In the wake of Brexit, the Government announced it would make various new laws under the umbrella of a new Financial Services Bill, and it would take the opportunity to make some improvements to existing laws outside the necessary changes.

The Queen's Speech highlighted three key measures, and the Government has now taken the initiative to start action. In this article, written for Compliance Monitor, Emma Radmore looks at what has happened so far.

Prudential standards – banks

Prudential standards for banks are largely driven by the Basel III framework, the implementation of which the UK is committed to, regardless of Brexit. However, many Basel measures (and other requirements) have in the past come into UK law directly or indirectly via EU legislation.

The UK Government is committed to implementing the Basel III provisions, together with the changes the EU has made in the second Capital Requirements Regulation (CRR 2) and to implementing an updated prudential regime for investment firms.

A policy paper explains that the Basel 3.1 amendments have already been incorporated into UK law in part, because part of the CRR 2 reforms took effect in June 2019. However, a further set of changes to EU law are due to take effect from June 2021 – that is, after the end of the transition period. Some of the changes, the revised Capital Requirements Directive (CRD 5) must be implemented into Member State laws by 28 December 2020 – and the Government and PRA say they will therefore do this, as required by the UK's commitments in the Withdrawal Agreement. But Treasury will need to take steps to implement the requirements of CRR 2 that are not effective until next June, and will need to take further action to implement other Basel 3.1 revisions which the EU has not yet legislated for. But much of the timeline may be impacted

UK banks will need to look out for consultations from Treasury and PRA at the appropriate time.

Marketing of overseas funds

The Government is taking the opportunity of necessary revisions to the framework that enables the marketing of overseas funds in the UK resulting from Brexit to review how the regime works more widely. It is consulting on a new "Overseas Funds Regime" (OFR), which it proposes will update the basis on which a variety of overseas funds can be marketed in the UK.

The focus of the proposals is on marketing to retail investors. When the Brexit transition period ends on 31 December 2020, the current rules that allow certain retail and wholesale funds constituted and managed in the EU to be marketed to UK investors will fall away. In the absence of knowing what, if any, alternative will be agreed between the UK and the EU, Treasury is taking the opportunity to undertake a fundamental review of how funds from any overseas jurisdiction can be marketed to UK investors.

Treasury says the current regime, regardless of Brexit, is not viable in the long-term, and proposes two new regimes, one for retail and one for money market funds.

Retail funds

Current regime

There are currently around 8,000 UCITS established in the EEA that market to retail investors in the UK under the UCITS passport – with only around 2,000 UK established UCITS. These funds can continue to market in the UK until the end of the year, provided they have correctly registered under the Temporary Permissions Regime (TPR) but thereafter will lose the ability to do so. As a result, and absent any other agreement between the UK and EU, they will fall back on the existing regime under s272 of FSMA. This is a clunky regime, which requires FCA to undertake an in-depth assessment of individual funds, including an analysis of the protection investors will receive and the powers and duties of the operator, trustee and/or depositary. Once the application is in, FCA has 6 months to determine it (or 12 if it's incomplete). It is hardly surprising that few funds apply for this status, and it would not be sustainable for FCA to have to consider applications from the majority of currently passported UCITS.

Proposed regime – equivalence

The proposed OFR will operate somewhere between the existing passporting regime and the detailed s272 regime. The OFR will be based on an equivalence regime, whereby the UK must grant equivalence to a jurisdiction, which will enable funds from those jurisdictions to benefit from the OFR. Treasury does not propose to repeal s272 FSMA, which will remain available for funds that are not eligible for the OFR because they do not have an equivalence determination.

An equivalence determination will allow eligible retail funds to become “recognised” and able to be marketed in the UK.

Equivalence determinations will be made by Treasury by statutory instrument. UK regulators will have the ability to make retail funds subject to appropriate requirements, including on disclosure, provision of investor facilities in the UK, reporting and fees, and will have the right to modify or withdraw determinations. 

Treasury notes that sometimes funds are managed in a different jurisdiction to the one where they are domiciled and is willing in principle to allow this, provided the overall structure gives investors appropriate protection.

The equivalence determination process will be run by Treasury, after seeking advice from FCA and taking into account any other relevant factors. The key conditions will be that the regulatory regime of the relevant third country meets the required standard on an outcomes basis, which are that:

  • it must achieve at least equivalent investor protection to comparable UK authorised funds; and
  • Treasury must be satisfied there are, or will be, proper supervisory cooperation agreements between the FCA and the relevant overseas regulator.

Treasury will also have the right to require that the specified fund category must comply with additional requirements, if it thinks it necessary to ensure consistency and compatibility with the way the UK equivalent funds work.

Registering with FCA

Retail funds from jurisdictions with an equivalence determination will need to register with FCA. FCA's job will not be to check compliance by the fund with the relevant overseas regulations, and it will be able to rely on self-certifications from the funds stating that they are eligible, although it may ask for supplementary evidence. FCA will also have greater powers to impose additional informational requirements on the incoming funds, and will seek this information at recognition, similar to the current s272 regime, rather than as ongoing supervision. Treasury also proposes that FCA be able to require recognised funds to maintain facilities in the UK.

