Retail fundsAvailable vehicles
What are the main legal vehicles used to set up a retail fund? How are they formed?
Under section 238 of FSMA before a fund which constitutes a collective investment scheme (CIS) may be promoted by a firm that is authorised under FSMA by either the FCA or the Prudential Regulation Authority (PRA) (each an authorised firm) to the general public (ie on a retail basis) in the UK, it must qualify as any of the following legal vehicles:
- an FCA-authorised unit trust scheme (AUT);
- an FCA-authorised contractual scheme (either a co-ownership or a limited partnership scheme) (ACS); or
- an FCA authorised open-ended investment company (OEIC) described by the FCA as an investment company with variable capital or ICVC.
Of the above vehicles only the OEIC is a body corporate and has separate legal personality.
In addition, a fund that is recognised by the FCA under section 272 of Individually Recognised Overseas Schemes (FSMA) may also be promoted to the general public. Such recognition does not turn on the nature of the legal vehicle deployed but on factors such as the adequacy of protection afforded to investors, the fund’s constitution and management and the powers and duties of the operator and if relevant its trustee or depositary.
A retail fund will typically be established in the UK as an open-ended undertaking for collective investment in transferable securities (UK UCITS) fund. A UK exchange-traded retail fund (a retail ETF) will usually be constituted as a UK UCITS fund listed on the London Stock Exchange. Alternatively, a manager may establish a closed-ended vehicle, typically to invest in assets in which a UCITS fund is not permitted to invest (eg, real estate), and adopt the investment trust model (see below). An investment trust is required to be listed on a stock exchange to allow investors to realise their shares on the stock market and to enable a public offering of the shares (if desired).
Open-ended retail funds
An open-ended fund is one in respect of which the participants have a right to redeem or sell their interest in the fund at a price related to the net value of the assets held by the fund. Open-ended retail funds established in the UK are either UCITS funds or (more rarely) non-UCITS retail schemes (NURS). A NURS is a type of non-UCITS fund authorised by the FCA for distribution to retail investors in the UK, with wider investment and borrowing powers than a UCITS; in particular, a NURS can invest in real estate (land) and gold. In either case, the fund will be legally constituted in the UK as an OEIC, AUT or ACS. UK AUTs, OEICs and ACS are all open-ended funds by definition, as they are required to confer on unitholders or shareholders the right to redeem their units or shares.
An OEIC is formed under the Open-Ended Investment Companies Regulations 2001 (not the Companies Act 2006) with an instrument of incorporation, at least one director and shareholders (investors). An OEIC must have an authorised corporate director (ACD), which must be an FCA-authorised person, who is responsible for managing the fund. Typically, the ACD is the OEIC’s sole director. The legal ownership of an OEIC's portfolio will be vested in the depositary or its nominee. However, in contrast to AUTs and ACS, the beneficial interest in the portfolio will be vested in the OEIC itself and not in its shareholders. An AUT is a trust and, as such, has no separate legal personality under English law. It is constituted by a trust deed made between the trustee and the fund manager. The trustee holds the assets (investments) on trust for the beneficiaries (investors), who are known as ‘unitholders’, since their beneficial interests are represented by ‘units’ under the trust. Unlike an OEIC or AUT, an ACS is a transparent vehicle constituted either as a co-ownership scheme or limited partnership. A co-ownership scheme is constituted by an agreement between the fund manager and the depositary (custodian), under which the investors’ rights to the assets are similar to those of AUT unitholders.
Any of these vehicles, except an ACS constituted as a limited partnership, can be an umbrella fund, with underlying sub-funds. The property of a sub-fund may be used only to discharge the liabilities of that sub-fund. Each sub-fund of an umbrella is therefore individually ring-fenced.
Closed-ended retail funds
Closed-ended retail funds established in the UK are typically companies listed on the London Stock Exchange’s (LSE) Main Market (called investment trusts, venture capital trusts or real estate investment trusts, each taking corporate form despite the name). An investment trust is typically a UK public company that meets the eligibility conditions in section 1158 of the Corporation Tax Act 2010 (CTA 2010), that satisfies certain other requirements on an ongoing basis, and that has been approved as an investment trust by HMRC. These vehicles do not constitute a CIS under FSMA and so are not subject to the restriction on promotion of CIS set out in section 238 of FSMA. The Main Market is the most liquid market in the UK (offering the widest investor base). Funds listed on the Main Market can accordingly be marketed to retail investors and also qualify for inclusion in institutional investors’ mandates limited to investments listed on a regulated market, subject to local law regulation which will need to be checked. Shares in an investment trust must be admitted to trading on a regulated market and the investment trust must comply with requirements including investment diversification in order to qualify for favourable tax treatment.
