Legal briefing | |

Funds Annual Briefing 2021 - Spotlight: on your radar

Funds Annual Briefing 2021 - Spotlight: on your radar
UK's proposed new Overseas Funds Regime

WHAT IS THIS? New alternative route to recognition for non-UK funds wishing to market to UK retail investors.

WHO DOES THIS APPLY TO? A wide range of non-UK retail funds, including EEA UCITS.

WHEN DOES THIS APPLY? Not known yet.

In October 2020, the Financial Services Bill (the "FS Bill") was introduced to Parliament to ensure that the UK’s regulatory framework continues to function effectively for the UK after leaving the EU. Included in the FS Bill is the introduction of a new Overseas Funds Regime ("OFR") to allow overseas domiciled retail funds (and money market funds) to be marketed to investors in the UK. This follows the HM Treasury consultation in March 2020 in which the government sought views on how overseas funds could be recognised in the UK following the end of the Brexit implementation period (and in respect of which HM Treasury published a summary of consultation responses).

Overseas funds must apply to be individually recognised by the FCA under s.272 of FSMA before they can be promoted to retail investors. Before 31 December 2020 this would occur automatically for EEA UCITS funds making use of a passport. Now, an EEA UCITS fund is in the same position as a non-EEA fund and (subject to the temporary transitional arrangements referred to below) may only be marketed to UK retail investors if it has been individually recognised under s.272.

Given that a s.272 application is on an individual fund's basis and requires a time-consuming assessment by the FCA, the OFR will be introduced to provide an alternative and more streamlined route to FCA recognition based on equivalence. In outline, the OFR will give HM Treasury the power to determine that certain overseas jurisdictions provide protection to investors equivalent to that which they would receive in a comparable UK collective investment scheme and to approve certain types of collective investment scheme from those jurisdictions. Certain other criteria apply, for instance that there is a cooperation arrangement in place between the FCA and the supervisor of the non-UK fund. Once this equivalence has been granted by HM Treasury, an overseas retail funds will then be able to apply to the FCA for recognition. Once granted, the fund would then be able to market in the UK as a recognised fund.

Pending the introduction of the Overseas Funds Regime, the process of individual recognition under s.272 FSMA remains the only route by which a non-UK fund may obtain recognition enabling it to market to UK retail investors. This is subject to the temporary recognition regime ("TRR") which provides that an EEA UCITS which notified the FCA by 30 December 2020 will be deemed to be recognised for the purposes of FSMA for a temporary recognition period which is currently set at three years. (The TRR does not cover new, stand-alone EEA UCITS established after 30 December 2020, although it will cover new sub-funds of an umbrella UCITS which is authorised under the EU UCITS Directive by its EEA home state regulator provided that at least one other sub-fund of the umbrella UCITS did notify the FCA before 30 December 2020 and therefore entered into the TRR.)   

The provisions of the FS Bill governing the Overseas Funds Regime also include a proposed amendment to the TRR extending the life of temporary recognition from three to five years. to allow for the establishment of the OFR and the completion of equivalence assessments by HM Treasury The FCA will be given power to create "landing slots" for funds that are leaving the TRR and applying for permanent recognition under the OFR. The two-month time limit for the FCA to consider applications under the OFR will also be disapplied for funds leaving the TRR.

The government's final policy is reflected in the FS Bill, which completed its committee stage in the House of Commons in December 2020. A revised version of the FS Bill was published, as amended in the committee stage. As the FS Bill proceeds through the legislative process, it is possible that some of the details relating to the measures outlined above will change before the Bill is finalised.

Welcome changes to UK proxy voting guidelines for 2021

WHAT IS THIS? A policy change (among other changes) by proxy advisory firm ISS to recommend support for share issue requests when investment companies provide an explicit commitment that shares will only be issued at or above net asset value.

WHO DOES THIS APPLY TO? All issuers but the changes are of particular interest to Investment companies and their sponsors.

WHEN DOES THIS APPLY? To shareholder meetings taking place on or after 1 February 2021.

The Institutional Shareholder Services ("ISS") has published updates to its UK proxy voting guidelines for 2021. Of particular interest to investment companies, the amendments include the following beneficial policy changes:


ISS states that a more lenient view may apply to overboarding for directors serving on boards of less complex companies and explicitly gives the example of externally managed investment companies. 

