FCA introduces charity authorised investment funds

The FCA has issued Handbook Notice No. 37, introducing made rules to permit the establishment of a new vehicle for investment by charities - the charity authorised investment fund (CAIF) as initially proposed in the FCA’s consultation paper CP15/27, issued in September 2015.

Prior to the introduction of the CAIF, investment funds established for charitable purposes pursuant to section 96 of the Charities Act 2011 (usually structured as “common investment funds” or “CIFs”) were regulated by the Charity Commission and fell outside of the Financial Services and Markets Act 2000. A CAIF is an authorised investment fund supervised and regulated by the FCA with the same regulatory oversight and protections as other authorised investment funds. As well as being supervised and regulated by the FCA, a CAIF is also eligible for registration as a charity in its own right under Part 4 of the Charities Act 2011 and regulated as such by the Charities Commission.

The Investment Association, The Charity Investors Group and The Charity Law Association have separately published a “basic guide" to CAIFs to coincide with the publication by the FCA of its made rules.

CIF to CAIF “conversion”

Existing CIFs will continue under the present rules, although their managers or sponsoring charities may choose to wind them up and replace them with CAIFs in due course. Although a request was made in response to the consultation paper, no mechanism has been introduced to “convert” an existing charity fund into a CAIF or to streamline the transition of assets from a CIF to a CAIF. It seems likely therefore that, where a promoter of a CIF wishes to bring the assets of an existing charitable fund into the CAIF structure, the CAIF would need to enter into a form of arrangement pursuant to which the CAIF would receive property by way of subscription in kind. The precise form of these arrangements will depend to an extent on the terms of the Scheme governing the CIF in question.

During the consultation, there was some question over whether existing CIFs that choose to continue under the existing regime will be disadvantaged in any way by the introduction of CAIFs. The FCA has stated that the continuation of the existing regime for CIFs is not a matter for the FCA to decide or influence. The FCA notes that "as far as it is aware, since a CIF is a collective investment scheme in the form of a trust, there is nothing within the FCA’s field of responsibility that prevents it from applying for authorisation as a CAIF". This raises the prospect that a CIF could seek to be treated as a unit trust scheme for the purposes of FSMA and the possibility that the manager and trustee might apply for an order declaring the CIF to be an authorised unit trust presumably pursuant to s.242 FSMA. There are technical hurdles to be overcome to achieve this result and each case will need to be considered on its merits based on the constitutional documents of the CIF in question.

Tax status

A CAIF will benefit from tax-exempt status as a registered charity, provided it has been recognised as a charity by HM Revenue & Customs. In addition, the management of a CAIF (covering both portfolio and administrative management) should fall within the VAT exemption for management of special investment funds.

Legal Structure

The “basic guide” published by the Investment Association and other bodies referred to above makes the point that CAIFs are, perhaps, most likely to take the form of AUTs as this “most closely reflects existing charity structures” but notes that it will be possible for CAIFs instead to be formed using other structures, such as authorised OEICs (ICVCs) or authorised contractual schemes (ACSs) if the Charity Commission can be satisfied that these structures can be charities.

It is suggested that there is no legal impediment to an OEIC or an ACS being registered as a charity by the Charity Commissioners but there are clearly discussions to be had with the Charity Commissioners on this point.

The Investment Association has also published a model trust deed for a CAIF and a jointly issued guide to CAIFs for AFMs, which includes a guide to completing the charity registration process.

FCA rules

To regulate CAIFs, the FCA has introduced a new section in the Collective Investment Schemes chapter of the FCA Handbook; COLL 14 which came into effect on 01 October 2016 and sets out specific rules and guidance applicable to authorised fund managers (AFMs) and depositaries of CAIFs. As a CAIF may be a UCITS, a NURS or a QIS and may be structured as an AUT, ICVC or an ACS, those sections of the FCA Handbook relevant to such types and structures of authorised investment funds will also apply to a CAIF.

The key sections of COLL 14 are summarised as follows:

Registration as a charity

The AFM and the depositary of a CAIF would have to notify the FCA, without undue delay, of both the registration of the CAIF with the Charity Commission and when that registration is cancelled.

Advisory committees

CAIFs may be established with an advisory committee (akin to a board of charity trustees, as some existing charities have) which performs a consultative role only, with no right to take decisions on matters which are the responsibility of the AFM and/or the depositary. The committee could, though, be given certain rights to receive information and to be explicitly consulted on issues affecting investors’ rights and the continued charitable status of the CAIF.

Income payments

Some existing CIFs can allocate and distribute income and capital with more flexibility than authorised investment funds under the current FCA rules. In particular, CIFs can:

• smooth income payments by holding back some of the income available for distribution, then paying it out later, thereby creating a stable income stream, and
• adopt a total return approach, which allows capital growth to be treated as income for the purpose of meeting a pre-determined target.

COLL 14 allows CAIFs to have these features, so the AFM and depositary of a CAIF will be able to smooth income or to adopt a total return approach to investment provided the CAIF’s constitution and prospectus allow.

The CAIF rules are a welcome development, albeit long in the making, and it can be expected that the new structure will be of interest to managers and charities alike providing a more modern form of regulation for a charitable investment vehicle.

Please contact Neil Simmonds or your other usual contact at Simmons & Simmons for further details.