The FCA clarifies the treatment of investors in EU funds managed in the UK (sort of)

Darren Sinden

In the interim large swathes of the managed fund market in the UK are effectively unregulated and unprotected from a UK investor perspective

No more regulatory passporting

Another gap resulting from the UK’s exit from the EU has come to light forcing the FCA to clarify its position on the matter.

This time the issue concerns funds that distributed throughout the European Union but which are managed from the UK.

The specific issue was whether or not retail investors in those funds would continue to enjoy the protection of the Financial Services Compensation Scheme (FSCS) which offers eligible investors protection against fraud or failure to a value of up to £85,000.

As recently as December it appeared that retail clients who had invested in UK managed funds, sold and distributed in Europe, would be exempt from FSCS coverage and UK officials had remained tight-lipped about exactly what status investors in these funds would enjoy.

The FCA appears to have had a change of heart, or at least a partial rethink on the matter and has said that these investors will now be covered by the scheme in an update on its website.

However, no formal statement has been issued nor has any guidance or explanation been forthcoming as to how exactly this arrangement would work or on how these funds and their retail investors would be categorised now that the UK is no longer part of the EU.

As part of that process, the FCA has lost its automatic ability to intervene and apply pressure to other European regulators on behalf of UK investors. As a result of which an asymmetry has developed.

For example, UK authorities have recognised 9,000 EU based funds and will allow them to continue to operate and market to UK investors. However, the FCA will have no regulatory oversight of those businesses neither will these funds be covered by the FSCS. What’s more EU authorities have not recognised the equivalent UK funds or accorded them the same privileges to operate on the continent.

These mismatches may turn out to temporary, if a reciprocal agreement, between the UK and the EU over the treatment of financial services, can be agreed. Perhaps in broad terms initially with the finer detail to be inked in later.

In the interim, however, large swathes of the managed fund market in the UK are effectively unregulated and unprotected from a UK investor perspective and that can’t be a good thing and certainly isn’t something that should be allowed to continue unchecked in the longer term.

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