Contents:
- Politically Exposed Persons
- Criminal background checks for controllers
- A change to the application of UCITS concentration rules
- Overseas fund regime
- Appointed Representative Supervision
- Long-Term Asset Funds (LTAFs)
- Other News
Politically Exposed Persons (PEPs)
Under legislation adopted by Parliament, financial firms are required to do extra checks on so-called politically exposed persons (PEPs). This follows global standards set by the International Financial Action Task Force and implemented by more than 200 jurisdictions.
The FCA has published a review of the treatment of Politically Exposed Persons (PEPs) and told firms to make improvements. The review found that most firms did not subject PEPs to excessive or disproportionate checks. It also said that firms can do more to ensure parliamentarians, senior public servants, and their families are not treated unfairly.
The FCA has released GC24/4: Proposed amendments to FG17/6 – Guidance on the treatment of politically exposed persons (PEPs) , which details the proposals. Firms have until 18 October to respond.
Criminal background checks for controllers
Firms applying for authorisation or applying to the FCA to approve a change in control have to provide details of the firm’s new owners.
The FCA currently undertakes criminal background checks on a risk basis for new controllers. After guidance from the Prudential Regulation Authority (PRA), the FCA is now proposing in CP24-11 (CP24/11: Quarterly Consultation Paper No. 44 ) to require controllers and beneficial owners to obtain criminal background checks from the Disclosure and Barring Service (DBS) (or equivalent for persons outside of England and Wales).
This requirement will apply to those making an application for authorisation or registration with the FCA and for a notice of an intended acquisition or increase in control.
A change to the application of UCITS concentration rules
Undertakings for Collective Investment in Transferable Securities (UCITS) funds can invest in other funds. This makes them a common fund of fund structure. A UCITS fund can also be comprised of an umbrella with underlying sub-funds. Rules limit the maximum amount that one fund can invest in another fund to avoid undue influence. These are currently set at 25% at the umbrella level.
The FCA has received feedback from authorised fund managers (AFMs) that applying this rule at the umbrella level limits how a fund of funds can operate. With the rules as they are, a UK UCITS scheme holding a large portion of a certain sub-fund is then limited as to how much it can hold other sub-funds underneath the same umbrella.
As such, the FCA proposes changing the 25% rule to apply at the sub-fund rather than the umbrella level. This is intended to improve the flexibility of investments within these structures.
For detailed proposals, see CP24-11 (CP24/11: Quarterly Consultation Paper No. 44).
Overseas fund regime
The Overseas Fund Regime is a framework that allows non-UK funds to be marketed to UK Retail Investors. It was legislated in the Financial Services Act 2021 to create a streamlined process for selling overseas funds to UK investors.
The FCA has released a policy statement (PS24/7: Implementing the Overseas Funds Regime: Feedback to CP23/26 and final rules), which implements the regime following a consultation paper in 2023.
Disclosure will be required if the Financial Ombudsman Scheme or the Financial Services Compensation Scheme covers the fund. The guidance also explains how funds can apply for the schemes.
Appointed Representative Supervision
The FCA released enhanced supervision rules at the end of 2022, which applied to firms that provided appointed representative services. At the time, the FCA felt that some firms were not adequately supervising their ARs, which created a risk.
Highlights of the findings include:
- One in five firms had not performed the required checks on their Appointed Representatives, such as annual reviews etc.
- Half of the firms that performed annual reviews were good quality, but the FCA found the other half had either not covered the required points or treated it as a ‘tick box exercise’.
- Most had not changed their onboarding or termination procedures since the new rules came into effect.
The FCA has provided a summary of the good and poor practices they found here: Principal firms embedding the new rules for effective appointed representative oversight: Good practice and areas for improvement | FCA
Long-Term Asset Funds (LTAFs)
Not to be confused with LTIFs discussed below, these were introduced to allow UK investors to invest in an open-ended investment vehicle to access long-term illiquid assets. Nine funds have been launched since the rules were introduced.
Feedback from Authorised Fund Managers (AFMs) was that the rules restricting the LTAF’s ability to invest in other collective investment schemes were hampering an expansion of these funds and the ability of other NURS schemes to invest in LTAFs.
This was because LTAFs commonly invested in SPV entities, which fell within the definition of collective investment schemes. The FCA has proposed in CP24/18 (CP24/18: Quarterly Consultation No 45) to amend these restrictions and adopt a principle-based approach. Once it becomes finalised, this may be of interest to AFMs as it could expand the type of investment NURS schemes are able to make.
Other news
Long-term Investment Funds (LTIFs) Regulations were introduced in the UK to assimilate European Law on the European version (European Long-Term Investment Funds). However, none were ever established in the UK, so the FCA has removed the regulations. These entities will no longer be available to apply for.
Now that the FCA is supervising firms that offer cryptoassets to retail customers under financial promotion rules, it has conducted a review of firms to assess compliance with the new rules. The FCA has released the following: Assessing firms’ compliance with ‘back end’ cryptoasset financial promotions rules, which explains its findings and good vs poor practices seen by firms.
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