ISS' rationale for this is that, whilst the current policy emphasises the strict view that the ISS will take for those who serve on the boards of complex companies, in practice, ISS has been taking a more pragmatic approach view, recognising that mandates held at investment companies may require a lesser time commitment than those at an operating company.

Investment companies

ISS recommends generally voting for a resolution to authorise the issue of equity if there is a firm commitment (in the form of an explicit confirmation given to the ISS) from the board that shares would only be issued at a price at or above net asset value.

ISS has also aligned its policy with the position set out in the Pre-Emption Group guidelines such that current 10 % limit for disapplying pre-emption rights when shares are to be issued at a premium has been removed (the 5% limit for general purposes remains).

Also worth noting is, that in relation to Board gender diversity, whilst ISS will generally recommend against the nomination committee chair (or other directors on a case-by-case basis) of (i) FTSE 350 companies where the board does not comprise at least 33% women; and (ii) AIM companies with a market capitalisation over £500 million, investment trusts are explicitly excluded from this new policy.

In terms of timing, the ISS intends to apply the new guidelines to shareholder meetings taking place on or after 1 February 2021. A full mark-up of the ISS policies showing the changes is available here.

LIBOR discontinuation and the transition to a replacement rate

WHAT IS THIS? The discontinuation of the use of LIBOR.

WHO DOES THIS APPLY TO? Any fund and/or fund manager which currently relies on LIBOR in any way.

WHEN DOES THIS APPLY? Now – funds to take immediate action to develop and implement transition plans ahead of LIBOR cessation (expected by the end of 2021)

The London Interbank Offered Rate ("LIBOR") is expected to be discontinued by the end of 2021 and there has been increased pressure from the regulators (including the Financial Conduct Authority (the "FCA")) to ensure that market participants cease to use this benchmark well in advance of the "big bang" date.

The FCA has sent several "Dear CEO" letters relating to LIBOR cessation. Most of these letters were addressed  to sell-side financial institutions but the FCA also sent a "Dear CEO" letter to asset managers in February 2020 (letter available here). The "Dear CEO" letters and the FCA's other statements on LIBOR transition stress the importance of engaging with LIBOR discontinuation as early as possible. The FCA expects regulated market participants to be taking immediate action to develop and execute a LIBOR transition plan.

"Risk free" reference rates (often referred to as "RFRs") are being developed to replace LIBOR in relation to specific asset classes and products. The Bank of England's Working Group on Sterling Risk-Free Reference Rates (the "RFR Working Group") has recommended Sterling Overnight Index Average ("SONIA") as its preferred replacement rate for LIBOR in sterling markets – and it has been working together with key industry bodies, including the Loan Market Association (the "LMA") and International Swaps and Derivatives Association, Inc. ("ISDA"), to establish the parameters around any adjustments to RFRs that should be applied by market participants when transitioning their existing contracts away from LIBOR to the replacement RFRs.

The RFR Working Group has set certain target milestones to manage the transition away from sterling LIBOR which includes the end of Q1 2021 as the date by which lenders should cease to issue sterling LIBOR referencing loans maturing after 2021 (which is relevant not only to fund finance facilities but also to any acquisition facilities entered into by funds' investee companies).

What is likely to be impacted?

Most funds are likely to be affected by LIBOR discontinuation. A fund might use LIBOR as a benchmark for performance targets, and its administrators, managers and custodians as an input to their valuations and risk assessments. Also, LIBOR might feature in late payment clauses (such as for capital contributions), default interest provisions and across a fund's fund finance facilities (such as bridge or NAV facilities), hedging arrangements and investments (as it is commonly referenced in loans, bonds, notes and securitisations).

It is important for managers to work closely with their custodians and counterparties to assess their fund's universe of exposures to LIBOR and determine the steps they will need to take to ensure that the risks of transitioning to replacement RFRs are mitigated and that the transition is implemented as smoothly as possible.

Why does this matter?

