UK regulator the FCA has set out its quarterly consultation paper with amendments to its Handbook, and is looking for comments.
For this latest round of changes to the Handbook, the FCA is proposing these adjustments:
- changes to the Glossary of definitions, the Decision Procedure and Penalties manual (DEPP), Collective Investment Schemes sourcebook (COLL) and the Enforcement Guide (EG) to reflect amendments made to the individually recognised overseas collective investment;
- the schemes regime under section 272 of The Financial Services and Markets Act 2000 (FSMA), together with other minor changes to COLL to reflect the UK’s withdrawal from the EU;
- changes to reporting requirements in the Supervision manual;
- changes to the Perimeter Guidance manual (PERG), the Consumer Credit sourcebook (CONC) and the Mortgages and Home Finance: Conduct of Business sourcebook (MCOB) to align with recent changes to the regulatory perimeter in respect of credit agreements entered into with high net worth borrowers;
- changes to clarify the definition of a ‘significant a Senior Management Arrangements, Systems and Controls (SYSC) firm’.
Adapting a new rule in COLL
In order for fund managers to work more seamlessly with overseas collective investment schemes, the FCA is proposing adjustments to s.727, including adding a new rule in COLL 9.3, to make it possible to specify a proposed alteration to a scheme recognised that would fall within the scope of being a ‘material alteration’.
s.272 regime-related amendments
The FS Act 2021 introduced changes to the s.272 regime, including:
- a new power for the FCA to make rules specifying which kinds of proposed alteration to a scheme will count as ‘material’ and therefore should be notified to us in writing by the scheme’s operator in accordance with section 277;
- the addition of a power of censure, to enable the FCA to inform investors of any wrongdoing by operators of overseas funds recognised under section 272. Its addition ensures consistency with our power of censure against funds recognised under the OFR, under section 271R.
New rule in COLL 9.3
FCA propose a new rule in COLL 9.3 (Section 272 recognised schemes) to specify when a proposed alteration to a scheme recognised under the s.272 regime would fall within the scope of being a ‘material alteration’. The rule identifies some specific changes which we believe will always be material, including:
- a change to the legal form or name of the scheme, or the composition of its board or governing body;
- a change resulting in the restructuring of the scheme or a merger with another scheme;
- any alteration to the regulatory status of the scheme or the fund operator, or the trustee or depositary, in its home jurisdiction.
Fundamental criteria in COLL 4.3 on changes to UK authorised funds. Based on those criteria, FCA propose that the following would generally be considered a ‘material alteration’ to a s.272 scheme:
- a change which alters the purpose, nature or risk profile of the scheme;
- any change which may materially prejudice the investors of the scheme, or affect their ability to exercise their rights;
- the introduction of any new type of payment, or a material increase in any existing payment, that an investor in the scheme would have to pay out of scheme property.
Unless any other changes, these amendments are to take effect from 1 January 2023.
Source: Quarterly Consultation No 37, Consultation Paper CP22/17, September 2022
Defining SYSC firm
After recent adjustments in previous consultations in January 2022 and introducing the Investment Firm Prudential Regime (IFPR), following the deletion of the Prudential sourcebook for Investment Firms (IFPRU), a number of firms and trade bodies shared their concern on the changes regarding renaming and moving on the definition of a ‘significant IFPRU firm’ to the SYSC sourcebook of the Handbook.
Concerns were also raised regarding moving more firms from the Core regime into the Enhanced regime under the Senior Managers & Certification Regime (SM&CR), as it could be disproportionate and not commensurate with the risk that it could cause to the market and consumers.
In this updated version of the Handbook, the FCA is proposing the clearer definition on SYSC firms to “only firms that would have been both significant IFPRU firms and IFPRU investment firms under the pre-IFPR arrangements fall within the definition of a ’significant SYSC firm’ for the purpose of the Enhanced scope SM&CR regime”.
Around 700 additional firms are estimated to be brought into the scope of this new Enhanced regime.
No extra cost for firms
Non of these amendments are believed to result in cost increases of more than minimal significance. The proposed change can even lower the costs for the 700 firms that have been brought into scope of the Enhanced Regime.
In the s.727 amendments, the proposal on specifying ‘material’ alterations might also instead lead to a decrease in cost. Today, fund operators are required to notify FCA of all changes to a s.272 scheme, but the proposed rule changes would allow fund operators to make fewer notifications to the FCA while focusing only on ‘material’ scheme adjustments in a more efficient way.
Comments to the amendment need to be sent in by 26 September 2022 for Chapter 4 and 5; 3 October 2022 for Chapter 3; 10 October 2022 for Chapter 2.
Other amendments to COLL
As a result of the UK’s withdrawal from the EU, extensive changes have earlier been made to the Handbook to remove and replace references to the EU and its laws and institutions where these are no longer relevant to the UK. In relation to COLL, most of the changes were consulted on in CP18/28 and CP18/36, but some bits have been found unamended. They are as follows:
- COLL 4.3.10R addressed the situation of an authorised fund manager of a UK Undertakings for Collective Investment in Transferable Securities (UCITS) scheme resigning without prior warning and being replaced by a management company authorised in another member state of the European Economic Area (EEA). The first paragraph of the rule was revoked but the second paragraph, requiring the unitholders to be notified immediately of the change, remained in place. All UK UCITS schemes must now have a UK-established management company following EU withdrawal, so the whole rule is obsolete and we propose to delete it.
- COLL 6.6B.24G refers to a UCITS depositary having its ‘branch or registered office in another EEA State’. It is no longer possible for a UK UCITS scheme to have a depositary with a registered office outside the UK, so we propose to modify subparagraph (3)(b)(ii) accordingly.
- Paragraph (2) of COLL 6.9.10G was originally intended to explain how the UCITS Directive provisions on the permitted activities of UCITS management companies would operate within the EU single market. Since the UK is no longer part of the single market, the reference to connected activities being carried out on behalf of EEA UCITS management companies is no longer relevant and we propose to delete it.
Unless any other changes, these amendments are to take effect from 1 January 2023.
Source: Quarterly Consultation No 37, Consultation Paper CP22/17, September 2022