On 9 October 2018, there was published on legislation.gov.uk a draft of The Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2018, together with an explanatory memorandum.
The draft Regulations form part of a series of draft statutory instruments that HM Treasury is publishing as part of its contingency planning for a no-deal Brexit. The statutory instruments are made by HM Treasury in exercise of its powers conferred by the European Union (Withdrawal) Act 2018.
As UK authorised schemes will no longer be established and authorised in the EEA post Brexit, they will lose their legal status as UCITS funds according to EU law. The draft Regulations introduce a UK UCITS regime for funds established and authorised in the UK, which will be distinguished by the label “UK UCITS”, and the relevant activity in the Regulated Activities Order will be “managing a UK UCITS”.
To ensure continuity for investors, the UCITS Directive’s investment rules will be maintained for UK UCITS. Also, to provide for continuity with the regime under the UCITS Directive, the draft Regulations allow the cash of a UK UCITS to be booked in accounts opened with any EEA credit institution. The intention here is to allow UK UCITS to continue to use settlement accounts in other Member States to give effect to their investment mandates.
Significantly, the draft Regulations set out the design and structure of a temporary permissions regime for EEA UCITS (including MMFs that use a UCITS structure). The explanatory memorandum to the draft Regulations explains that:
- the temporary permissions regime will last for three years from Brexit day, with a power for HM Treasury to extend the regime by no more than 12 months at a time in certain circumstances;
- to enter the temporary permissions regime, the operator of an EEA UCITS which markets into the UK before the UK leaves the EU will need to inform the FCA prior to Brexit day that it wishes the relevant fund(s) to have permission to be marketed in the UK. Funds with temporary permissions will be treated as a recognised scheme, and can continue to be marketed to retail investors in the UK;
- in relation to sub-funds, the temporary permissions regime will only be available to existing sub-funds of EEA UCITS which have been specified in that EEA UCITS’s notification to the FCA to enter into the temporary permissions regime before Brexit day. An EEA UCITS (which has notified under the temporary permissions regime before Brexit day) will not be able to market a sub-fund that it does not include in its notification to the FCA before Brexit day, or a sub-fund which it creates after Brexit day. Such sub-funds will not be, nor will they form part of, recognised schemes under the temporary permissions regime;
- the operator of the EEA UCITS will be required to provide the following: (i) a notification if the authorisation of the scheme in the home state is varied or cancelled; (ii) information that they are currently required to provide to the FCA as the host state competent authority; and (iii) information that they would have previously had to notify to the home state competent authority, which would then have been shared with the FCA; and
- the operator of EEA UCITS with temporary permissions will be required to continue to comply with the duties imposed on it in relation to a host member state by specific provisions of the UCITS Directive, and which were previously implemented by the home member state.
In order to be marketed to UK retail investors, EEA UCITS that have not entered the temporary permissions regime will need to recognised under section 272 of the Financial Services and Markets Act 2000. In order to be marketed to institutional investors in the UK, the operator of the fund will need to notify the FCA under the national private placement regime and market the fund as a third country AIF. This process for marketing to UK investors is the same as the existing process for third country funds.
After Brexit day, the depositary, trustee, operator and/or manager of UK authorised funds will have to meet the following requirements, depending on the legal form the fund takes:
- authorised unit trust: the manager and trustee must each be a body corporate incorporated in the UK, the affairs of each must be administered in the UK and they must each have a place of business in the UK;
- authorised contractual scheme: the operator and depositary must each be a body corporate incorporated in the UK, the affairs of each must be administered in the UK and they must each have a place of business in the UK; and
- open-ended investment companies: the depositary must be a body corporate incorporated in the UK, and have a place of business in the UK. The sole director must also be a body corporate incorporated in the UK;
After Brexit day cross-border mergers between UK UCITS and EEA UCITS will no longer be possible.
Provisions in UK legislation requiring cooperation and information sharing have been removed. However, this will not preclude UK supervisors from sharing information with EU authorities where necessary, as the existing domestic framework for cooperation and information sharing with countries outside the UK already allows for this on a discretionary basis.