Some investment companies are traded on the LSE’s Alternative Investment Market (AIM) or its Specialist Fund Segment. AIM is an exchange-regulated market, not a UK regulated market. As such, it is generally easier and quicker for a fund to make an initial offering of its shares on AIM rather than on the Main Market (and also follow-on offerings), provided the offering is limited to institutional investors, because compliance with the retained EU law version of the Prospectus Regulation 2017/1129/EU (UK Prospectus Regulation) is not then required. The Specialist Fund Segment is designed for specialist investment funds targeting only professional, professionally advised, institutional or knowledgeable investors. Compliance with the UK Prospectus Regulation is required. There are also special LSE regimes for venture capital trusts and real estate investment trusts.
Most investment companies listed or traded on the LSE are classified as AIFs under the Alternative Investment Fund Managers Regulations 2013, with the exception of those real estate investment trusts which have a commercial, not an investment, purpose.Laws and regulations
What are the key laws and other sets of rules that govern retail funds?
The establishment and operation of open-ended retail funds in the UK are governed by FSMA, various statutory instruments made under FSMA and the FCA Handbook (in particular, the FCA’s Collective Investment Schemes sourcebook (COLL)). In addition, the retained EU law version of the Packaged Retail and Insurance-based Investment Products Regulation 1286/2014/EU (UK PRIIPs Regulation) applies to all investment funds that are available to retail investors (each a PRIIP) except UK and EEA UCITS funds that are exempted until 31 December 2026. This exemption was maintained in the UK PRIIPs Regulation for all UCITS, including EEA UCITS, so that both UK and EEA funds can continue to adhere to the existing disclosure framework for UCITS until the exemption ends, and that investors in UK and EEA UCITS can continue to receive the same disclosures for similar investment products. The UK PRIIPs Regulation requires a standardised pre-contractual key information document for each fund. If and when that Regulation applies to UCITS, this would replace the equivalent key investor information document currently required by virtue of the UCITS Directive. Specialised rules apply to UK UCITS funds that are money market funds (MMFs) under the retained EU law version of the Money Markets Fund Regulation 2017/1131/EU (UK MMFR), including liquidity management procedures and a prohibition on external financial support (such as a guarantee). Notably, the EU Packaged Retail and Insurance-based Investment Products Regulation 1286/2014/EU continues to apply to UK firms that manufacture, sell or advise on PRIIPs to retail investors in the EU.Authorisation
Must retail funds be authorised or licensed to be established or marketed in your jurisdiction?
Open-ended retail funds
From IP Completion Day, to be marketed in the UK, open-ended retail funds must either be authorised by the FCA (if established in the UK) or, in the case of EEA UCITS, be temporarily permitted by the FCA to be marketed in the UK for a limited period of time following the end of the Brexit transition period on 31 December 2020 under the TMPR or, in the case of a fund managed outside the UK, recognised by the FCA under section 272 of FSMA. The TMPR for EEA UCITS lasts until 31 December 2025 (unless extended). Any entity established as an open-ended retail fund in the UK must be authorised by the FCA.
The UK government is concerned to ensure that, post-Brexit, the UK remains attractive to overseas business and that non-UK investment funds can be made available to the domestic market including on a retail basis. In addition, the Government wanted to ensure that MMFs – the vast majority of which are EEA-domiciled – will still be able to access the UK market. MMFs are funds that invest in liquid assets such as cash, government and corporate debt and which provide an important cash management function for financial institutions, corporations and governments. Following the UK's departure from the EU, the fund marketing passporting regime that has historically allowed EEA UCITS to be marketed and sold to UK investors under section 264 of FSMA is no longer available (when the UK departed from the EU on 31 December 2020, section 264 was repealed), which means retail investment funds either use the TMPR or must seek individual recognition from FCA under section 272 of FSMA. Whilst the TMPR allows EEA investment funds marketed in the UK before 31 December 2020 to continue to access the UK market after IP Completion Day, it is not (as its label suggests) viable over the long-term. Due to the following concerns, the section 272 regime was not considered fit for that purpose:
- Using section 272 to recognise a large number of investment funds exiting the TMPR would be an operational challenge both for the FCA and fund managers.
