OFR – new draft rules extend the TMPR and correct inconsistencies

Update: On 25 November 2024, the Statutory Instrument referred to in this article was published in final form, coming into force the following day (26 November 2024)

As we reported at the time, in January 2024, HM Treasury announced its intention to find the states of the EU and EEA equivalent under the Overseas Funds Regime (OFR) as far as UCITS other than Money Market Funds (MMFs) are concerned. Legislation to enact this decision came into force on 16th July 2024.

HMT has now published a draft Statutory Instrument along with an Explanatory memorandum intended to support the operationalisation of this equivalence decision.

For our practical guide to the OFR, see here.

What does the Draft SI do?

(a) Extending the TMPR

First and foremost, the Draft SI extends the TMPR by a further year to 2026 in order to "allow sufficient time for funds in scope of the Government's equivalence decision to transition to the more permanent marketing arrangements provided by the OFR and avoid any cliff-edge risks".

Even though, logically speaking, this was an inevitable step (under the current timetabling, some funds in the OFR are not able to apply for recognition until after the TMPR was due to expire), it is still good to see the position formally confirmed.

The draft SI also makes a number of amendments to the existing legislation.

(b) Consequences of failing to apply for recognition during the landing slot

Inadequate cross-referencing in the original rules of the FCA's powers meant that, where a fund operator failed to apply for recognition under the OFR (or under s.272 of FSMA) during its landing slot, the fund's recognition would not necessarily come to an end, as had been intended. This has been corrected

(c) Sub-funds

New changes should allow sub-funds which are in scope of the Government's equivalence decision to transition smoothly to the OFR (or, alternatively, apply for recognition under section 272 of FSMA 2000).

The OFR as originally set out was not appropriately cross-referenced within the conditions for a new sub-fund to be added to the TMPR for an existing umbrella scheme.

The result of this was that - contrary to the policy intention - once the FCA made a direction for an umbrella scheme and its sub-funds to apply for recognition under the OFR, new sub-funds of that umbrella could continue to be added to the TMPR.

The previous policy (that umbrella schemes should all have the same conditions for new sub-funds to be added) has been altered. The new policy provides for different conditions depending on the composition of the umbrella schemes. This includes distinguishing between umbrella schemes that

• have a mixture of MMF and non-MMF sub-funds

• comprise only MMF sub-funds and

• comprise only non-MMF sub-funds.

(d) CCPs

The temporary recognition regime (TRR) established under the UK's Central Counterparties (CCP) Regulations following Brexit, will be altered.

Under current rules, an overseas CCP which had prior recognition by the EU (and so has market access to the UK) automatically loses its temporary recognised status if its EU recognition is withdrawn. The amendment to the TRR will ensure that this is no longer the case.

What happens next?

The Regulations set out in the Draft SI will come into force the day after they are formally made.