top of page

When do Overseas Investment Funds Need to Obtain Marketing Recognition?

Updated: Dec 3, 2024

In the wake of Brexit, financial markets have been undergoing some serious changes. For overseas investment funds, the process of obtaining marketing recognition in the UK has become a little bit more complex and nuanced than before. 


This article aims to guide fund managers through this novel and sometimes complex legal framework, exploring the historical context and current regulations, as well as looking forward to the future outlook. We'll examine the various routes available for recognition, including the new Overseas Funds Regime (OFR) and the existing Section 272 FSMA individual recognition. 


Historical Context of UK Fund Marketing 

The UK fund market has a long and rich history, dating back to the early 20th century. However, the modern regulatory framework as we recognise it today, in particular for overseas funds, began to take shape in 1984. This was when specific offshore fund rules were introduced, and it was the beginning of a more structured approach to regulating foreign investment vehicles in the UK.


A big milestone came in 1985 with the introduction of the UCITS (Undertakings for Collective Investment in Transferable Securities) directive. This EU initiative dramatically changed the UK fund landscape by creating a harmonised framework for retail investment funds across Europe. The UCITS regime, which we often see as a suffix on investment fund names, allowed for the 'passporting' of funds across EU member states, including the UK, which went a long way in simplifying cross-border distribution.


Over the next few decades, the UK fund market experienced a lot of growth. According to industry data, the market expanded from approximately £50 billion in 1980 to over £1.3 trillion by 2020. Investment funds were suddenly very important to the UK financial ecosystem.


The 2008 financial crisis did prompt some regulatory changes though, with a focus on enhancing investor protection and market stability. This led to more stringent oversight and reporting requirements for both domestic and overseas funds.


Brexit in 2020 was the next pivotal moment, ending the UK's participation in the EU's financial services passporting regime. This necessitated the development of new frameworks for overseas funds to access the UK market, setting the stage for the current regulatory landscape.


Post-Brexit Regulatory Framework 

The UK's departure from the European Union in 2020 brought some big changes. The loss of passporting rights meant that EEA-based funds could no longer automatically market to UK investors.


In response, the UK government introduced the Temporary Permissions Regime (TPR) and the Temporary Marketing Permissions Regime (TMPR). These temporary measures allowed EEA funds already marketing in the UK to continue doing so. But, it’s for a limited period, making it just a bridge for the new permanent arrangements to arrive.


The headline of the post-Brexit framework is the Overseas Funds Regime, which has the acronym ‘OFR’. In May 2024, the UK laid out a fairly simple "roadmap" for authorising EU investment funds, marking a significant step in implementing the OFR. It’s important to read it directly, but some of its key features include


  • A streamlined process for overseas funds to gain recognition in the UK

  • Focus on regulatory equivalence assessments for foreign jurisdictions

  • Ongoing compliance requirements for recognised funds


The Financial Conduct Authority (FCA) has announced plans to open the OFR gateway in September 2024 for non-TMPR funds, with applications from funds currently in the TMPR starting in October 2024. This timeline provides a clear path for overseas funds seeking continued access to the UK market.


The UK remains the second-largest global asset management sector, emphasising the importance of efficient market access for overseas funds. Around 8,000 EEA funds were using the TMPR in 2023, showing that Brexit didn’t drive a wedge between the UK and Europe when it comes to investment funds.


For fund managers, understanding and adapting to this new framework is of course essential in order to remain compliant. The OFR represents both a challenge and an opportunity…


Comparison of Recognition Routes 

For overseas funds seeking to market to UK retail investors, there are now two main routes for recognition: the Overseas Funds Regime (OFR) and the individual recognition process under Section 272 of the Financial Services and Markets Act 2000 (FSMA).


The OFR, introduced in 2024, offers a more streamlined approach for funds from jurisdictions deemed equivalent by HM Treasury. Key advantages include


  • A simplified application process

  • Faster processing times (the FCA aims for a two-month turnaround)

  • Lower costs compared to individual recognition


In contrast, the Section 272 route involves a more rigorous, fund-by-fund assessment by the FCA. This process


  • Requires detailed documentation on the fund's structure and operations

  • Can take significantly longer to complete

  • Is generally more expensive


While Section 272 remains available, it's primarily suited for funds from non-equivalent jurisdictions or those with unique structures that don't fit the OFR criteria.


The choice between routes depends on factors such as the fund's home jurisdiction, structure and target market in the UK. 


The Role of Equivalence in Fund Recognition 

Equivalence is a big part of the UK's Overseas Funds Regime. It's the process by which HM Treasury assesses whether a foreign jurisdiction's regulatory framework for investment funds provides comparable protections to UK investors.


The equivalence assessment considers


  • Investor protection measures

  • Fund governance standards

  • Disclosure requirements

  • Regulatory oversight in the home jurisdiction


HM Treasury conducts these assessments on a jurisdiction-by-jurisdiction basis. A positive equivalence determination opens the door for funds from that jurisdiction to apply for recognition under the OFR.


As of January 2024, the UK has made its first equivalence determination under the OFR, granting equivalence to EEA UCITS funds (excluding money market funds). This decision reflects the historically close alignment between UK and EU fund regulations.


For fund managers, understanding the equivalence status of their home jurisdiction determines whether they can access the streamlined OFR process or if they need to pursue individual recognition under Section 272 FSMA.


