The Overseas Funds Regime (OFR), which came into effect for new schemes from September 2024, will greatly simplify fund sales into the UK, particularly for Irish and Luxembourg domiciled funds, says Julian Mayo, head Of business development, Universal Investment.
Though Post-Brexit, it has become more difficult for asset management firms in the UK to do business in Europe, and vice versa.
Under the new regulation, funds granted OFR approval “can be promoted in the same way as an authorised collective investment scheme established in the UK”, according to the FCA.
From our clients’ perspective, mainly asset management boutiques who access the European fund market via UCITS funds, for the first time since Brexit, when they are looking at the UK/Europe, they are looking at something akin to a single market. In light of market movements, many UK investors are looking globally for opportunities, making the opportunity under the OFR ever more attractive for asset managers across the globe.
For funds established before the end of 2020, funds marketed in the UK could continue to be sold here under the Temporary Marketing Permissions Regime (TMPR). However, for a fund set up after the start of 2021, for it to be distributed to retail investors in the UK by a foreign asset manager, it needed to be approved under Section 272 of the Financial Services and Markets Act 2000. Only a small number of funds went through this complicated and costly process, whereby asset managers were only able to apply for Section 272 recognition after the fund had been set up, often leaving firms without a solution for their clients for months. It was an expensive and timing-consuming process many asset managers didn’t have the bandwidth to go through.
In addition, Section 272 didn’t account for the fact that a number of UK asset managers established in the past 30 years have a single range of UCITS products (Lux or IRE), but don’t have a domestic product, such as an OEIC. Boutique asset managers based in the UK with a range of funds, or a single umbrella with underlying funds, suddenly couldn’t do business in their own market, which is absurd. For many UK managers with a UCITS product, most assets are raised in the UK, even though they are LUX or IRE vehicles and can be sold anywhere. That was the situation until this announcement.
With the end of the TMPR and the introduction of the OFR, the landscape is much improved. For new funds, managers can set up one fund which they can sell around world.
We foresee that the OFR will benefit asset management firms, consumers, and the UK economy alike:
• first, asset managers can simplify their business models by offering one suite of products rather than two, creating economies of scale and accessing a larger asset pool. Any resulting cost savings will likely be passed on to both shareholders and customers;
• second, the regime will give consumers more choice. Many international asset managers sat on their hands post-Brexit to implement growth plans that involved Europe. Before Brexit, asset managers from North America and Asia Pacific with expansion plans for Europe had included the UK in these plans: it is the second-largest fund market after Germany, and for many, the language and cultural links make the UK a natural place to do business. That model was then blown out of the water. With the OFR, they can think about the business model again which will benefit consumers; and
• third, the UK economy is set to benefit in several ways, as the regime will lead to high value-add, fee-paying jobs linked to distribution and other critical areas.
Due to the challenges posed by Brexit, there’s been a period of non-hiring in the UK in favour of financial centres in the EU. The UK may now bolster its pre-eminence as the factory of investment management in Europe: at the same time, international asset managers domiciled in the US or Asia, for example, will more likely look to establish a local salesforce in the UK again, now that they can sell their UCITS funds here.
We’re finally getting closer to where we were before. Granted, the transition from TMPR to OFR will take time. Funds’ applications will be staggered over a two-year period which ends in September 2026. However, when this is finished, managers can effectively set up one fund which they can sell in the UK, in the rest of Europe, and in dozens of other countries around the world.
With the FCA committing to prompt implementation and supporting applications through the process, this should give asset management firms greater confidence with their growth plans.
