The FCA recently updated the Fund Supervision and Authorisation section of its website to provide information on: the FCA’s targets for determination of fund authorisation applications; liquidity and valuation oversight by trustees and depositaries; and trustee/depositary reporting of breaches. The new page can be found here.
The FCA has up to six months from the date of receipt to determine an application for authorisation of an authorised unit trust, an OEIC or an authorised contractual scheme which is not an undertaking for collective investment in transferable securities (“UCITS”). For applications for authorisation of UCITS, this period is two months. These periods are statutory maximums which the FCA is required to comply with, although if it deems an application to be incomplete the clock does not begin to run on the statutory period.
From April 2015, the FCA will introduce a target period for determination of applications of two months for non-UCITS retail schemes (“NURS”) and one month for qualified investor schemes (“QIS”). The targeted timeline for UCITS remains unchanged at two months. The FCA previously updated its authorisation targets in April 2014 to 3 months for NURS and 2 months for QIS.
While this is of course welcome news for those intending to submit applications for NURS or QIS authorisations, it should be noted that these periods are targets. The FCA is entitled to take up to the statutory maximum length of time to process applications. While a given application may be processed within the target timeframe, it would be prudent for project timelines to allow for a longer period for determination of NURS and QIS authorisation applications.
Derivatives reporting and disclosure
The FCA has found that many UCITS funds are not complying with requirements relating to disclosure of derivatives leverage. The Committee of European Securities Regulators or “CESR” (now the European Securities and Markets Authority, or “ESMA”) set out in guidelines in July 2010 its expectations for disclosing the level of leverage being deployed, the risk this presents and the limits for leverage.
The FCA’s view is that firms should consider their disclosure of derivative risks more broadly to ensure they are clear, fair and not misleading, ensure investors are clearly informed of important risks and decide whether leverage represents a material risk to the fund and if so, whether it should be disclosed in the KIID.
Firms should also ensure that they submit details of their derivative risk management process to the FCA at firstname.lastname@example.org at least annually, as required under the FCA Handbook.
Liquidity and valuation oversight
The FCA notes that trustees and depositaries are required to take reasonable care to ensure the scheme property of funds they oversee is appropriately managed, including as to valuation. The FCA is of the view that this will include some form of check on valuations to ensure they are accurate. An unidentified depositary not performing additional checks on valuations is given as an example of bad practice which is being followed up by the FCA’s supervision function.
In relation to liquidity monitoring oversight, the FCA states that trustees and depositaries should perform liquidity monitoring in proportion to liquidity risk, particularly for less liquid funds.
Trustee and Depositary reporting
Finally, the FCA notes that it, the Investment Association and the Depositary and Trustee Association have reached agreement that trustees and depositaries will regularly report on fund breaches and summaries of visits to authorised fund managers to the FCA to help inform the FCA in its understanding of the UK authorised fund landscape.
The trustee/depositary reporting does not alter authorised fund managers’ obligations to inform the FCA directly of significant events.