LIBOR cessation, if improperly managed, may have adverse financial implications for market participants with LIBOR exposures. These implications could range from an economic impact (if the fallback rate chosen to replace LIBOR is less favourable), basis risk (if, for example, there is a mismatch between the fallback rate of a loan and the fallback rate of any hedging of the interest-rate of that loan) or, at worst, potential defaults under arrangements that apply an interest rate linked to LIBOR. The replacement of LIBOR interest rates will not be automatic, nor is there yet established market practice for moving to replacement rates. Different markets (e.g. the loan market and the derivatives market) may adopt different fallbacks. Moving to fallback rates will often require managers to consult with their counterparties and in many cases obtain their consent.

How should funds manage the impact?

Once funds have established what the impact of LIBOR transition will be, managers should focus on preparing a LIBOR transition plan to ensure that a consistent approach is taken and that they are not exposed to mismatches in replacement rates, imperfect hedges that result in basis risk, potential disputes and/or defaults. Consideration should also be given to regulatory guidance on managing conduct and compliance risks relating to client communications during LIBOR transition. All UK funds, but debt funds in particular, should be mindful of the FCA's focus on "treating customers fairly" as a "customer" relationship exists between a debt fund and both its investors and borrowers.

The next step will be to engage with counterparties and commence the process of amending affected contracts. To assist with transition, industry bodies have been working on amendments to their standard form documentation and calculations to adjust to RFRs (such as SONIA).

Recent developments include:

  • In the derivatives space, ISDA has launched important tools to assist market participants with the transition from LIBOR under their derivatives, repo and stock lending transactions, namely the ISDA 2020 IBOR Fallbacks Protocol and the IBOR Fallbacks Supplement to the 2006 ISDA Definitions, which took effect on 25 January 2021. You can find more details on these documents in our LIBOR Transition Toolkit note, available here.

  • In the loans space, the LMA has published (here) a proliferation of exposure drafts of RFR-linked loan templates, term sheets and commentaries including, most recently, multicurrency facility agreements (i) with initial Ibor-based pricing, "hardwired" to switch to RFRs with effect from agreed trigger points, and (ii) providing for use of a compounded RFR pricing (where relevant), with forward-looking interbank term rates applying to other currencies (e.g. for EURIBOR). Whilst these are only "exposure drafts" (and only contemplate simple unsecured "investment grade" facilities), the pricing formulae and standardised definitions used here are likely to dictate the shape of future loan documentation. Although the market has not fully embraced RFR pricing, all new and re-financed loans typically now include some form of contractual arrangement designed to facilitate re-pricing at a future date, based on standard clauses published by the LMA.

What should funds be doing? - A Checklist

Funds should:

  • scope the universe of impacts that LIBOR cessation will have on their business and prepare a transition plan setting out the steps they will take to manage those impacts and transition away from LIBOR to an appropriate replacement rate;

  • work on amendments to their existing contracts to deal with LIBOR fallback mechanics and consider which replacement rate (e.g. SONIA; Bank of England base rate, etc) would be most appropriate for inclusion in those contracts; and

  • assess any regulatory, accounting and tax implications resulting from amending (or opting not to amend) their contracts (e.g. loss of regulatory grandfathering, significant accounting or tax gains or losses).

The industry's work on LIBOR discontinuation is part of a broader benchmark reform which under the EU Benchmarks Regulation requires certain 'supervised entities' to ensure that they have robust written plans setting out the actions that they would take if a benchmark materially changes or ceases to be provided, and to reflect these plans in their contractual arrangements. Funds should also consider if and how this regulation might apply to their arrangements.

You can find more information about LIBOR transition in our briefing note, which is available here.

Upcoming (targeted) amendments to be made to the UK PRIIPs regime

WHAT IS THIS? Proposed amendments to the post-Brexit PRIIPs regime.

WHO DOES THIS APPLY TO? Market participants advising on, selling or otherwise making available a PRIIP to a retail investor in the UK. 