In terms of timing, FCA will normally have 2 months from receipt of a completed form to confirm registration or explain why a fund is not eligible. Reasons for refusal would include that the operator has knowingly or recklessly given FCA false or misleading information, that additional requirements would not be met or that it is necessary to protect the interests of potential UK participants.

FCA will also have power to suspend or revoke registrations if funds are not compliant with its requirements.

What if a regime is not equivalent?

Funds from non-equivalent jurisdictions will still be able to make use of the s272 procedure. S272 will not be repealed, but will be amended. Treasury plans to simplify the current process so that:

  • FCA will need to consider only matters which are the subject of current rules (rather than the current position, where it needs also to consider matters that could be the subject of rules);
  • FCA can decide which changes it needs to approve (as opposed to having to approve all changes, however minor or irrelevant); and
  • advance notice of changes to the operator, trustee or depositary will no longer be required.

Money market funds

Current regime

Money market funds (MMFs), while not UCITS, invest in liquid assets and provide an important cash management function for governments, corporates and financial institutions. Under the EU's MMF Regulation there is again a mechanism for qualifying funds to be marketed in the UK, which will fall away at the end of the transition period. Treasury says there are very few UK based MMFs, so it is important that investment in EU MMFs should still be possible.

Proposed regime

Treasury proposes to introduce an equivalence regime also for MMFs. These will allow them to gain "market access" to the UK, and will require that:

  • the regulatory regime must be at least equivalent to the regime that applies to UK MMFs; and
  • Treasury must be satisfied there are, or will be, proper supervisory cooperation agreements between the FCA and the relevant overseas regulator.

As with retail funds, Treasury may also set additional requirements. The equivalence determination will set out whether it covers only MMFs or also retail funds.

Registration with FCA

The registration process for MMFs will depend on whether they wish to market just to professional clients, or also to retail. MMFs wanting to market solely to professional clients will be able to continue to notify under the national private placement regime (NPPR). If they want to market to retail clients as well, they will need to register as retail funds. They can do this either under the retail fund procedure outlined above if the equivalence determination covers retail funds, or, if they do not meet those conditions, can take the s272 route (as amended).

Wider issues

Dispute resolution and compensation

The Government is seeking views on whether to extend the compulsory jurisdiction of the Financial Ombudsman Service (FOS) to apply to operators and depositories of recognised funds. While this might encourage investment, in practice any findings may be hard to enforce and, under the current regime, evidence suggests that complaints are more usually made against UK-based distributors rather than overseas funds.

Similarly, no overseas fund is currently covered by the Financial Services Compensation Scheme. The Government thinks that the reason it has not become aware of any situations where UK investors suffer losses for which they would have been compensated had their passported-in fund been covered may be because of the strict rules that apply to UCITS. It is seeking views on whether it might be possible or desirable to include any overseas funds within the scope of the UK compensation scheme.

Either way, the Government also seeks views on whether investors should be required expressly to acknowledge their understanding of the availability of ADR and compensation arrangements.


The OFR will give the regulators the opportunity to review the form in which investors currently receive information, particularly the unpopular PRIIPs regime – but it is not seeking views on this in the current consultation.

Financial promotions

The consultation confirms that operators of funds that are recognised under the OFR will not be "authorised persons" and that, therefore, a UK authorised person must make or approve their financial promotions, unless exemptions apply.

UK facilities and fees

Finally, the FCA will have the power to require funds to maintain facilities in the UK and set appropriate fees.

The future of UK/Gibraltar access for financial services

Treasury is also consulting on the post-Brexit market access arrangements between the UK and Gibraltar. Constitutionally, Gibraltar is an Overseas Territory with internal self-government. Responsibility for financial services lies with its elected Government.

From an EU point of view, Gibraltar was not a Member of the EU in its own right, nor party to the EEA agreement. Currently, as with the UK, EU law applies during the transition period. But, as between the UK and Gibraltar, a separate regime has always applied, based on the EU passport model.

The Government now proposes a new Gibraltar Authorisation Regime (GAR), that will allow Gibraltar-based firms to be treated as “authorised persons” for the purposes of FSMA, provided the activities are covered by a statutory instrument that will set out the requirement that the firm be authorised in Gibraltar to carry them on. Treasury expects the activities will be a subset of regulated activities, that reflect the composition of Gibraltar firms that currently do business in the UK. The GAR will also be contingent on the UK and Gibraltar regulatory systems remaining aligned, and be subject to appropriate memoranda of understanding.

Practically, the regime will work on the basis of notifications via the Gibraltar Financial Services Commission, which will have the power to withhold consent or place restrictions on permissions. The process should take 2 months.

The consultation also covers proposals for Gibraltar firms to participate in certain sub-classes of the Financial Services Compensation Scheme, the alignment assessment process, and orderly wind-down of current cross-border business.

What next?

The two consultations discussed in this article close on 11 May, but in the current COVID-19 situation we can expect it to be some time before any policy statements result. But the funds industry will in particularly be looking for the opportunities the proposes OFR may present.