- Section 272 was designed for individual funds and is not a proportionate and viable regime for recognising funds following the UK's departure from the EU.
To address those objectives and concerns, a new process, the overseas funds regime (OFR), has been introduced that will allow investment funds domiciled overseas to be sold to UK retail investors. The OFR has been introduced by sections 24 to 26 and Schedule 9 of the Financial Services Act 2021 (the 2021 Act), which is the first major piece of UK primary legislation intended to address issues relating to financial services and financial regulation arising from Brexit. The OFR comprises two separate equivalence regimes for retail investment funds and MMFs respectively. Under these equivalence regimes, HM Treasury has the power to make a decision that effectively declares that another country's regime for investment funds is equivalent to the UK regime. Once HM Treasury has made an equivalence determination for a particular country, an investment fund domiciled in that country may apply to the FCA for recognition. After these steps have been completed, the funds can be marketed to retail or professional investors (depending on the route used). The regime in section 272 of FSMA has remained in place alongside the OFR and can be used for individual funds that do not fall within the scope of an equivalence determination, but still want to market to UK retail investors. Section 272 will not be repealed but will, instead, continue to be available for individual retail schemes that are not eligible to be recognised through the OFR because they are not covered by an equivalence determination for retail schemes. Section 272 will also remain for MMFs that still wish to market to both retail and professional investors, and which are assessed as MMF equivalent but not eligible to be recognised under the OFR.
While the majority of the OFR provisions in the 2021 Act are already in force, the OFR requires further development before it becomes operational. HM Treasury has not yet made any equivalence decisions and the FCA is yet to publish details about how the OFR will work in practice. The FCA's November 2021 regulatory initiatives grid indicates that the FCA is working on operationalising the OFR and will be consulting on various aspects of its Handbook rules throughout 2022 to ensure OFR funds are appropriately captured.
Closed-ended retail funds
Closed-ended retail funds listed on the LSE’s Main Market or traded on its Specialist Fund Segment are not authorised as funds by the FCA, although the actual listing on the Main Market will require approval by the FCA in its capacity as the UK ‘listing authority’, and Main and Specialist Fund Segment prospectuses will require its approval under the UK Prospectus Regulation and FCA Handbook. Closed-ended funds traded on AIM are also not FCA authorised, but will still be subject to the AIM rules. In addition, an AIM prospectus will require approval by the FCA if the shares are to be offered to retail investors. Any fund traded on AIM must appoint an independent adviser to act as a nominated adviser (NOMAD), whose function will be to confirm to the LSE the fund’s compliance with the AIM rules.Marketing
Who can market retail funds? To whom can they be marketed?
Open-ended retail funds authorised or recognised by the FCA, and closed-ended retail funds listed on the LSE’s Main Market or traded on its Specialist Fund Segment (SFS), can be marketed to any type of investor in the UK (although, in practice, a fund traded on the Specialist Fund Segment will not make a retail offering, because the LSE will admit to that market only funds targeted at professional, professionally advised, institutional or knowledgeable investors). The SFS appeals to a variety of different types of investment managers, including those managing large hedge funds, private equity funds, and certain emerging market and specialist property funds, seeking admission to a public market in London. As the SFS is a regulated market, securities admitted to the market are eligible for most investor mandates providing a pool of liquidity for issuers admitted to the market. A fund traded on AIM is also, in practice, rarely offered to retail investors in the UK (any retail offering would require compliance with the UK Prospectus Regulation, and AIM-traded funds typically seek to avoid that expense). However, UK retail investors can and do acquire shares in AIM-traded funds on the secondary (as distinct from primary) market.
An entity marketing a retail fund in the UK must be an authorised firm if:
- it carries on a regulated activity by way of business in the course of marketing the fund, such as giving investment advice or arranging deals in investments; and
- it carries on that activity in the UK, subject to the overseas person exclusion.
In practice, a professional UK fund distributor, such as an independent financial adviser (IFA), is normally an authorised firm either because it gives investment advice to clients or because its distribution activities, such as taking clients’ investment orders and transmitting their investment subscription monies, constitute the regulated activity of ‘arranging deals’ in investments.Managers and operators
Are there any special requirements that apply to managers or operators of retail funds?
