Agefi Luxembourg - novembre 2024

AGEFI Luxembourg 30 Novembre 2024 Fonds d’investissement ByGuillaumeSCAFFE,Partner&DorianeHARDY, Manager at Deloitte Luxembourg A fter years of uncertainty for UCITSnotmarketed in theUni- tedKingdom(UK) beforeBrexit, the investmentmanagement industry could finallybreathe againon 30 Septem- ber 2024, when theUK’sOverseas FundsRegime (OFR) became fully operational. However, inpractice, does theOFR really offer streamlined market entry to target retail investors in theUK? Deloitte Tax & Consulting Luxem- bourg collaborated with the UK’s Fi- nancial Conduct Authority (FCA) to test the newOFRapplicationprocessbeforeitslaunch.Sub- sequently,DeloittesubmittedapplicationsforUCITS and obtained the first-ever authorization to market undertheOFR.ThisarticlediscussesDeloitte’sobser- vations andmarket practice. Anewmarket access route TheOFRallows foreign retail investment funds tobe marketed in the UK similarly toUK-domiciled ones, basedonequivalentinvestorprotectionandadequate cooperationbetweentheFCAandthefunddomicile’s national competent authority. Funds fulfilling these criteriacanapplyforFCA“recognition”,withUCITS being granted equivalence so far, apart fromMoney Market Funds (MMFs). Therefore, the OFR comes as a huge relief for UCITS ineligible for the Temporary Marketing Permissions Regime(TMPR),atemporarysolutionforfundsmar- keted in the UK before the Brexit transition ended. Post-Brexit, Deloitte observed ineligible UCITS turn- ingtotheNationalPrivatePlacementRegime(NPPR) as a workaround. However, this alternative restricts marketingtoprofessionalinvestorsonly,representing amajor disadvantage for theUKmarket. In addition, section 272 of the Financial Services and MarketsAct 2000—the only alternative to target re- tail investors outside the TMPR—was not really an option due to its extremely cumbersome and costly requirements. As the third-highest European market regarding UCITSnetassets,theUKremainscriticalforcross-bor- derUCITSmarketing.Adoptinganadequateregula- toryframeworktotargetretailinvestorswasessential to maintain market attractiveness. While UCITS are thefirstfundstobeOFReligible,theregimecouldex- pand tonon-European funds in the future. TheOFR is suitable for UCITS, but with restrictions The question for investment fundmanagers (IFMs) is, does the OFR’s flexibility signal a shift toward a more competitive and diversified investment land- scape in the UK? One challenge is that not allUCITSare eligible for the OFR. In December 2023, the previous UK Govern- ment published draft legislation for a regime to ap- proveoverseasMMFs,providedtheyalsoregisterfor marketing with the FCA. However, this proposed MMF Regime is not yet in force. Currently, while MMFs canstayunder theTMPRuntil it ends in2026, withpossibleextensionstoensureasmoothtransition, MMFs are still excluded fromtheOFR. Acomplex transition Whilemuchawaited,theOFRcomesataprice—both figuratively and literally. The transition from TMPR toOFR is not automatic and requires a formal appli- cation.LandingslotsforTMPRUCITSopenedinOc- tober2024andareallocatedalphabeticallybyIFMfor umbrella structures, ending on 30 September 2026. Compared to the EuropeanUnion (EU)marketing passport regime, the OFR application process is more labor-intensive and costly, with application fees matching those of UK-domiciled funds, as well as introducing many new rules. So, while the OFR promises new opportunities, it remains to be seen how IFMs will navigate the additional com- plexities and costs. Towardmore regulatory constraints UndertheOFR,therequirementtohaveaUK-domi- ciledfacilitiesagenttoprovidefundinformationtoin- vestorshasbeenrepealedundercertainconditions,as it canbe done remotely. However,OFRfunds are subject toadditional disclo- sure requirements for their marketing communica- tions. Unless an exemptionapplies, the obligation for aUK-licensed entity to disseminate or approvemar- keting communications has been extended to OFR funds. In comparison, TMPR UCITS are allowed to disseminate marketing communications independ- ently. This raises the question of whether, in practice, removing the local presence requirement for provid- ing facilities to