Fund Governance Insights

Review of the UK funds regime

3 minute read time

On 26 January 2021 HM Treasury published its call for input on the future of the UK funds regime. The government has stated that it aims to make the UK a more attractive place for setting up, administering and managing funds.

It covers a series of key questions around how the funds regime can be enhanced, to support UK economic attractiveness and the levelling up of the economy across the UK, as well as questions on the taxation of Real Estate Investment Trusts (REITs) and Property Authorised Investment Funds (PAIFs), and the taxation implications of the Long Term Asset Fund.

Gaps and issues

The call for input asks a number of questions around potential gaps in the current state of the funds market in the UK, and on how it can be adapted to better enable investors to meet their goals. One area of focus is around speed to market and the extent to which the current system facilitates an efficient process for the establishment of new funds. Linked to this is the authorisation process: the paper seeks an international perspective, asking respondents how the FCA’s processes compare to those found in other jurisdictions. On the matter of operational efficiency, the Treasury also notes the ongoing work on the Direct2Fund model.

Aside from the operational and procedural structures underpinning the funds regime, the Treasury also probes the attractiveness and effectiveness of a number of different fund types, including Qualified Investor Schemes (QISs), Exchange Traded Funds (ETFs), Investment Trusts, and Alternative Investment Funds (AIFs). The paper asks open questions around what could be done to make AIFs and QISs more attractive; for example, it raises the option of removing requirements for distribution of income and allowing QISs to distribute capital and carry over income.

The call for input asks respondents why they think there are so few ETFs domiciled in the UK, and what could be done to address this. Acknowledging that re-domiciling ETFs could prove expensive and technically challenging, the government asks what could be done to encourage new ETFs to be set up in the UK.

The government is also interested in why asset managers choose to set up funds as either closed-ended or open-ended funds, and whether they should be required to justify why they have chosen to set up a fund as one or the other. Views are also being sought as to whether there are barriers to investing in long-term assets, and whether the investment trust structure is a more appropriate fund type for these than, for example, Non-UCITS Retail

Schemes (NURSs), which have been the focus on attention from the FCA in CP20/15 (liquidity mismatch in open-ended investment funds).

Levelling up

A key area of focus in the call for input is how the jobs and growth of the asset management and fund administration industries can be spread across the country. The HM Treasury paper noted that 20% of asset management jobs in the UK are in Scotland.

Respondents are asked for thoughts on how specific UK locations could better foster growth in funds-related employment, and how the government can support in ensuring that the right expertise exists in the workforce. This aligns with the government’s “levelling up” agenda, in seeking to spread the benefits of the industry across the UK and in ensuring that the workforce is well-placed to facilitate this growth.

Next steps

This call for input represents an important step as the government looks to the future of the funds industry, now that the UK has left the European Union. It is wide-ranging in its scope – covering (among many other things) taxation, operational effectiveness, fund structures, efficiency of bringing funds to market, and the distribution of jobs across the UK. However, in so doing, it effectively ties together a number of 2021’s key regulatory themes. The deadline for responses is 20 April 2021.

NWTDS view

The call for input is significant in tying together a number of key strands in government policy – from “levelling up” to UK attractiveness and international competitiveness. Its questions encourage deep thinking as to why some fund types are more popular and successful than others, and this represents an opportunity for the regime to “build back better”.

We will engage with clients’ and industry bodies such as the IA and DATA on the themes and issues that the government has raised and will build this into our response to this call for input.

By Peter Flynn

Associate, Funds Regulation & Governance