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This publication is available at https://www.gov.uk/government/publications/draft-eu-exit-sis-for-investment-funds-and-their-managers/the-collective-investment-schemes-amendment-etc-eu-exit-regulations-2018-explanatory-information
The European Union (Withdrawal) Act 2018 (EUWA) repeals the European Communities Act 1972 on the day the UK leaves the EU and converts into UK domestic law the existing body of directly applicable EU law. The purpose of the EUWA is to provide a functioning statute book on the day we leave the EU.
The EUWA also gives Ministers powers to make Statutory Instruments (SIs) to prevent, remedy or mitigate any failure of EU law to operate effectively, or any other deficiency in retained EU law. We refer to these contingency preparations for financial services legislation as ‘onshoring’.
HM Treasury is using these powers to ensure that the UK continues to have a functioning financial services regulatory regime in any scenario.
This SI is part of the wider work the government is undertaking to prepare for the UK’s withdrawal from the EU. It is not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition. The changes made in this SI would not take effect on 29 March 2019 if, as expected, we enter an implementation period.
The attached draft SI is intended to provide Parliament and stakeholders with further details on our approach to onshoring financial services legislation. The draft instrument is still in development. The drafting approach, and other technical aspects of the proposal, may change before the final instrument is laid before Parliament.
3. Policy background and purpose of the SI
3.1 What does the underlying EU regulation and UK law do?
The Collective Investment Schemes (Amendment) (EU Exit) Regulations 2018 relate to the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive. The UCITS Directive sets out the common standards for investor protection for regulated investment funds that can be sold to retail investors in the EU, i.e. individual investors making investments for their savings or retirement. UCITS may also be sold to investors classified as “unsophisticated investors”, such as local governments.
3.2 Deficiencies this SI remedies
This SI will make amendments to retained EU law related to UCITS to ensure that it continues to operate effectively in the UK once the UK has left the EU. Changes introduced by the SI include:
Naming convention – Part 3
The UCITS Directive applies only to funds established in the EEA which have applied for authorisation to be marketed to retail investors. As UK authorised schemes will no longer be established and authorised in the EEA, they will lose their legal status as UCITS funds according to EU law. This SI will 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”.
Eligible investments of UCITS
The UCITS Directive sets out the investment rules for UCITS, which can only invest in eligible assets, and can only enter into borrowing and leverage arrangements, as prescribed by the EU legislation. In some cases, investment in EEA assets are given preferential treatment over third country assets. To ensure continuity for investors, this SI will maintain the existing investment rules for UK UCITS.
Cash of UCITS – Regulation 58(14)(b)
The cash of a UCITS can currently be booked in accounts opened with any EEA credit institution. To ensure continuity, this SI will continue to allow the cash of a UK UCITS to be booked in accounts opened with any EEA credit institution. This will enable UK UCITS to continue to use settlement accounts in other member states to give effect to their investment mandates, in line with maintaining the eligible investments of UK UCITS, as set out above.
EEA UCITS marketed in the UK via a passport – Part 6
Currently, an EEA UCITS can be marketed to retail investors in the UK via passporting (i.e. by becoming a scheme recognised by the FCA under section 264 of the Financial Services and Markets Act (FSMA)). If the UK leaves the EU without a deal, the passporting system will cease, and any references in UK legislation to the EEA passporting system will become deficient at the point of exit.
To ensure that UK investors have continued access to EEA UCITS that are currently marketed in the UK, the government announced on 20 December 2017 that it would put forward legislation to establish a “temporary permissions regime” enabling EEA funds and sub-funds that have notified the FCA of their intention to market in the UK via a passport before exit day to continue to access the UK market for a limited period after exit day. This SI sets out the design and structure of such a regime for EEA UCITS (including Money Market Funds which use a UCITS structure).
The temporary permissions regime will last for three years from exit day (see section 60), with a power for HM Treasury to extend the regime by no more than 12 months at a time in certain circumstances, as detailed in section 66 of the SI.
To enter the 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 exit day that it wishes the relevant fund(s) to have temporary permission to be marketed in the UK. The FCA will provide further details to firms on how and when to do this. Funds with temporary permissions will be treated as a recognised scheme, and can continue to be marketed to retail investors in the UK.