investors has not just shifted this re- quirement to another obligation, as a UK-licensed entitywill be required in any case. In addition, many IFMs are con- cerned whether the UK’s Sustain- ability Disclosure Requirements (SDR) and labelling regime will apply toOFR-marketed funds. Initially, the UK Treasury plannedtoconsultonextending the SDR to OFR funds in the third quarter of 2024, but the consultation has been post- poned until further no- tice. If the UK Government decides to proceed after this consultation, it would need to legislate, and the FCAwould consult on the implementation rules. Therefore, it will take time for the sustainabil- ityrequirementsofforeignUCITSmarketedintheUK to become clear. The SDR’s extension could cause IFMs to reconsider marketing sustainable funds in the UK. IFMs would need to comply with both the EU’s Sustainable Fi- nance Disclosure Regime (SFDR) and the SDR, in- creasing costswhere the regimes diverge. On the one hand, IFMs are no strangers to comply- ing with diverging requirements. They already need toproduce key informationdocuments under the EU’s Regulation on Packaged Retail and Insur- ance-based Investment Products (PRIIPs KIDs), as well as theUKmarket’s UCITSKey Investor Infor- mation Documents (UCITS KIIDs). On the other, the UCITS KIID is already familiar to IFMs. The UKwill be replacing the PRIIPs concept (which includes UCITS) with Consumer Compos- ite Investments, alongside its ownRetail Disclosure Regime. Foreign funds will need to comply with this regime by 2027, which will be costly for IFMs to implement. Operational challenges Increasing IFMs’ administrative burdens is the OFR’s extensive data requirements, both at the time of the recognition application and on an ongoing basis. The FCA’s Connect platform, which must be used to submit theOFR application, requires exten- sive manual data entry. Currently, it is not possible to bulk upload or automatically synchronize with external data sources, making the process resource- intensive and error-prone. Nolessthan60datapointsarerequiredjusttomarket oneshareclassundertheOFR,resultinginthousands of entries for an umbrella fund. Furthermore, data mustbecompiledfromvarioussources,includingthe prospectus, the KIIDs, internal databases and third parties. IFMs must submit a portfolio statement for eachsub-fundasasupportingdocument,distinguish- ing the OFR from the previous UCITS marketing passport notification. This requires IFMs to allocate more resources to regulatory compliance, potentially diverting focus fromstrategic activities. The regime’s complexity extends beyond data sub- mission.Anyexistingdatamodification requires the FCA to be informed accordingly, which involves a thorough change screening, identification and vali- dation process. Therefore, IFMs will have to define anewoperatingmodel tomanage,monitor andup- load this information. Another compliance hurdle is the FCA’s stance on remuneration definitions and cost reporting. De- tailed reporting on fund remuneration, costs and charges is now required, and the terminology— such as the sponsor’s remuneration and annual management charge—often diverges fromEU and other international standards. IMFs accustomed to EUregulationswill need to fa- miliarise themselves with the OFR’s requirements and incorporate this wider impact into their busi- ness strategy toavoidnon-compliancewithUKreg- ulatory standards. Alongside the previously requiredUK-specific supplement to theprospectus, theOFR introduces enhanceddisclosures regarding consumer redress. OFR funds must inform in- vestors about the lack of access to the Financial Ser- vices Compensation Scheme and the Financial Ombudsman Service, outlining the protection lim- itations compared to UK-domiciled funds. Extended timeline tomarket: Yes and no OFR approval can take up to two months, signifi- cantly longer than the tenbusiness days for the pre- vious UCITSmarketing notification. Although Deloitte was approved within five busi- ness days for the first-ever OFR recognition, faster than the UCITS marketing passport in some cases, approval timelines may vary depending on the number of sub-funds to be marketed and the file’s