EEA and EU member states that have been authorised under the UCITS Directive, with the exception of EEA UCITS authorised as money-market funds. Both new EEA UCITS and those currently operating under the TMPR will be eligible to apply.


To gain recognition under the OFR, fund operators must complete an application form and pay a hefty fee to the Financial Conduct Authority (FCA). Applications should be submitted online via the FCA Connect system. The FCA has two months to make a decision on applications once received.


For TMPR funds, the FCA plans to follow a structured process to ensure fair treatment and a smooth transition to the new regime. Fund operators in the TMPR are advised to check their existing records to ensure the FCA has accurate data for contacting them about the transition.


FCA Improvements to the Application Process

While not specific to the OFR, the FCA is making general improvements to its application forms and processes. These aim to simplify language, improve accessibility and essentially provide better guidance. The FCA is also working to reduce duplicative information requests and prepopulate some data to save time and effort for applicants, which may take some of the sting out of the high fees.


As the OFR implementation approaches, fund managers should stay informed about these developments and prepare for the upcoming changes.


Analysis of the New Rules 

A significant change is the requirement for detailed cost and charge disclosures. Funds must provide transparent information on all fees ranging from ongoing charges and initial/exit fees to performance fees. The FCA will scrutinise these disclosures, of course, in an attempt to monitor the fact that they do not harm investors through undue costs.


The new rules also prohibit promotional payments to third parties from the fund. This is to protect investors from hidden costs and ensure that promotional activities do not compromise the fund’s financial integrity.


Ultimately, compared to the previous TMPR, the new OFR rules focus more strongly on transparency and investor protection. This is an opportunity to position oneself as an ethical and modern leader within the market.


Reasons Behind the Changes 

The updates to the OFR are driven by the need for a consistent framework in a post-Brexit world, where dealignment occurred. The UK wants to provide clarity and stability for overseas funds marketing to UK investors because the finance sector is so important to the nation’s economy. 


Aligning regulation with global best practices is perhaps the only sustainable way to ensure the UK remains an attractive market, particularly in a time of rallying European funds. Along with this, the FCA wants to uphold its reputation as a world-class regulator that is respected around the world.


There are of course legitimate benefits too for the investors, with greater protections around what information they’re told. 


Impact on Fund Managers 

The new OFR rules will most certainly impact fund managers’ operations. The additional compliance requirements, such as detailed cost disclosures and the need for a UK-authorised firm to approve financial promotions, will mean that fund managers ought to enhance their internal processes. Whether it be through technology, greater training, or improved processes.


Fund managers must prepare for the transition from TMPR to OFR by reviewing and updating their records. The FCA’s relatively structured process for transitioning funds, including the allocation of landing slots, means that fund managers will have to be ready to submit their applications within the specified timeframe to avoid losing recognition.


The prohibition on promotional payments to third parties will undoubtedly affect marketing strategies. All promotional activities must comply with the new rules, so this may involve renegotiating agreements with third-party promoters to get guarantees regarding all promotional costs being transparent and justified.


Opinions 

Sarah Pritchard, an executive director at the FCA, claimed, "We want to make sure that consumers have as much choice as possible. That’s why we are investing in our systems to make sure that the overseas funds recognition process is smooth and efficient."


Grania Baird, at Farrer & Co, said, “This will go a long way in providing assurance and injecting confidence for new European-based funds not currently in the TMPR, many of which have wanted to launch in the UK but have been put off by the onerous regime currently in place.”


Conclusion 

The recent changes to the OFR present a big set of challenges, but also opportunities for fund managers. The most important thing for fund managers will be understanding these rule changes and preparing for them early, with a strong emphasis on compliance and meeting the expectations of UK distributors, like platforms and advisers.

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