The impact of the Overseas Fund Regime explained

The Financial Conduct Authority's (FCA) Overseas Fund Regime (OFR) became effective from 31 July 2024. It provides a framework for individual non-UK investment funds that are ‘recognised' by the FCA, to be marketed to – and accessed by – UK retail customers. This initially covers UCITS funds issued in most EU and EEA member states.

Some of those funds already benefit from post-Brexit passporting arrangements under the Temporary Marketing Permissions Regime (TMPR), which is currently due to cease at the end of 2026. The FCA has engaged with those fund operators to explain the process and timings they must follow if they wish to apply for recognition under the OFR.

Funds are given a three-month window by the FCA to apply for recognition under the OFR – applications must be made at fund level, so even if a fund manager applies for recognition of certain funds, due to the reporting requirements to the FCA that apply per fund, they may not apply to have all of their funds recognised.

Equally, the FCA may not, and probably will not, approve all the applications it receives.

What does this mean?

There are some immediately apparent implications of a fund falling out the TMPS and not landing in the OFR, most notably that any overseas funds not in the OFR will cease to be ISA-eligible. 

It is always difficult to identify actions to take for clients when regulation creates this level of complexity and when there are so many factors, however, there are some immediate actions you could take:

• Identify any of your client holdings currently benefiting from the TMPR – your platform/s should be able to help you with this
• Look closely at any holdings in ISAs:  

o   Identify any funds currently in the TMPR and confirm their OFR status

o   ISA holdings can be transferred to a GIA, but bear in mind the tax treatment of the holdings and how they are removed from ISAs

o   If your clients' ISAs are flexible, flexibility only applies to cash withdrawals, so moving the affected holding/s in specie will mean that the tax-free status of that chunk of savings could be lost

• Any affected funds not in the OFR will be considered non-standard assets in a SIPP, which is not as significant as the ISA eligibility but may affect the accessibility of the fund/s
• Consider any holdings that currently sit in model portfolios:

o   Will further purchases into these funds be allowed?

o   Without access to the UK market, does the fund have a sufficient liquid market to operate normally?

This is a complex topic and one made more frustrating by the lack of certainty – I can see only two certainties in the current situation:

1)      There will be impacts on clients that require careful management

2)      Advisers will support clients through this process in a way that ensures good outcomes

Whilst ‘Brexit benefits' might not ever be the top topic for an email to read, it's important to keep an eye on your inbox over the next five months or so for any communications about your clients' investments and the impact of the OFR.

Mark Rendle is product director at AJ Bell