complexity. Opportunity or obstacle? The OFR is a promising step forward post-Brexit, balancing investorprotectionwithstreamlinedmar- ket access.While operationallydemanding, it offers significant improvements over the previous section 272 of the Financial Services andMarketsAct 2000, particularly regarding its online applicationprocess and the equivalence regime. Even in its early stages, theOFRshows potential for simplifying access to the UKmarket, reinforcing its position as a key destination for EU IFMs. Deloitte observes agrowing interest in this newregime,with many IFMsplanning towithdrawtheirUCITS from the NPPR and transition them to the OFR. This trend highlights the industry’s willingness to navi- gate the complexities and associated costs of main- taining their UK market presence. Obviously, the game is worth the candle. As the OFR evolves, Deloitte anticipates that most UCITS, whether under the TMPR or previously il- legible, will seek recognition under the OFR. With its deep expertise and proactive approach, Deloitte is ready to seamlesslyguide IFMs through thisOFR transition and limit any impacts. Raising money in the UK with OFR: Relief or hurdle? M opso SARL, a leading RegTech company, in collaborationwith the Luxembourg Institute of Science andTechnology (LIST), has been awarded a significant grant by the Ministry of the Economy and LuxembourgNational Research Fund (FNR) under the Joint Call HPC (HighPerformanceCompu- ting) program. This grant will fund their innovative pro- ject,i.e.,PAMLA,aimedatrevolutionizing anti-money laundering (AML) efforts in the financial sector. PAMLA (Performant Anti Money Laundering Analytics) will leverage Mopso’s expertise in semantic web technologies and LIST’s advanced research capabilities to develop cutting- edge solutions for detecting suspicious transactionsandhigh-riskcustomers.The projectwillutilizehigh-performancecom- puting to process and analyze vast amountsof data, enhancing theefficiency and accuracy ofAMLprocesses. Mopso, founded in 2021 and operating in Luxembourg since the end of 2022, brings to the table its innovativeBrainso- lution,whichhas alreadymadewaves in the Italian financial market. The company’s CEO, Andrea Danielli, brings 14years of experience in theAML sector,whileCTOEnricoFagnoni contri- butes over two decades of expertise in large-scale softwareprojects and seman- tic web technologies. LIST, as the public partner, will provide its world-class re- search facilities and expertise, enriched by recent projects into network analysis, ensuring that the project remains at the forefront of technological innovation. FintanMcGee, leadResearch&Techno- logy scientist, stated: “This grant is a tes- tament to the potential of our cutting-edge research and technology and the strength of our partnershipwith MOPSO. Leveraging state-of-the-art vi- sual analytics tools driven by the latest Machine Learning approaches, and ex- ploiting High Performance Computing infrastructure and techniques, PAMLA will enable new techniques to be ap- plied to quantifyAML risk, that would otherwise by infeasible due to the lack of processing power”. Andrea Danielli, CEO of Mopso, said: “With PAMLA, we aim to set new stan- dards in AML compliance, making the financial systemsafer andmore effective infightingorganizedcrime.Our solution will reduce the time needed in transac- tion monitoring analysis, creating less false positives”. Theproject is expected toyield commer- ciallyviableproducts by early2027,with potential applications across the Euro- peanfinancial sector.Mopsoplans touse its position within Luxembourg’s thri- ving FinTech ecosystem to expand its reach into France, Belgium, The Nether- lands, andGermany. For LIST, this grant confirms its engage- ment in the financial sector andwill pro- duce new, direct knowledge in network analytics and advanced machine lear- ning techniques. For more information about Mopso, visit https://www.mopso.eu/ FormoreinformationabouttheLuxembourgInstituteof ScienceandTechnology,pleasevisit :https://www.list.lu/ Anti-Money Laundering: Mopso and LIST to develop a joint solution AndreaD ANIELLI , Founder &CEOand Leonardo L ONGHI , Software Engineer atMopso