In July 2020, HM Treasury published a policy statement on proposed amendments to the retained EU law version of the PRIIPs Regulation (the "UK PRIIPs Regulation"). HM Treasury plans to make some amendments to improve its functioning in the UK. The changes, which represent targeted amendments rather than a wholesale reform, will comprise of:

  • clarification of the scope of PRIIPs to address the uncertainty around the scope of the PRIIPs Regulation since implementation, particularly in respect of corporate bonds;

  • giving the FCA power to clarify what information should be provided in the KID;

  • replacing the 'performance scenario' section with 'appropriate information on performance' with the FCA amending what information to provide in this section; and

  • allowing UCITS to be exempt from issuing Key Investor Information Document ("KIDs") for up to five years (the current exemption runs out in December 2021). Under this exemption, UCITS may use their KID instead of the PRIIPs KID.

The definition of PRIIPs will not be changed. A related webpage explains that HM Treasury intends to conduct a more wholesale review of the disclosure regime for UK retail investors in the longer term. This review will explore how to harmonise the PRIIPs regime with requirements contained in the MiFID II Directive.

There is no date set for these amendments. HM Treasury intends to legislate for these amendments when parliamentary time allows.

FCA changes process for notifying details of major shareholdings

WHAT IS THIS? A new online portal which must be used for notifying the FCA of major shareholdings.

WHO DOES THIS APPLY TO? Main market investors. Registration to use the new portal is required.

WHEN DOES THIS APPLY? The portal will be live on 22 March 2021.

In Q1 2021, the FCA will be changing the way in which Main Market investors notify the FCA of major shareholdings under DTR 5. Instead of emailing TR-1 forms to the FCA, investors will need to complete an electronic TR-1 form which will be sent via an online portal. That form will be able to be downloaded and sent to the issuer. After the launch of the new portal, Main Market investors will no longer be able to submit TR-1 Forms to the FCA via email. In order to use the new portal, issuers will need to complete a two-step registration process (detailed on the FCA's webpage) and early registration is encouraged so that investors are ready to send electronic TR-1 Forms as soon as the portal is launched. A Main Market investor will have two weeks within which to complete its registration. In the meantime, Main Market investors should continue to submit their TR-1 Forms to the FCA in email format. The new process does not apply to investors of AIM companies (who have to notify the issuer but not the FCA).

National Security and Investment Bill: impact on share and asset acquisitions

WHAT IS THIS? Draft legislation designed to strengthen the government's powers to scrutinise transactions on grounds of national security.

WHO DOES THIS APPLY TO? A wide range of transactions.


In November 2020, the National Security and Investment Bill 2019-21 (the "NSI Bill") was introduced to the House of Commons and given its first reading. The Bill will establish a new statutory regime for government scrutiny of, and intervention in, investments for the purposes of protecting national security and follows the government's 2017 and 2018 Green and White Papers on the national security and infrastructure investment review.

The NSI Bill will broaden the range of investments which can be reviewed by the UK government on national security grounds and introduce a statutory requirement for parties to notify relevant transactions in the most sensitive areas of the economy. Alongside a mandatory requirement, the government will also have a more extensive "call-in" power to enable it to assess deals which may give rise to national security risks. In each case, the review process will be subject to statutory time limits.

A number of direct and indirect share and asset acquisitions may be caught by the NSI Bill.

  • Share acquisitions. Various types of share acquisition may fall within the scope of the NSI Bill depending on the circumstances. However, as a broad guide, acquisitions of 15% or more of the votes or shares in an entity will likely fall within the scope of the NSI Bill, as will increases in shareholding through certain bands (e.g. from 25% or less to more than 25%, from 50% or less to more than 50%, or from less than 75% to 75% or more).

  • Asset acquisitions. A wide range of asset acquisitions may also fall within the scope of the NSI Bill. In particular, attention should be paid to the acquisition of a right or interest in an asset providing the ability to: use the asset, or use it to a greater extent than prior to the acquisition; or direct or control how the asset is used, or direct or control how the asset is used to a greater extent than prior to the acquisition. Assets within the scope of the NSI Bill are land, tangible moveable property, and (covering intellectual property) any idea, information, or technique with industrial, commercial or other economic value (including assets/land outside the UK which are used for activities in the UK or for supply of goods/services to persons in the UK). Examples of assets within that last category include: (a) trade secrets; (b) databases; (c) source code; (d) algorithms; (e) formulae; (f) designs; (g) plans, drawings and specifications; and (h) software.
Outcome of the European regulator's consultation on the application of the market abuse regime to collective investment undertakings

WHAT IS THIS? Comprehensive ESMA review of the functioning of EU MAR.

