The FCA quietly published Handbook Notice 37 and Policy Statement PS16/23 in late September/early October along with a number of statutory instruments. Together, these documents implement a number of changes to the FCA Handbook that impact UCITS, NURS and QIS as well as their operators and depositaries.

The changes were consulted upon in the FCA’s Consultation Paper CP15/27 “UCITS V implementation and other changes to the Handbook affecting investment funds” and Consultation Paper CP15/32 “Smarter Consumer Communications: Removing certain ineffective requirements in our Handbook."

Although some of the policy decisions following these consultations were discussed in Policy Statement PS16/2 “Implementation of the UCITS V Directive”, for many changes this is the first official feedback from the FCA.

In this briefing, we consider the following topics:

For more information regarding any of these topics, and their impact on your business, please contact your usual Eversheds contact or Michaela Walker, Julian Brown or Philip Spyropoulos.

UCITS V

The UCITS V Level 2 Regulation Instrument 2016 comes into force on 13 October 2016 (in parallel with the UCITS V Level 2 Regulation) and makes changes to the FCA Glossary and to the COLL, CASS, SYSC and SUP sourcebooks. These changes are in addition to those made in the FCA’s Policy Statement referred to above. Some of the changes simply cross-refer to the UCITS V Level 2 Regulation though there are also some implementing/interpretative aspects. The changes are supplemented by explanatory statements in the Handbook Notice.

The majority of the changes relate to depositary and custody services including independence and record keeping requirements. These are summarised below

Glossary

  • A new definition of “UCITS Custodial Assets” has been introduced.

COLL

  • The FCA has reaffirmed the existing UK strict independence requirements as between fund managers and depositaries. A cross-reference to the less restrictive UCITS V Level 2 Requirements on independence has now been added to COLL.

Client Assets sourcebook (CASS)

CASS has been amended to reflect a depositary’s revised record keeping obligations in relation to UCITS:

  • CASS now includes a cross-reference to a depositary’s obligations in COLL 6.6B.
  • Confirmation that a non-custodian depositary who delegates custody to a delegate is not carrying out “safeguarding and administering investments."
  • Confirmation that a depositary’s record keeping requirements can be met by its delegate’s record keeping systems (subject to certain standards) and that no duplication of records is required.

Senior Management Arrangements, Systems and Controls sourcebook (SYSC)

  • A technical clarification has been introduced around when a remuneration committee should be appointed.

Supervision sourcebook (SUP)

  • The FCA has clarified that in relation to Client Money and Asset Return (CMAR) Reporting, this needs only to cover custody assets subject to CASS 6.

New changes required to authorised funds’ prospectuses

The Collective Investment Schemes Sourcebook (Amendment No 9) Instrument 2016 came into force on 1 October 2016 and makes changes to the FCA Glossary and to the COLL and FUND sourcebooks (including the changes for CAIFs noted below). The changes being implemented were consulted upon in Part III of the FCA’s Consultation Paper CP15/27 noted above but until now there has been no feedback on them.

As a result of these changes a number of amendments to prospectuses and instruments may be required since the ‘checklists’ for these documents have been amended and firms may also want to update prospectuses to reflect the revised investment and borrowing power wording in COLL. Some of the changes are accompanied by a transitional period meaning that the documents do not need to be updated until 30 September 2017. However, if the documents are amended for any reason prior to this date, they will need to incorporate all of the relevant amendments.

We have summarised the changes below (though please note that some of these will not be required for all documents in all cases) depending on both the characteristics of the fund and the way existing disclosures are formulated).

Note that these are in addition to changes required for UCITS V and SFTRs

Location of the disclosure

Description of the change

UCITS

NURS

QIS

When required?

Instrument constituting the fund (instrument of incorporation, trust deed or ACS deed)

The wording around government and public securities has been tweaked.

Some firms will not need to make any amendment to existing wording

COLL 3.2.6 R (8)

COLL 3.2.6 R (8)

 

30 September 2017 or upon prior update

Prospectus

Incorporate all of the disclosures itemised in FUND 3.2.2 R and FUND 3.2.3 R (assuming AIFM is full-scope UK AIFM)

Not required

COLL 4.2.2 R (2)(aa)(i) and COLL 4.2.6 G (7)

COLL 8.3.2 R (1A)(i)

30 September 2017 or upon prior update

Incorporate the disclosures from FUND 3.2.5 R and 3.2.6 R unless those disclosures are made in the most recent annual or half yearly report

Not required

COLL 4.2.2 R (2)(aa)(i)(ii)

COLL 8.3.2 R (1A)(ii)

30 September 2017 or upon prior update

Include the product reference number of the standalone fund or umbrella

COLL 4.2.5 R (2B)(b)

COLL 4.2.5 R (2B)(b)

COLL 8.3.4 R (1A)

30 September 2017 or upon prior update

Include the product reference number of each sub-fund of an umbrella fund

COLL 4.2.5 R (2B)(b)

COLL 4.2.5 R (2B)(b)

COLL 8.3.4 R (17)(6)

30 September 2017 or upon prior update

The investment powers around government and public securities has been tweaked.