The manager and trustee of a UK UCITS fund or a UK NURS, established as an AUT, must be persons who are independent of each other. Subject to the temporary permissions regime (TPR), each must be a body corporate incorporated in the UK whose affairs are administered in the UK and be an authorised firm permitted, in the case of a manager of a UK UCITS, to act as a manager of a UK UCITS, or, in the case of a manager of an NURS, to act as a manager of an AIF; and, in the case of a trustee, to act as a trustee of a UK UCITS or an AIF, as the case may be. The TPR does allow for AUTs to continue for a limited time to have as their manager or trustee an EEA firm participating in the TPR.
The manager of a UK UCITS fund established as an OEIC will usually be the ACD of the OEIC which, subject to the TPR, must be a body corporate incorporated in the UK and an authorised firm permitted to carry on the regulated activity of managing a UK UCITS. The depositary of an OEIC must also be a body corporate incorporated in the UK, an authorised firm permitted to carry on the regulated activity of acting as a depositary of a UK UCITS and be independent of the OEIC and its ACD. The TPR does allow for OEICs to continue for a limited time to have as their manager or depositary an EEA firm participating in the TPR.
The manager of a closed-ended retail fund must be an authorised firm, typically one permitted to carry on the regulated activity of managing an AIF. Alternatively, the fund itself can be authorised by the FCA as a self-managed AIF, if it has no external AIFM.
Under product governance rules introduced in 2018 by the FCA in the course of implementing MiFID II and set out in chapter 3 of the FCA’s Product Intervention and Product Governance sourcebook (PROD), a firm ‘manufacturing’ a new fund (ie, creating, developing, issuing or designing a new fund) must identify the fund’s ‘target market’ of ‘end (ultimate) clients’, ensure its distribution strategy is compatible with that market and take reasonable steps to ensure the fund is in fact distributed to that market. Typically, it will be the manager or operator of a fund that will manufacture it for these purposes, although this will not necessarily preclude a primary distributor from also being a manufacturer. Although the rules apply to non-retail funds as well as retail funds, they will, in practice, have a greater impact on retail funds, simply because the end clients and distributors will be more numerous and identifying the target market and monitoring distributors will therefore be more challenging.
Managers of an ACS, AUT or an OEIC, (authorised fund managers or AFMs), are required to act in the best interests of the authorised funds they manage and those who invest in those funds, under rules in the FCA’s Conduct of Business Sourcebook (COBS), COLL and the FCA’s Principles for Businesses (the Principles). While PROD rules apply to AFMs as guidance rather than rules, the FCA does expect AFMs to carefully consider them when meeting their obligations to ensure they comply with the FCA Principles and other relevant rules. Notably, acting in line with PROD will enable AFMs to comply with some of these other requirements. As well as the guidance in PROD, the FCA states that AFMs should also consider the guidance in the Responsibilities of Providers and Distributors for the Fair Treatment of Customers (RPPD). RPPD sets out the FCA’s view on what various rules require of providers and distributors in certain circumstances to treat customers fairly. Compliance with these product governance rules is a particular continuing focus of the FCA.Investment and borrowing restrictions
What are the investment and borrowing restrictions on retail funds?
The investment and borrowing powers for UK UCITS funds (except MMFs) are set out in the FCA’s COLL sourcebook implementing the UCITS Directive. A UK UCITS fund (except an MMF) can invest its portfolio in the following assets:
- transferable securities and money market instruments traded on an EEA or UK regulated market or on an ‘eligible market’ (broadly, a non-UK market listed in the UCITS fund’s prospectus satisfying specified criteria). Transferable securities consist of shares, debt securities and other traded securities, such as depositary receipts;
- certain other money market instruments issued by a regulated body;
- other transferable securities and money market instruments (unlisted securities) (subject to the investment spread limit below);
- cash and near cash (including bank deposits and Treasury bills);
- units in other UCITS funds and regulated collective investment schemes, subject to conditions; and
- derivatives and forward transactions.