WHO DOES THIS APPLY TO? All persons (although for the purposes of this section we focus on the recommendations made in respect of collective investment undertakings).

WHEN DOES THIS APPLY? Not yet known.

In September 2020, ESMA announced the outcome of its 2019 consultation on EU MAR.

By way of background, the European Commission is required, under Article 38 of EU MAR, to submit a report to the European Parliament and the Council of the EU to assess various provisions under the Regulation. In March 2019, it formally requested technical advice from ESMA on the report and ESMA published a consultation in response to this request in October 2019. The consultation covered the topics included under Article 38 of EU MAR, together with a set of additional elements arising out of the Commission's request to ESMA. In addition, it incorporates several other issues ESMA has identified as closely linked to some of these topics and connected elements, which ESMA considers should be addressed jointly.

The consultation included a chapter focussing on collective investment undertakings ("CIUs") (notwithstanding the fact that the Commission’s Mandate refers to all CIUs, ESMA considers the consultation to be of relevance to only those CIUs admitted to trading or trading on a trading venue). ESMA acknowledged that there might be elements making the application of MAR to CIUs vis-à-vis other issuers more difficult: the fact that a significant number of CIUs do not have legal personality, and the role played in CIUs by external companies (e.g. management companies, asset managers, depositaries), the specificities of CIUs in terms of investment strategies and the determination of net asset value (both for CIUs with and without personality), led ESMA to analyse whether it is necessary to apply the EU MAR provisions for issuers to them.

The MAR Review Report is therefore the first in-depth review of the functioning of EU MAR since its implementation in 2016, and its recommendations will feed into the European Commission’s review of the Regulation. The Report concludes that, overall, MAR has worked well in practice and is fit for purpose.

Key areas addressed in the report and specifically relating to CIUs were:

  • ESMA had asked for views on whether CIU should be differentiated from other listed issuers. Whilst it received responses suggesting that the  characteristics of CIUs admitted to trading or trading on a trading venue made market abuse unlikely, ESMA concluded that there are no compelling arguments to exempt CIUs from the scope of MAR as to do could create an objective risk for other market participants if inside information was generated, in the absence of an obligation to disclose it under EU or national law;

  • MAR should include a specific reference excluding self-managed CIUs from “persons discharging managerial responsibilities” ("PDMR") obligations;

  • ESMA does not propose extending the PDMR obligations to the managers of funds as the managers may not have influence on the value of the CIUs, the public disclosure of transactions by the manager will not have an impact on the CIUs's share price, and that some controls are in place already in measures such as the AIFMD and UCITs;

  • ESMA remains of the view that EU MAR should be amended such that the management company is made responsible for disclosing inside information, and keeping insider lists, on behalf of the fund (such proposals, ESMA acknowledges, did not form part of its 2019 consultation).

Other key areas covered by the report include:

  • market soundings: clarification that the EU MAR requirements represent an obligation for disclosing market participants that, if complied with, will protect them from the allegation of having unlawfully disclosed inside information.  ESMA requests flexibility from the European Commission to amend its guidelines to introduce recommendations to market sounding recipients that are tailored to their size, sophistication, and nature;

  • inside Information and delayed disclosure: ESMA will issue further guidance in relation to the application of the definition and for specific scenarios concerning delayed disclosure; and

  • buyback programmes: proposals to improve the reporting and transparency obligations derived from buyback programmes.

The European Commission will now use the technical advice to inform its own report on EU MAR which it will present to the European Parliament and the Council of the EU. Specific legislative amendments may therefore follow. See above, for the amendments the UK government intends to make to UK MAR under the Financial Services Bill.


WHAT IS THIS? Regulations on OTC derivative transactions, central counterparties and trade repositories.

WHO DOES THIS APPLY TO? Managers of AIFs who use, or may use, derivatives.


The main derivatives regulation in the EU, the European Market Infrastructure Regulation on OTC derivative transactions, central counterparties and trade repositories (Regulation EU 648/2012) (“EMIR”), and its on-shored UK equivalent (colloquially referred to in the market as "UKMIR"), will continue to be relevant for managers in 2021.

