FCA confirms changes to UCITS concentration rule

On 31 January 2025, the FCA published Handbook Notice 126 (the Notice). This describes changes made to COLL 5.2 and COLL TP 1.1 by a new Handbook Instrument, FCA 2025/1 (the Instrument).

The Instrument, which came into force on 31 January 2025, follows on from the FCA's consultation paper CP24/11 and confirms that the limits on the ability of a UCITS scheme to hold units of other collective investment schemes ("second schemes") in COLL 5.2.29R will be changed.

The aim of the changes is

• to reinforce appropriate risk diversification in a UCITS fund of funds

• to clarify how the rule applies to umbrella/sub-fund structures and

• to disapply the rule in certain situations where the investing UCITS scheme and second scheme are managed by the same firm.

The Notice also sets out some guidance on the changes being made - this includes the FCA's view that amending the prospectus to reflect the changes to the FCA rules would not be expected to result in a significant change to a fund's prospectus and so will not require FCA approval.

What changes is the FCA making?

To maintain a prudent spread of risk and limit one scheme's influence over another, a UK UCITS scheme must abide by the concentration rule (COLL 5.2.29R), which limits the proportion of financial instruments issued by another entity that it can own.

COLL 5.2.30R(1)(c) had applied the concentration rule at the umbrella level, which meant that some fund-of-funds could not be run as efficiently as they would otherwise be.

The new rules:

• apply the UCITS concentration rule to umbrella UCITS schemes at the sub-fund level rather than the umbrella level and

• clarify at which level COLL 5.2.29R(3) applies to an umbrella Collective Investment Scheme (CIS) that is the target fund of such investments.

More specifically, the changes mean that the 25% maximum limit under the concentration rule will apply to each individual sub-fund in an umbrella. This will consequently allow managers greater investment flexibility where managing a range of UK UCITS schemes organised as sub-funds within an umbrella.

The changes also clarify that the reference in COLL 5.2.29R(3) to a CIS which is the target of investment by a UCITS scheme (a 'second scheme'), applies to each sub-fund of an umbrella and not to the umbrella as a whole.

This is intended to enable the rules to work more effectively for funds with an umbrella/sub-fund structure, which is a fund structure that the FCA wishes to facilitate "where appropriate risk controls are in place".

Guidance in the Notice

The Notice also clarifies a number of areas of potential uncertainty. These include:

• the reference in COLL 5.2.29R(3) to 'more than 25% of the units' relates to the value of scheme property, not the number of units in issue. The FCA believes that most AFMs already interpret the rule in this way, but has amended the relevant sub-paragraph "for the sake of clarity"

• the FCA does "not foresee that applying these changes would result in a significant change to a fund's prospectus and therefore they should not require FCA approval". Any updates to the prospectus should be emailed to ukcis@fca.org.uk

• the FCA envisages that, in most instances, the rule changes will have no material impact on how a fund is operated and managed - nevertheless, it "would expect firms to engage with fund investors as appropriate".