A UK UCITS fund (except an MMF) is subject to investment spread and concentration requirements, including:
- up to 5 per cent of its assets can be invested in transferable securities or money market instruments issued by a single body (unless the fund tracks an index, when a higher limit may apply – see below). The 5 per cent limit can be raised to 10 per cent for 40 per cent of the portfolio;
- up to 10 per cent of its assets can be invested in unlisted securities;
- up to 20 per cent of its assets can be invested in cash deposits with a single body;
- exposure to a single over-the-counter derivatives counterparty cannot exceed 5 per cent of its assets, except where the counterparty is an approved bank, where the exposure can be up to 10 per cent;
- up to 20 per cent of its assets can be invested in transferable securities and money market instruments issued by the same group (or, exceptionally, up to 35 per cent in transferable shares or debt securities issued by a single body, if the fund tracks an index);
- up to 20 per cent of its assets can be invested in units of (broadly) any one regulated collective investment scheme (eg, another UCITS fund) and up to 30 per cent in (broadly) all other regulated collective investment schemes;
- up to 35 per cent of its assets can be invested in government or public securities issued by a single body – or 100 per cent, subject to conditions, including:
- no more than 30 per cent can be invested in a single issue; and
- the securities must comprise at least six different issues;
- the fund cannot hold more than 10 per cent of the debt securities issued by a single body;
- the fund cannot hold more than 25 per cent of the units or shares issued by a single regulated collective investment scheme; and
- the fund cannot hold more than 10 per cent of the money market instruments issued by a single body.
A UK UCITS fund (except an MMF) can borrow up to 10 per cent of its assets on a temporary basis. It follows that, in practice, a UK UCITS fund cannot borrow for investment purposes, and so can do so only to cover redemptions of units or shares by selling investors or, if it is an MMF, not at all.
A UK UCITS fund that is an MMF must comply instead with the UK MMFR’s specialised investment eligibility, spread, concentration and portfolio rules. The applicable investment portfolio rules will depend on the type of MMF and whether it is ‘short-term’ or ‘standard’.
A UK NURS is subject to less restrictive investment spread limits than a UK UCITS fund, so that it can invest, for example:
- up to 100 per cent of its assets in real property (land);
- up to 10 per cent of its assets in transferable securities issued by a single body;
- up to 10 per cent of its assets in gold;
- up to 20 per cent of its assets in unlisted transferable securities; and
- up to 35 per cent of its assets in other collective investment schemes (including non-UK non-UCITS funds whose investment and borrowing powers are equivalent to, or more restricted than, NURSs, and other non-UCITS funds, provided that the combined value of unlisted transferable securities and those other non-UCITS funds does not exceed 20 per cent of its assets).
In addition, a UK NURS authorised as a ‘fund of alternative investment funds’ can invest in a range of AIFs.
A UK NURS can borrow up to 10 per cent of its assets on a permanent basis and, if it tracks an index, can invest up to 20 per cent of its assets in transferable shares or debt securities issued by a single body (or, exceptionally, up to 35 per cent).
Closed-ended retail funds
Closed-ended retail funds listed on the LSE’s Main Market are not subject to restrictions on investment or borrowing, although, as a condition of listing, they must have a published investment policy covering asset allocation, risk diversification, gearing and maximum exposures. In practice, a fund will have to draw up its own set of investment restrictions and require shareholder approval to amend them.
A UK closed-ended retail fund listed on the LSE’s Main Market must satisfy certain investment conditions in order to qualify for favourable tax treatment. For example, the business of the company must consist of investing its funds in shares, land or other assets with the aim of spreading investment risk and giving members of the company the benefit of the results of the management of its funds.Tax treatment
What is the tax treatment of retail funds? Are exemptions available?
Open-ended retail funds
Subject to special rules applying to tax-elected funds, property authorised investment funds (PAIFs) and Funds invested in Non-Reporting Offshore Funds (FINROFs), AUTs and OEICs are treated as investments companies within the scope of corporation tax in the UK on profits, and may benefit from reliefs under tax treaties with other jurisdictions. They are generally exempt from UK tax on capital gains on the disposal of investments. They are taxable at a special rate of corporation tax (currently 20) per cent on net income, subject to certain exemptions, including for most dividends received. Deductions may be available, for amounts distributed by funds primarily invested in debt securities including MMFs (bond funds) as interest distributions, subject to certain restrictions.
