International Funds Legal Update | 27 February 2024

HM Treasury has published changes to operationalise the overseas funds regime and the much anticipated final AIFMD II text has arrived.

HM Treasury has amended FSMA to facilitate the overseas funds regime

Legislative changes to the overseas funds regime (OFR) have been published by HM Treasury to facilitate the regime's operationalisation. These were published shortly after the government's announcement that overseas undertakings for collective investment in transferable securities (UCITS) have been deemed equivalent under the regime (as set forth in our International Funds Legal Update from earlier this month).

The changes are included in the Financial Services Act 2021 (Overseas Funds Regime and Recognition of Parts of Schemes) (Amendment and Modification) Regulations 2024 (SI 2024/114) which HM Treasury published together with an explanatory memorandum.

The regulations include consequential amendments to legislation to insert references to section Financial Services and Markets Act 2000 (FSMA), which provides that a non-UK authorised fund will be a recognised scheme under the OFR when certain conditions are met. Recognised schemes are overseas funds that may be distributed to UK retail investors. The regulations also make amendments to ensure that sub-funds are accounted for.

The legislation being amended includes the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 and the retained EU law version of the PRIIPs (Packaged Retail and Insurance-based Investment Products) Regulation. By making these changes, funds recognised under section 271A of FSMA will be treated in the same way as funds recognised under section 272 of FSMA.

The regulations come into force on 26 February 2024.

European Parliament adopts amendments of the AIFMD and the UCITS Directive

The European parliament has adopted a proposed directive amending the Alternative Investment Fund Managers Directive (AIFMD) and the directive relating to UCITS, often jointly referred to under the misnomer AIFMD II.

The changes relate to delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services, and loan origination by alternative investment funds.

The parliament has also published the adopted text of the proposed directive. The directive is now pending publication in the European Union's official journal, and the implementation phase should end somewhere in March or April 2026.

The changes to the AIFMD and the UCITS Directive aim to:

• Strengthen investor protection.
• Improve firms' access to finance from sources other than banks.
• Better tackle greenwashing.
• Help complete the capital markets union by limiting national approaches when it comes to marketing alternative investment funds.