Cross-border fund distribution in the UK: what will it look like post-Brexit?

in Advisory, 18.11.2020

After the transition period concludes on 31 December 2020 following the United Kingdom’s (UK) departure from the European Union (EU) and the European Economic Area (EEA), asset managers distributing undertakings for collective investments in transferable securities (UCITS) and alternative investment funds (AIFs) in the UK can expect major changes and a new framework.

We know that the use of UCITS and AIFM passports in the UK will be replaced by the temporary marketing permissions regime (TMPR), allowing EU/EEA firms to continue their UK business with limited disruption. This regime will tentatively be in place until the end of 2025.

As it currently stands, the UK and the EU have not bilaterally decided how cross-border fund distribution will work in the future. In case there is no agreement, or the agreement does not cover this area, the UK is planning to unilaterally introduce an appropriate legal framework.

What could the UK’s post-Brexit UCITS regime look like?

The UK is planning to roll out what will be known as the Overseas Funds Regime (OFR) — a specific and streamlined regime to recognize retail investment funds in overseas countries with equivalent investor protection rules. More specifically, this relates to the over 8,000 EU UCITS currently distributed in the UK.

The UK is currently finalizing these rules in Parliament. However, to give you advanced notice, here are the broad strokes of the current draft OFR rules and how they differ from the current rules, as of the date of this article and as we understand them.

  • Authorization procedure
  • Timeline
  • Maintenance
  • Financial promotion
  • Local facilities agent
  • Additional requirements
  • Regulatory fees
  • Dispute resolution
Current rules — UCITS passporting Notification via home state authority
Draft rules — OFR Registration with the Financial Conduct Authority (FCA)
Current rules — UCITS passporting

Ten working days to verify compliance (home state authority)

+

Five working days to acknowledge receipt (FCA)

Draft rules — OFR

Two months (following receipt of a completed registration form) for the FCA to either confirm a fund’s recognition or provide reasons why the fund is not eligible

This time limit applies to new products only and not to funds under the TMPR that are transitioning to the OFR

Current rules — UCITS passporting The FCA must be informed of any material changes and provided with any updated documents
Draft rules — OFR

The FCA should be informed of any changes that may affect the fund’s eligibility — in case of breaches, the FCA must be informed immediately

Furthermore, regular and ongoing confirmations that recognition conditions are being met may be required

Further requirements are currently not known

Current rules — UCITS passporting EEA UCITS are regarded as authorized persons who can issue financial promotions without the approval of a UK-authorized person
Draft rules — OFR

Recognized overseas funds will not be considered as authorized persons, meaning that a UK-authorized person (e.g. a distributor) must carry out or approve any financial promotion

Current rules — UCITS passporting EEA UCITS are required by the FCA to have an appointed UK-based agent to ensure facilities services
Draft rules — OFR

The FCA will be able to require that recognized overseas funds have an appointed UK-based agent to ensure facilities services (i.e. no change)

Current rules — UCITS passporting N/A
Draft rules — OFR

The FCA will have some (but limited) ability to impose additional information requirements to determine equivalency

For example, the FCA may require further information on the fund’s investment powers and limits, redemption frequency, investment restrictions, and details of the independence of the board. These additional requirements must be proportionate to the requirements of UK-authorized funds

Current rules — UCITS passporting Registration and periodic fees set by the FCA apply
Draft rules — OFR The FCA will have the ability to set registration and periodic fees (i.e. fees may change)
Current rules — UCITS passporting UK investors can access the dispute resolution service in the fund’s country
Draft rules — OFR UK investors will continue to have access to the dispute resolution service in the fund’s country


Based on our analysis, the most disruptive change is likely to be in financial promotion, as you will need to team up with a UK-authorized person to promote and sell your fund before entering the OFR.

However, it is worth restating that these draft rules are not final and, therefore, may be subject to change.

 Moreover, the UK is expected to distinguish somewhat between overseas retail funds and money market funds. If you would like further information about the latter, please get in touch.

What could the UK’s post-Brexit AIF regime look like?

The TMPR will also apply to AIFs for a limited time (most likely until the end of 2025 as mentioned previously) to avoid any disruption. After the TMPR, EU AIFs can be marketed in the UK through the National Private Placement Regime (NPPR) — introduced in Article 42 of the Alternative Investment Fund Managers Directive (AIFMD) — which is already in place for non-EEA funds.

The TMPR’s provisions will end when the fund’s AIFM notifies the FCA under the NPPR, or when the TMPR expires, whichever comes first. Based on our understanding, here are the main differences between the current passporting rules and the UK’s NPPR.

Current rules — AIFM passporting UK NPPR
Authorization procedure Notification via home state authority Registration with the FCA
Timeline Twenty working days to verify compliance (home state authority) Compliance is verified immediately upon submission
Maintenance/ material changes Notify home authority Notify host authority
Regulatory fees No fees

Notification fee: GBP250 per fund

Periodic fee: GBP337 per fund

AIFM reporting Home state only

Annex IV reporting under AIFMD Article 24

Notification of major holdings and control in EU companies under AIFMD Articles 27 and 28

Based on the above, it appears that registering AIFs under NPPR will be more straightforward and quicker than under the current rules. However, it is worth restating that the above may be subject to change.

Count on the experts at KPMG

KPMG Luxembourg is here to help you anticipate whatever may come your way. If you have any questions about how Brexit may affect your cross-border business, please get in touch.

Contact us

Please note that any information provided here is general in nature, is based on the latest publicly available information as analyzed on a best endeavor basis and does not constitute any specific legal opinion or advice.