Navigating the Application Process 

For fund managers seeking to market their overseas funds to UK retail investors under the OFR, understanding the application process is crucial. The FCA has outlined a clear procedure for OFR recognition


  1. Pre-application steps

    1. Register on the FCA's Connect system

    2. Complete an enrolment form for the fund operator


  1. Application submission

    1. Provide detailed information about the fund, including its structure, investment strategy and risk profile

    2. Submit documentation on the fund's compliance with home jurisdiction regulations

    3. Pay the application fee (aligned with fees for UK-authorised funds)


  1. FCA assessment

    1. The FCA aims to make a decision within two months of receiving a complete application

    2. They may request additional information if needed


  1. Recognition decision

    1. If approved, the fund will be listed on the FCA Register

    2. If rejected, the FCA will provide reasons and the operator can appeal


Key documentation requirements include

  • Fund prospectus and key investor information documents

  • Details of the fund's management company and depositary

  • Information on the fund's marketing strategy in the UK

  • Details of the authorised entity in the UK that will approve financial promotions


To avoid common pitfalls, fund managers should

  • Ensure all information is accurate and up-to-date

  • Clearly demonstrate how the fund meets UK investor protection standards

  • Be prepared to explain any unique features of the fund


The FCA has published detailed guidance on best practices for OFR applications. Fund managers are advised to review this thoroughly before submitting their application.


For funds currently in the Temporary Marketing Permissions Regime (TMPR), the FCA has allocated specific 'landing slots' for OFR applications, starting from October 2024. 


Adapting to UK-specific Requirements 

For overseas funds seeking recognition in the UK market, adapting to UK-specific requirements is of course a prerequisite. These requirements focus on three main areas: consumer protection, disclosure obligations, and governance standards.


Consumer protection measures are at the forefront of UK regulations; these are the most important democratically speaking. The FCA has introduced the Consumer Duty, which came into effect in July 2023 for new products and July 2024 for existing ones. This regulation requires firms to act in good faith, avoid foreseeable harm and enable consumers to pursue their financial objectives. Overseas funds must align their practices with these principles. Although they are not directly applied to overseas fund operators, they do apply to their UK based financial promotions approvers and distributors. Failure to meet their expectations, or to help them meet their obligations under the Consumer Duty, can bring distribution and promotion in the UK to a halt.


Disclosure obligations in the UK have been changing since Brexit. A key change is the transition from the European KIID (Key Investor Information Document) to the UK KID. This shift requires funds to adapt their documentation to meet UK-specific standards, meaning clear and comprehensive information for UK investors.


Governance and oversight expectations in the UK are rigorous. Funds must demonstrate robust internal controls and clear lines of responsibility. Effective risk management processes are really important here, and the FCA expects overseas funds to maintain high standards of corporate governance. It must be comparable to those required of UK-domiciled funds. It also expects UK entities approving financial promotions for overseas funds to assess and monitor the funds and their operators for the same high standards.


Impact on Fund Distribution Strategies 

The new UK regulatory environment has impacted fund distribution strategies for overseas investment funds. Fund managers must essentially reassess their target markets and adapt their marketing materials accordingly. 


In reassessing target markets, fund managers need to consider the specific needs and preferences of UK investors, which may of course differ from those in other European markets. This could involve tailoring fund offerings or creating UK-specific share classes.


Marketing materials have many rules of their own. Most revolve around the mantra of being “fair, clear, and not misleading” in your communications, even if they’re concealed on social media. Fund managers must ensure that their promotional content meets these standards and includes all necessary risk warnings and disclosures. So, big fonts, contrasting colours, and clear messaging.


Engaging with UK distributors has become increasingly important, too. According to recent industry data, fund platforms have become the dominant distribution channel in the UK, with a market share of around 48% for retail fund sales. This shift towards platform-based distribution requires fund managers to build strong relationships with key platform providers and ensure their funds are well-positioned on such platforms.


The rise of direct-to-consumer platforms is also relevant here. Fund managers may need to consider how to effectively reach retail investors through these channels while complying with the new regulations.


Ongoing Compliance and Reporting 

Once an overseas fund gains recognition in the UK, maintaining ongoing compliance and fulfilling reporting obligations are essential. The FCA has set out clear expectations for overseas recognised funds, which include regular reporting and prompt notification of material changes.


Annual reporting is an important requirement to keep in mind. This involves submitting audited financial statements and other regulatory reports to the FCA. The exact reporting requirements may vary depending on the type of fund and its regulatory status.


Funds must also notify the FCA of any material changes to their operations, structure or investment strategy. This could include changes to key personnel, for example, or any alterations to the investment policy. Ultimately, it’s concerning any events that might impact the fund's ability to meet its obligations to UK investors.


Intuitively, the FCA takes a risk-based approach to supervising overseas funds. This means that funds perceived as higher risk may face more frequent or intensive scrutiny. Factors that might increase regulatory attention include those with complex investment strategies, exposure to volatile markets or, perhaps, a bumpy history of compliance issues.


To manage these relentless requirements effectively (and the inevitable alterations that will come with it), many fund managers establish a dedicated UK compliance team or simply partner with local service providers, such as our Funds CollectiveEnglebert team. Getting outside help can ensure they can stay on top of regulatory changes and maintain consistent compliance, particularly when it comes to marketing materials.


Conclusion 

The Overseas Funds Regime represents a positive step in the UK's post-Brexit financial services landscape. It offers a streamlined path for overseas investment funds to obtain marketing recognition in the UK. But, the UK and EU are still not perfectly aligned by any stretch, particularly when it comes to ESG matters.







The Funds Collective (3).png

Are You Ready to Enter The UK Market?

Partner with The Funds Collective today and unlock the full potential of your fund distribution in the UK. Get in touch to learn more about how we can help you achieve your goals.

bottom of page