Fund management regulationRegulatory framework and authorities
How is fund management regulated in your jurisdiction? Which authorities have primary responsibility for regulating funds, fund managers and those marketing funds?
The Financial Conduct Authority (FCA) is generally responsible for regulating funds, fund managers and fund management-related activities (including fund marketing) in the UK. The UK regulatory framework for fund managers is largely set out in the Financial Services and Markets Act 2000 (FSMA), various statutory instruments made under FSMA and FCA rules.
Subject to a transition period that expired on 31 December 2020, the UK withdrew from the European Union (EU) and the European Communities Act 1972 (which incorporated subsisting EU law into domestic UK law) was repealed on 31 January 2020. At the end of the transition period, EU law that was operative in the UK at that time broadly became part of UK domestic law as a new category of retained EU law under the EU (Withdrawal) Act 2018.Fund administration
Is fund administration regulated in your jurisdiction?
Overall responsibility for the administration of a fund in the UK will normally amount to the regulated activity of ‘establishing, operating or winding up a collective investment scheme’. Providing custody services relating to investments is generally also a regulated activity. Subject to certain exemptions, these regulated activities require FCA authorisation.Authorisation
What is the authorisation or licensing process for funds? What are the key requirements that apply to managers and operators of investment funds in your jurisdiction?
UK collective investment in transferable securities (UCITS) funds established as authorised unit trusts (AUTs), open-ended investment companies (OEICs) or authorised contractual schemes (ACSs) must be FCA-authorised. An application form for authorisation must be submitted to the FCA, along with:
- a draft prospectus;
- constitutional documents (and a solicitor’s certificate confirming their compliance with applicable regulation); and
- a model portfolio.
The FCA has two months to consider a UCITS authorisation application.
Most UK closed-ended retail funds and non-retail open- and closed-ended funds do not require FCA authorisation. However, their UK manager would generally be subject to FCA authorisation or registration and self-managed funds that do not have a separate manager must generally be FCA-authorised.
Subject to certain exemptions and depending on the precise activities carried on, a manager or operator of an investment fund must generally be FCA-authorised to carry on in the UK the regulated activities of:
- managing an alternative investment fund (AIF) or a UCITS fund;
- discretionary portfolio management (eg, delegated portfolio management for a fund or managing a single investor’s assets in a segregated account);
- advising on investments;
- establishing, operating or winding up a collective investment scheme (where operating generally involves being responsible for the scheme’s property);
- arranging deals in investments (including intermediation activities relating to arranging an investor’s investment in an investment fund); and
- agreeing to carry on any of the above regulated activities.
The FCA authorisation process can take six months or more for managers or operators of investment funds and self-managed funds, and the FCA requires as part of the process detailed information on the applicant’s operation, management and ownership.Territorial scope of regulation
What is the territorial scope of fund regulation? Can an overseas manager perform management activities or provide services to clients in your jurisdiction without authorisation?
Unless an exemption applies, it is prohibited (and a criminal offence) under FSMA to carry on in the UK a regulated activity by way of business without authorisation, and any contract made in contravention of this prohibition is unenforceable against an investor. For the purpose of this prohibition, an investment manager would not be deemed to be carrying on in the UK the regulated activities of discretionary portfolio management or arranging deals in investments if the investment manager is based outside the UK when undertaking those activities. Further, an overseas investment manager could rely on an exclusion from requiring authorisation to carry on the regulated activity of entering into an agreement with a UK person to carry on for them discretionary portfolio management, if the overseas manager enters into the agreement other than from a permanent place of business maintained by it in the UK and any solicitation of the UK person complies with the UK financial promotion rules.Acquisitions
Is the acquisition of a controlling or non-controlling stake in a fund manager in your jurisdiction subject to prior authorisation by the regulator?
A person who decides to acquire control over an FCA-authorised fund manager must obtain the FCA’s approval before making the acquisition. For this purpose, ‘control’ broadly means holding at least 10 per cent of the shares or voting power in the manager or the manager’s parent undertaking (or 20 per cent if the manager’s FCA permission only covers managing AIFs) or holding shares or voting power as a result of which the holder is able to exercise significant influence over the management of the manager. Further, a person deciding to subsequently increase his or her holding in a fund manager (other than in a fund manager with FCA permission only to manage AIFs) to at least 20, 30 or 50 per cent of the shares or voting power in the manager must again obtain the FCA’s prior approval.Restrictions on compensation and profit sharing
Are there any regulatory restrictions on the structuring of the fund manager’s compensation and profit-sharing arrangements?
Certain employees of UK fund managers may be subject to one of more of the five sets of remuneration rules.
Broadly, an investment manager that is a firm other than a manager of an AIF (AIFM) or a UCITS is likely to be governed by the FCA’s BIPRU Remuneration Code, an AIFM is governed by the FCA’s AIFMD Remuneration Code and a UCITS manager is governed by the FCA’s UCITS Remuneration Code. More than one of these remuneration codes may in certain circumstances apply to a firm, although the requirements of each code are similar (but not identical). The rules must be applied in a way that is appropriate to the firm’s size and internal organisation, and the nature, scope and complexity of its activities.
FCA-authorised investment managers with FCA permission to hold client money or assets, to deal on own account or to underwrite or place financial instruments are subject to the FCA’s IFPRU Remuneration Code. For these firms, the ratio of variable to fixed remuneration must not exceed 1:1 (or 2:1 with shareholder approval) and all variable remuneration must be subject to clawback in case of subsequent poor performance.
Further, dual-regulated firms, such as banks that carry on asset management, are subject to the FCA’s Dual-regulated firms Remuneration Code.
Law stated dateCorrect on
Give the date on which the information above is accurate.
31 May 2020.