How UCITS marketing in the United Kingdom will be carried out in case of a no deal scenario post-Brexit is one of the questions that many fund managers are asking today. Luckily, the so called onshoring – a process initiated since 2017 by the UK government to prepare for a no-deal – made good progress, well in advance of March 2019. In fact, a draft statutory instrument recently issued by HM Treasury provided more clarity on the issue of the future dynamics of UCITS marketing in the United Kingdom (read it here).
And whilst the scope of the onshoring is wider than UCITS and encompasses all financial services, this post will concentrate on some of the main considerations stemming from the statutory instrument on UCITS, especially for what concerns UCITS marketing in United Kingdom to retail investors.
Temporary permission regime and UCITS marketing in United Kingdom
Whilst the basic assumption of the onshoring process, at least on paper, is that it is in the interest of both the UK and the EU to achieve a workable deal and establish a special relationship going forward, the temporary permission regime (please read more on the subject here) addresses a no-deal case scenario. The statutory instruments establishing the regime aim, at different levels, to prevent failures and mitigate inefficiencies in the EU law retained by the United Kingdom.
The regime so designed will introduce some inevitable changes to the current framework of EEA UCITS marketing in the United Kingdom. And whilst UCITS marketing in the United Kingdom towards institutional investors will follow the route of the private placement authorisation, it will not be significantly altered in our view. We believe that the new regime for institutional investors UCITS marketing in the United Kingdom in the temporary permission regime will not pose particular concern for fund managers either. Different is the case for retail investors UCITS marketing in United Kingdom. There will be a more dramatic shift in this sector and different considerations, more commercial in nature, will be incumbent on managers. In fact, managers will have to rethink their existing plans and operation and either reorganize investment strategies into local product offerings or rationalise deployment of current marketing efforts.
In fact, on the assumption that the United Kingdom will become a third-country, – in EU financial services regulation parlance – EEA UCITS will simply be re categorized as third country Alternative Investment Funds. Marketing will be authorised via the national private placement regime, already existing and abundantly tried and tested under a few years of implementation of AIFM Directive. The national private placement regime as such is relatively straightforward, raising no concerns of sorts in its deployment for EEA UCITS. In fact, the United Kingdom is for the time being amongst those European domiciles where private placement is still seen as a notification, rather than an approval process. Accordingly, process is very much structured and standardised, with marketing authorisations obtained in very short time-frames. Of course, one of the downsides of this route lies in the additional burdens and costs for compliance, especially with regards to reporting requirements imposed by the national private placement regime itself (Annex IV reporting). However, these are not new either and managers already offering Alternative Investment Funds should be able to transition their UCITS funds under existing reporting infrastructures rather easily.
Authorisation under article 272 Financial Services and Markets Act
Different and more intricate is the scenario for retail investors UCITS marketing in United Kingdom post-Brexit. In fact, the process for marketing authorisation will follow the route of direct application to the UK Financial Conduct Authority directly via article 272 of the Financial Services and Markets Act 2000. If not for the requirements imposed on this type of authorisation, as we will see further down, one of the first things to consider is certainly the timing of approval for this type of applications, which today is up to six months from filing a complete application. The regulatory delay on authorisation alone – clearly nowhere close to the 10 days delay of the EU passport nor to the one of the national private placement regime – represents one of the major changes to the scenario currently in place for UCITS marketing in United Kingdom.
The article 272 FSMA route has been used in the past for recognition of certain types of funds, typically domiciled in the Channel Islands. The process is aimed at evaluating any such schemes on the basis of comparability with corresponding local schemes and adequacy of their features to the levels of investor protection afforded by the same local products. Of course, we may have the impression that the process of article 272 FSMA is more complicated of what it really is because we have always seen it applied to fund structures established and regulated in accordance with different rules than the one in the UK, which are modelled on EEA criteria. We take the view though that such complexity should be mitigated the UCITS brand, which is consolidated, widely recognised in the UK market and should create less complexities and moving parts required for the process in relation to substantiate compatibility and adequacy. It may also be that approval timing might shrink considerably as a consequence.
Also, schemes authorised in the United Kingdom via article 272 must also provide local facilities, with a local physical address to be specified in the application letter as well as in the prospectus of the UCITS. This is already the case also in the current regime for UCITS marketing passport in the United Kingdom.
UK products for UK market
Whilst considerations on regulatory aspects of the marketing authorisation process are very relevant, there is more than regulation to a successful fund distribution project. And whilst criticised by many, the avenue of article 272 FSMA might very well prove to be successful for EEA UCITS marketing in the United Kingdom going forward.
However, the design of sustainable and successful distribution starts with the end goal in mind and analysis of investor and market preference for specific products is accordingly of paramount importance. Managers interested in approaching the market in the United Kingdom going forward, will have to consider that the shift generated by Brexit is larger than regulation and it might affect also market perception of EEA products. Accordingly, it cannot be excluded that preferences towards UK products rather than EEA ones might be developed in some pockets of the market. This is something that needs to be factored when designing from scratch or re-evaluating existing distribution architectures in a post Brexit case scenario.