Some firms will not need to make any amendment to existing wording

COLL 4.2.5 R (3)(i)(i) and (ii)

COLL 4.2.5 R (3)(i)(i) and (ii)

No change

30 September 2017 or upon prior update

Although there is a transitional period for prospectus updates, UCITS are expected to be actually complying with revised rules now whereas NURS have until 31 March 2017 to comply

The requirement to publish a short report is being removed along with the prospectus requirement to detail when this will be sent to unitholders.  Firms wishing to discontinue their short reports will be able to remove this statement from their prospectuses.

See also our“Other points to note” section below

COLL 4.2.5 R (4)(d) along with multiple changes to the rules formerly relating to short reports

COLL 4.2.5 R (4)(d) along with multiple changes to the rules formerly relating to short reports

No change

The change is effective from 22 November 2016

New power for NURS to invest into the feeder of a master-feeder structure (with certain safeguards). This incorporates a specific restriction on a feeder NURS from investing into another feeder NURS (the “anti layering rule”)

N/A

COLL 5.6.10 R (3), COLL 5.6.10 A R, COLL 5.6.10B G,   COLL 5.6.10C G and COLL 5.6.26 R (26)

N/A

No transitional period

An explanation of what is meant by large deals

COLL 4.2.5 R (16)(b)(v) and (18)(b)(i)

COLL 4.2.5 R (16)(b)(v) and (18)(b)(i)

No change

30 September 2017 or upon prior update

Removal of the  largely obsolete requirement to include details around SDRT

Deletion of COLL 4.2.5 R (19) and amendments to various other provisions

Deletion of COLL 4.2.5 R (19) and amendments to various other provisions

No change

30 September 2017 or upon prior update

Update to references to RICS Valuation Standards in relation to real property.

May not be applicable to funds other than property funds

N/A

COLL 5.6.20 R (3)(f)

COLL 8.4.12 R (2)(f)

30 September 2017 or upon prior update

New guidance on the calculation of the preliminary charge may require updates to prospectuses. 

Many prospectuses will already be compliant

COLL 6.7.8 G (4) and (5) (which compliments  COLL 6.3.5A R and 6.3.5B R)

 

 

No transitional period

An explanation of forward pricing.

Many firms already do this while others just state that a fund will use forward pricing

COLL 4.2.5 R (20)

COLL 4.2.5 R (20)

No change

30 September 2017 or upon prior update

Securities Financing Transaction Regulation (SFTR)

Our January briefing on the EU Securities Financing Transactions Regulation (SFTR) explained various changes that would need to be made to the prospectuses and annual reports of new funds and existing funds which use securities financing transaction techniques (SFTs) and total return swaps (TRS).

In conjunction with the Investment Funds (Securities Financing Transaction) Instrument 2016, the FCA has implemented the position we had indicated would be taken and made a number of clarifications.

First, a definition of ‘total return swap’ has been added to the FCA Glossary though it merely cross refers to the Regulation.

It has further been clarified that SFTR disclosures are only required in prospectuses and annual reports where SFTs or TRSs are actually being used as opposed to where there is only a power for them to be used.

The FCA decided not to issue guidance on whether SFTR disclosures amount to changes requiring FCA approval and therefore the materiality of the changes should be assessed in the usual way.

Charity Authorised Investment Funds (CAIFs)

Following announcements in the March 2015 budget, a new category of FCA authorised funds has been introduced exclusively for investment by charities and for charitable purposes. These funds are to be known as Charity Authorised Investment Funds (or CAIFs) and will also be subject to oversight by the Charity Commission (as each CAIF will itself be a charity). We will be publishing a full briefing on CAIFs in the next few days.

Other points to note

  • The FCA is removing the requirement for UCITS and NURS to produce short reports on the basis that they are of limited use to investors and therefore do not meet the FCA’s objectives. The requirement to product short reports will cease on 22 November 2016 although firms can choose to continue to provide them if they wish. The FCA notes that any firms that wish to discontinue short reports must still publish and distribute any that would fall due before 22 November 2016, and also consider the communication to investors of any decision to cease producing short reports.
  • The FCA had consulted on a proposal to allow PAIFs more flexibility in the dealing arrangements for their feeder funds. The FCA Handbook Notice explains that the proposals were well received but respondents noted that it should not be limited to PAIFs. Therefore the rule has not been implemented and the FCA will consult on a wider rule for the future.
  • Guidance on money market funds has been revised in line with CESR guidelines as consulted upon.
  • A new Glossary definition of “Pension Feeder Fund” is being introduced.
  • The rules consulted upon around the calculation of borrowing limits are to be implemented.
  • Clarification that FUND 3.3.3 R (regarding timing of publication of annual reports and accounts) does not apply to a NURS, which instead must comply with the requirements of COLL 4.5.14R.
  • Notification requirements in relation to the appointment of service providers and AIFM delegates have been included in FUND Sch 2.1 G.