New sub funds of an umbrella fund will be permitted to notify the FCA to enter the TPR after exit day. New sub-funds of an umbrella fund are those which become authorised in accordance with the UCITS Directive by their EEA home state regulator on or after exit day. For those new sub-funds to enter the TPR after exit day, at least one other sub-fund of the new sub-fund’s umbrella fund must have notified to enter the TPR before exit day.
To ensure that the FCA continues to receive information regarding the EEA UCITS during the temporary permissions regime, this SI will require the operator of the EEA UCITS to provide the following:
- a notification if the authorisation of the scheme in the home state is varied or cancelled
- information that they are currently required to provide to the FCA as the host state competent authority
- information that they would have previously had to notify to the home state competent authority, which would then have been shared with the FCA
The SI will also require the operator of EEA UCITS with temporary permissions to continue to comply with 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.
This SI specifies that in order for a relevant fund to continue to be marketed in the UK after the end of the temporary permissions regime, the fund must be recognised under section 272 of FSMA. The Government is committed to reviewing the regime for exiting the temporary permissions regime, and will bring forward legislation as necessary.
EEA UCITS marketing in the UK after exit day
In order to be marketed to UK retail investors, EEA UCITS that have not entered the temporary permissions regime will need to be recognised under section 272. 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 (NPPR) and market the fund as a third country Alternative Investment Fund (AIF). This process for marketing to UK investors is the same as the existing process for third country funds. Futher detail is specified in the Alternative Investment Fund Managers (Amendment) (EU Exit) Regulations 2018 and associated policy note.
Depositaries, trustees, managers and operators of UK authorised funds – Regulation 8, Regulation 16, Regulation 52 and Part 8
Currently, UK authorised funds, which includes funds classified as UCITS, non-UCITS retail schemes (NURS) and qualified investor schemes (QIS), must have a depositary that is established and has a place of business in the UK. There is no passporting system for depositaries, but it is currently possible for eligible EEA firms to establish a branch in the UK, then receive a top-up permission to carry out depositary services in the UK.
This SI will treat EEA firms the same as third country firms.
After exit 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
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
Under the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018, branches of EEA firms will be able to get temporary permissions to continue to operate and carry out regulated activities in the UK. To minimise disruption and ensure continuity, a transitional arrangement will be included in this SI, which will dis-apply the incorporation requirements of the depositary, trustee, operator and/or manager after exit, for as long as the firm has the temporary permissions needed to continue to carry out the relevant regulated activity in the UK.
Cross-border and domestic mergers
It is currently possible for UCITS in different member states to merge under the procedure established by the UCITS Directive. After exit day, cross-border mergers between UK UCITS and EEA UCITS will no longer be possible. This SI deletes provisions enabling or referring to cross-border mergers as they will no longer be possible, but retains the provisions enabling or referring to domestic mergers.
When the UK is no longer part of the single market, it would not be appropriate for UK supervisors to be unilaterally obliged to share information or cooperate with EU authorities, without any guarantee of reciprocity. As such, provisions in 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.
3.3 Relevant Rulebook and Binding Technical Standard changes
The FCA will be updating its Rulebook and relevant Binding Technical Standards to reflect the changes introduced through this SI, and to address any deficiencies as a result of the UK leaving the EU. The FCA has confirmed its intention to consult on these changes in the autumn 2018.
This SI is relevant for EEA fund managers operating UCITS authorised in the UK, and fund managers marketing EEA UCITS into the UK. It is also relevant for depositaries which provide services to UK authorised funds.
As already noted, the intention of this SI is not to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition to this position. HM Treasury has engaged with industry bodies where possible to ensure awareness of these changes.
This SI does not include provisions that may be necessary to ensure Gibraltarian financial services firms’ continued access to UK markets in line with the UK Government’s Statement in March 2018, and other provisions dealing with Gibraltar more generally. Where necessary, provisions covering Gibraltar will be included in future SIs.
4. Next steps
HM Treasury plans to lay this instrument before Parliament in the autumn.
5. Further information
If you have queries regarding this instrument, email FSlegislationEUWA@hmtreasury.gov.uk.