Authorised Investment Funds

Apart from ‘UCITS V’ and ‘European Long Term Investment Funds’ (see previous two articles) CP15/27 also manages to pack in (Part III) proposed miscellaneous changes to the Handbook with a view to keeping the rules and guidance for authorised investment  funds up to date.

Changes include:

Under COLL 6.12.3, authorised fund managers of UCITS schemes are required to notify the FCA with details of its derivative risk management process (DRMP).  The FCA has found that the information submitted is often incomplete or in a format that is not easy to access or compare. It is proposed to introduce a standard DRMP template, an example of which can be accessed via (new) COLL 6 Annex 2R. The report will need to be submitted annually by 30 November each year with information that is accurate as at 15 October in that year – ad hoc reporting will be required should there have been any material changes to the fund’s risk profile since that last submission.  To avoid duplication of data it is proposed that the FSA042 report (which only consists of three yes/no questions) will be abolished.

Authorised fund managers should be aware of two important  changes to SUP 16.6 (‘Compliance reports’) that are proposed.  The first will place an obligation on depositaries of authorised funds to submit monthly reports to the FCA on any breaches of COLL or FUND – currently depositary reporting (quarterly) is limited to negative boxes and pricing errors. The second important change is a requirement for such depositaries to submit quarterly reports on its oversight visits. Examples of each of these reporting templates can be found in (new) SUP 16 Annex 12AR.

The FCA assigns a PRN (product reference number) to identify each fund it authorises. To encourage the use of PRNs COLL 4.2 (‘Pre-sale notifications’) and COLL 8.3 (’Investor relations’) will be amended to require the PRN to be included in the prospectus of an authorised fund (and a PRN for each sub-fund in the case of an umbrella structure). As far as inclusion of the PRN in the KIID is concerned COLL 4.7 will use the wording ‘may include’.

Charity funds are invariably established as Common Investment Funds (CIFs) – or Common Deposit Funds if a deposit-taking scheme. A CIF is a collective investment scheme which is regulated by the Charity Commission and not the FCA. It is effectively an unregulated collective investment scheme (and an AIF) and for financial promotion purposes is regarded as a non-mainstream pooled investment  (see ‘enterprise and charitable funds’ in the table in COBS 4.12.4(5)). In conjunction with both the Treasury and the Charity Commission, a new COLL 14 will introduce the concept of a charity authorised investment fund (CAIF) which will be both authorised and regulated by the FCA so ensuring that they receive the same regulatory oversight and protections  as is the case for funds for retail investors. Existing charity funds will continue under the present rules, although, of course, their managers may choose to wind them up and replace them with CAIFs. Unlike current authorised funds, CAIFs will not have to distribute all income but instead will be permitted to ‘smooth’ such payments by holding back some income as a reserve to be paid out a later date.  Another unusual feature for an authorised fund will be the ability adopt a total return approach which will allow capital growth to be treated as income for the purpose of meeting a pre-determined target.

On the matter of financial promotions and the table in COBS 4.12.4(5) the FCA has decided to amend the exemption currently relating to the above mentioned ‘enterprise and charitable funds’ (category 3 in the table) so that it will only relate to ‘charitable funds’.  The ‘enterprise funds’ referred to were EuVECAs and EuSEFs; the FCA believes that they properly belong under ‘excluded communications’ (category 11).

The FCA has taken the opportunity to amend COLL 5.5 to advise firms that when calculating a fund’s borrowing level (maximum of 10%) they are not permitted to net off long and short positions in different currencies against each other.

The above does not represent all of the changes proposed and it is recommended that managers of authorised investment funds should familiarise themselves with Part III of CP15/27.

The consultation period ends 7 December 2015.