International Funds Legal Update | 7 August 2024

A new research payment option has arrived

The Financial Conduct Authority (FCA) has published its policy statement on payment optionality for investment research.

The regulator has not introduced "full bundling" but rather an arrangement similar to  commission sharing agreements. This has been introduced via an additional payment option for investment research which will exist alongside those already available: paying for research from a firm's own resources (known as a P&L model) or from a dedicated research payment account for specific clients (known as an RPA model).

Some changes have been made to the rules as consulted on: relating to budgeting, research provider disclosures, price benchmarking, cost allocation and disclosure, and separately identifiable research charges.   

Firms that use the new payment option will need to ensure they comply with the applicable rules. This includes having a written policy; a structure for the allocation of payments between research providers; assessing at least annually the value, quality, use and contribution to investment decision-making of research purchased; and putting in place appropriate client disclosures. The rules came into force on 1 August 2024.

In addition to investment firms, the new option will also apply to fund managers, including alternative investment fund managers, and the FCA plans to set out the necessary additional rule changes to achieve this in a further consultation this autumn.

The overseas funds regime has arrived

The FCA has published a policy statement on implementing the overseas funds regime (OFR). The OFR will aims to provide a streamlined gateway for overseas investment funds to be sold to UK retail investors. The policy statement sets out the final rules and guidance necessary to implement the regime.

While most respondents supported the FCA's overall policy proposals, a number expressed concerns, including that application requirements could, despite the aim of the OFR, create barriers to entry to the UK market.

The OFR is different to the temporary marketing permissions regime (TMPR) and previous passporting arrangements into the UK. This is due to the fact that individual funds from recognised jurisdictions must apply to the FCA and be assessed for recognition.

The FCA intends to create a proportionate regime that allows it to rely on overall equivalence determinations made by the government, while gathering and assessing information it needs to meet its obligation to protect UK investors.

In the light of the feedback received, the regulator has adjusted its proposals by:

• Removing the 30-day period between notifying the FCA of changes to OFR funds and when those changes could take effect in the UK.
• Providing further explanation and clarification as to which categories of changes should be notified.
• Including guidance relating to additional information in disclosures for fund prospectus and point of sale information.

The changes came into force on 31 July 2024, and the OFR gateway is expected to open later in 2024 for EEA retail funds, known as "UCITS" (except for those that are money market funds).

FCA provides help on the operational impact of TMPR funds applying for recognition under the OFR

The FCA has also updated its webpage on the OFR to provide details about the operational impact for operators of funds in the TMPR, which is coming to an end.

For fund operators using the TMPR that apply for fund recognition under the OFR, it is important that the fund population data at the beginning of a landing slot is accurate and stable. Operators should not make any changes to the population data during their allotted landing slot and must plan accordingly.

The regulator also highlights the following points:

• Change of operator. Once a landing slot direction is issued by the FCA, and until an application for recognition has been determined, the regulator cannot consider any change of operator for an EEA UCITS within the TMPR. This must wait until the scheme has been recognised under the OFR.
• Addition of new sub-funds under the TMPR. Operators of umbrella EEA UCITS in the TMPR can currently add a sub-fund of that umbrella to the TMPR if the sub-fund has been authorised since the UK withdrew from the EU. The last point to do so is two weeks before the opening of the umbrella landing slot. Any further sub-funds will need to wait until the umbrella has received OFR recognition.
• Addition of sub-funds not notified under the TMPR. Currently, operators of umbrella EEA UCITS in the TMPR cannot add a sub-fund of that umbrella to the TMPR if the sub-fund was authorised before the UK withdrew from the EU. The operator will need to apply within its landing slot for recognition under OFR of the umbrella and the sub-funds within the TMPR. Once that recognition has been granted, recognition of additional non-TMPR sub-funds can then be applied for.

Information on how to comply with the SFDR

The European Supervisory Authorities have updated their consolidated questions and answers on the Sustainable Finance Disclosure Regulation (SFDR) and the SFDR Delegated Regulation.

Guidance has been provided about:

• Establishing a website to comply with Article 10 of the SFDR.
• The calculation of principal adverse impact indicators being performed on a pass/fail basis.
• How to calculate the share of sustainable investments that qualify as environmentally sustainable and its disclosure.
• A table showing how the calculations of sustainable investment can be done either at the economic activity or the investment level for financial products.
• Whether sustainable investment can be made by investing in another financial product.

Liquidity management tools under AIFMD II

The European Securities and Markets Authority (ESMA) have published:

• A consultation paper on draft regulatory technical standards (RTS) on liquidity management tools (LMT) under the Alternative Investment Fund Managers Directive (AIFMD) and the UCITS Directive. In the draft RTS, ESMA defines the constituting elements of each LMT, such as calculation methodologies and activation mechanisms.
• A consultation paper on guidelines on LMTs of UCITS and open-ended alternative investment funds. These include how managers should select and calibrate LMTs in the light of their investment strategy, their liquidity profile and the redemption policy of the fund.

The draft RTS clarify the functioning of specific LMTs, such as the use of side pockets, which is a practice that currently varies significantly across the EU.

The consultation is open until 8 October 2024. ESMA plans to publish final reports and draft RTS and guidelines to submit to the European Commission by 16 April 2025.