UK-resident individual fund investors will be subject to income tax on dividend distributions made or accumulated if the fund adds value to accumulation units or applies the funds to reinvestment units, subject to a £2,000 annual dividend allowance. These dividend distributions are generally tax exempt for UK corporation taxpayers, such as companies, to the extent they are sourced from underlying dividend receipts. To the extent sourced from non-dividend income of the fund, UK corporation taxpaying investors are taxable on the distribution, but the distribution carries a tax credit that should offset the corporation tax. No withholding of tax on payment of the distributions is required.
UK-resident individual investors in bond funds will have their interest distributions generally treated as interest for income tax purposes, subject to an annual personal savings allowance under certain circumstances. UK corporation taxpayers generally need to treat interest distributions as loan relationship credits subject to corporation tax. No withholding of tax on payment of interest distributions is required.
UK-resident individual fund investors are generally subject to capital gains tax on gains realised that exceed their annual exempt amount on the disposal of units or shares in an AUT or an OEIC (excluding a FINROF). Payments of certain fund investment-related bonuses or trail commissions, for example from investment advisers, may be paid after deduction of UK tax (at 20 per cent). Non-UK resident individual fund investors are generally not directly subject to UK withholding tax (excluding investors in PAIFs receiving property income dividends), nor subject to UK capital gains tax, unless the fund (including a PAIF or FINROF) has a significant direct or indirect investment (broadly 75 per cent by gross asset value) in UK real estate.
With respect to income returns, UK resident individual ACS investors will be treated broadly as if they had invested directly in the underlying assets, and this is also the case with respect to capital gains if the ACS is structured as a partnership. If the ACS is structured as a co-ownership scheme, it is not treated as transparent for capital gains tax from the perspective of the investor, so capital gains derived by the ACS are in effect disregarded, and UK resident investors are taxable on any gains when they dispose of their interest in the ACS.
Closed-ended retail funds
UK investment trusts that satisfy relevant qualifying conditions (including the shares being traded on a regulated exchange, the business consisting of investing in shares, land and certain other assets to spread investment risk and most of its income being distributed annually) are exempt from tax on capital gains, but otherwise generally subject to UK corporation tax currently at 19 per cent. Most dividends received by an investment trust should generally be exempt from UK tax. Individual investors in a UK investment trust are generally taxed in the same way as individual shareholders in other UK companies. Investment trusts that receive interest income may elect to treat distributions of interest effectively as if they were payments of interest, and in this case the payment should be deductible for the investment trust, but taxable as interest income for the investors.Asset protection
Must the portfolio of assets of a retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?
Open-ended retail funds must appoint an independent entity to hold their assets. This must be a trustee, for an AUT, or a depositary, for an OEIC or ACS. A trustee must be independent from the manager and established in the UK; the TPR does allow for AUTs to continue for a limited time to have as their trustee an EEA firm participating in the TPR. A depositary must likewise be established in the UK; the TPR does allow for OEICs and ACSs to continue for a limited time to have as their depositary an EEA firm participating in the TPR. Trustees and depositaries must be authorised by the FCA, since their activities as such constitute regulated activities. They will be subject to the FCA’s rules on custody of assets in its Client Assets sourcebook (CASS), which are intended to ensure that custodians observe professional standards of care and diligence, including in the appointment of sub-custodians. Depositaries of UCITS funds, and trustees, in the case of AUTs, are subject to strict liability for the loss of assets held in custody, similar to AIF depositaries.
Most closed-ended retail funds marketed in the UK are AIFs. Pursuant to the Alternative Investment Fund Managers Directive (AIFMD) under the FCA’s Investment Funds sourcebook, a UK AIFM must appoint a depositary for an AIF established in the UK. Closed-ended retail funds not required under the AIFMD to appoint a depositary, because the fund or the AIFM is established outside the EEA and UK (or the fund is managed by a sub-threshold AIFM), will, in practice, appoint a custodian, where they hold assets, such as listed securities, requiring a custodian for trade settlement purposes.Governance
What are the main governance requirements for a retail fund formed in your jurisdiction?
The registration and organisational governance requirements for UK UCITS funds established as AUTs, OEICs or ACSs are largely the same. Each must be authorised by the FCA. Application is accordingly made to the FCA with:
- a draft prospectus;
- a draft instrument of incorporation, in the case of an OEIC;
- a trust deed, in the case of an AUT, or limited partnership agreement or co-ownership deed, in the case of an ACS;
- a model portfolio;
- an application form; and
- a solicitor’s certificate confirming that the constitutional documents comply with the applicable regulations.
