Shearman & Sterling LLP | Financial Regulatory Developments Focus | Draft UK Post-Brexit Legislation to Onshore EU UCITS Directive Published
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  • Draft UK Post-Brexit Legislation to Onshore EU UCITS Directive Published
    10/08/2018
    HM Treasury has published a draft of the Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2018, along with explanatory information. The draft Regulations will onshore the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive for Brexit.

    The draft Regulations are primarily relevant for EEA fund managers operating UCITS authorized in the U.K., fund managers marketing EEA UCITS into the U.K. and depositaries that provide services to U.K. authorized funds. HM Treasury has also published separately the draft U.K. legislation to onshore EU legislation for Alternative Investment Funds for Brexit.

    The draft Regulations have been prepared in preparation for a "no-deal" scenario, in which the U.K. exits the EU on March 29, 2019 without a ratified Withdrawal Agreement. The no-deal scenario would mean that there would be no transitional period following Brexit and that the U.K. would be treated as a third-country after exit day. The changes set out in the draft Regulations will not take effect on exit day if the U.K. enters a transition period.

    The UCITS Directive applies only to collective investment schemes established in the EEA that have applied for authorization to be marketed to retail investors. The Directive sets out the framework for authorization and supervision of these EEA "UCITS" funds and provides for the authorization and regulation of their management companies.

    The draft Regulations amend the U.K. law that implemented the UCITS Directive to ensure that the regime continues to operate effectively in the U.K. after exit day. This includes amendments to the Financial Services and Markets Act 2000, the Financial Services and Markets Act 2000 (Regulated Activities) Order and the Undertakings for Collective Investment in Transferable Securities Regulations 2011, along with amendments to various other pieces of U.K. secondary legislation. The draft Regulations also make amendments to retained EU delegated regulations, including on investor information and on depositary obligations.

    The draft Regulations make the following key changes to U.K. and retained EU legislation to correct deficiencies and ensure a workable U.K. regime for UCITS funds after exit day.
     
    1. U.K. UCITS regime. Due to one precondition for classification as a UCITS fund under EU law being EU establishment, U.K.-established UCITS will lose their legal status on exit day. The Regulations will create a U.K. UCITS regime for UCITS that are established and authorized in the U.K. A consequential change in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 will be the addition of a regulated activity of "managing a U.K. UCITS."
    2. UCITS investment rules. With the aim of providing continuity for investors, the draft Regulations will carry through to the U.K. UCITS regime the existing investment rules under the UCITS Directive. These relate to eligible assets, borrowing, leverage and preferential treatment for EEA assets over third-country assets in certain circumstances.
    3. Cash of UCITS. The draft Regulations will allow the cash of a U.K. UCITS to continue to be booked in accounts opened with any EEA credit institution, but will not allow cash to be booked in non-EEA credit institutions unless an equivalence determination has been made.
    4. Temporary permission - EEA UCITS marketed in the U.K. via a passport. The draft Regulations introduce a Temporary Permissions Regime for EEA UCITS, enabling EEA funds and sub-funds to continue to access the U.K. market for a limited period after exit day. This UCITS TPR will also be available Money Market Funds that use a UCITS structure. The operator of an EEA UCITS which markets into the U.K. before Brexit will need to inform the Financial Conduct Authority prior to exit day that it wishes the relevant fund(s) – and any sub-fund(s) to have temporary permission to be marketed in the UK. The UCITS TPR will extend for three years after exit day, with discretion for HM Treasury to extend the regime by increments of up to 12 months in specified circumstances. EEA UCITS will be deemed to be "recognised schemes" for the duration of the TPR and must comply with certain obligations. On its expiry, these funds must apply for recognized status under FSMA in order to continue to be marketed in the U.K. to retail investors. The FCA has consulted separately on its proposed approach to a temporary permissions regime for EEA firms and investment funds.
    5. Transitional arrangements for U.K.-authorized funds. U.K. authorized funds (whether they are authorized unit trust schemes, authorized contractual schemes or authorized open-ended investment companies) ordinarily require a U.K.-based depositary, trustee, operator and/or manager, depending on their structure. Transitional provisions in the draft Regulations will operate so that a U.K. authorized fund is not prevented from having as its manager, trustee or depositary an EEA firm that has temporary permission to conduct activities in the U.K. by virtue of the temporary permissions regime for EEA firms (established by the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018). The transitional provisions will disapply the U.K. incorporation requirements of the depositary, trustee, operator and/or manager after exit, for as long as the relevant firm has temporary permission.
    6. Cross-border and domestic mergers. After exit day, it will not be possible to effect cross-border mergers between U.K. UCITS and EEA UCITS. The draft Regulations retain provisions enabling or referring to mergers of U.K. UCITS but remove provisions relating to cross-border mergers. 

    HM Treasury intends to lay the draft Regulations before Parliament in the autumn. It is intended that provisions in the draft Regulations that relate to temporary recognition will come into force on the day after the day on which the Regulations are made, with the remainder of the Regulations coming into force on exit day in the event that there is a no-deal scenario.

    View the draft Regulations

    View the explanatory information.

    View details of the FCA consultation on the temporary permissions regime for EEA firms and funds

    View details of the onshoring legislation for Alternative Investment Funds.

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