The FCA has two months in which to consider a UCITS application.
Since 30 September 2019, FCA rules, forming part of the Asset Management Market Study, have required the manager of a UK UCITS fund or NURS to conduct an annual value assessment. This is required to discuss whether the payments out of the fund are justified ‘in the context of the overall value delivered’ to the fund’s investors. This has to be tested against a minimum of seven prescribed criteria. The results must then be set out in the fund’s annual report with an explanation of actual or proposed remedies if they show no justification. From the same date, FCA rules have required that at least a quarter, and no fewer than two, of the members of the governing body (eg, the board) of the manager of a UK UCITS or NURS are independent individuals (ie, in practice, independent of the fund manager). Tenure of such independent non-executive directors, often referred to as iNEDs, will be limited to 10 years, with reappointment allowed five years later. In part, these new FCA rules are designed to address FCA concerns about ‘closet trackers’ (ie, actively managed retail funds that in fact deliver a return not unlike that of passively managed funds that follow the performance of specified benchmarks, and that usually carry much lower fees).
Most UK closed-ended retail funds, as distinct from their managers, are outside FCA regulation, although their manager, or the fund itself if (unusually) self-managed, will be subject to FCA regulation. A listed or exchange-traded closed-ended retail fund is subject to the governance requirements of the rules of the exchange on which it is listed or traded. In particular, the FCA’s Listing Rules, applying to the LSE’s Main Market, require that the majority of the fund’s board of directors are independent of the investment manager.Reporting
What are the periodic reporting requirements for retail funds?
For UK open-ended retail funds, reports must be made available on request to investors and to the public generally, free of charge, annually and half-yearly. The reports must include certain prescribed information, including the accounts and, in the annual report, a report from the auditor and the trustee or depositary.
Closed-ended retail funds listed on the LSE’s Main Market, or traded on its Specialist Fund Segment or AIM, must also publish a report twice a year, with a long report annually.
UK open-ended and closed-ended retail funds must effectively report any interest distributions to the UK tax authority (HMRC) and a PAIF must also report property income dividends to HMRC (and withhold tax from property income dividends). Special reporting rules may apply to a fund that has a significant direct or indirect investment (broadly 75 per cent by gross asset value) in UK land (real estate).
UK open-ended and closed-ended retail funds are generally required to report prescribed account holder information to HMRC (for onward automatic exchange with the Internal Revenue Service (in relation to the US Foreign Account Tax Compliance Act) and taxation authorities in the EU and other Organisation for Economic Co-operation and Development (OECD) participating jurisdictions (in relation to the OECD common reporting standards).Issue, transfer and redemption of interests
Can the manager or operator place any restrictions on the issue, transfer and redemption of interests in retail funds?
UK open-ended retail funds must offer to issue and redeem (buy back) shares or units to or from investors on every dealing day. There must be at least two dealing days in each month, at least a fortnight apart. Retail funds can limit the number of shares or units in issue, provided this complies with the fund prospectus. Retail funds with a daily dealing day may defer redemptions to the next dealing day, if redemption requests for a particular day exceed 10 per cent of the fund’s value, or some other reasonable proportion stated in the prospectus, subject to certain conditions. Dealing in open-ended retail funds may also be temporarily suspended under exceptional circumstances and where justified in the interests of unitholders or shareholders. This must be immediately notified to the FCA. Many UK open-ended real estate funds suspended usual dealings as a result of difficulties in valuing fund assets because of the Covid-19 crisis. In addition, specialised rules apply to the suspension of redemptions by UK UCITS funds that are MMFs under the UK MMFR’s liquidity management procedures. A UK NURS can impose limited redemption arrangements (to limit redemptions for up to every six months) if it is a property fund, has an investment objective providing for a specified level of return (capital protection) or is a fund of alternative investment funds.
Shares in UK-listed or exchange-traded closed-ended retail funds are dealt in on-exchange. It will usually be a condition of listing or admission to trading, and of admission of the shares to a trade settlement system, that there are no restrictions on share transfer, although limited restrictions (such as on transfers to US persons) can be permitted. A UK closed-ended retail fund can repurchase its shares out of distributable profits, a method sometimes used to reduce a discount of the trading price to the fund’s net asset (net investment) value.