Recap of 2020

  • In June of 2020, the definition of financial counterparty (“FC”) under EMIR was broadened to include all EEA AIFs, whether or not they are managed by a manager authorised or registered under AIFMD. Previously, EEA AIFs that were not managed by a manager authorised or registered under AIFMD were categorised as non-financial counterparties (“NFCs”). This means that it is more likely that a manager will find its funds subject to more onerous regulation. In particular where, in the past, non-EEA AIFs managed by a non-EEA manager were deemed NFCs, those are now deemed FCs when facing EEA brokers/banks. The key implication of the change in classification is that NFCs are generally not required to exchange collateral as variation margin or to clear any derivatives transactions. FCs are however required to exchange collateral as variation margin in respect of most uncleared derivatives transactions on a daily basis and, depending on the product, clear certain derivatives transactions.

Looking ahead to 2021:

  • Notification to the FCA: all UK FCs and UK NFCs that exceed the clearing thresholds (or that have chosen not to calculate whether or not they exceed such thresholds) must make a clearing threshold notification to the FCA. By way of recap, the thresholds are EUR 1 billion for credit and equity derivatives, and EUR 3 billion for interest, FX, commodities and other types of derivatives. The notification obligation applies even where such entities have already made such a prior notification to the FCA under EMIR. The deadline for the FCA to receive the first notification under UKMIR is 17 June 2021.

  • Initial Margin Phase 5: managers who manage funds with an aggregate average notional amount of OTC derivative transactions in excess of EUR 50 billion will be required to exchange collateral as initial margin from 1 September 2021. This threshold will reduce to EUR 8 billion on 1 September 2022 and so will capture more funds then. Initial margin is in addition to variation margin (the requirements for which have been in force since 2017) and must be segregated and held subject to security. Managers cannot offset initial margin amounts against initial margin held by their derivatives counterparties. This obligation therefore comes with not insignificant cost, legal complexity, and administrative and operational considerations.

  • Post-Brexit cross border arrangements:

      • General: the impact of Brexit on funds with cross-border derivatives arrangements will largely depend on the type of transactions that those funds enter into and where the counterparties to those transactions are located. Some examples are set out below however, for more details, please see our separate client note.

      • Clearing:

        - For EU managers who use UK clearing houses to clear their derivatives, the EU has provided an 18 month window in which EU managers should transition to EU clearing houses. This is because, from 30 June 2022, UK clearing houses will no longer meet the requirements under EMIR for EU managers who use derivatives clearing services.

        - Certain cleared interest rate and credit derivatives need to be executed on a regulated market. The EU no longer regulates or recognises UK markets, so EU managers that have been trading in London may need to consider this issue further with their UK bank/broker specifically, whether such derivatives should be moved to another market (for example certain US markets are recognised by both the EU and UK).

      • Reporting: all transactions subject to EMIR must be reported to a trade repository. UK trade repositories will cease to be permitted recipients of reports that EU counterparties are required to make under EMIR, so EU managers will need to make arrangements to report to EU trade repositories instead (UK managers reporting to UK trade repositories will be unaffected). Managers who have delegated reporting to their counterparties should consider whether those reporting arrangements will need to be revisited, particularly because under EMIR responsibility for reporting falls on the manager itself and not on the fund.

Managers of AIFs who use, or may use, derivatives should think carefully about the implications of EMIR and UKMIR, as applicable. There are ways we can assist you with planning, structuring, reviewing and negotiating legal documents as well as regulatory advice and optimisation work. We would also be happy to discuss the impact of Brexit on the derivatives used by your funds.

ESMA Consultation Paper on guidelines for funds' marketing communications

WHAT IS THIS? Consultation on guidelines for funds' marketing communications.

WHO DOES THIS APPLY TO? EU AIFMs, UCITS management companies, EuSEF managers and EuVECA managers. Also fund distributors.

WHEN DOES THIS APPLY? 2 August 2021.

In November 2020, ESMA issued a consultation paper on its draft guidelines for funds' marketing communications.  These supplement the requirements in the Regulation on cross-border fund distribution regarding marketing communications.

The draft guidelines include the following:

  • Identification of marketing communications: Marketing communications should include sufficient information to make it clear that the communication has a purely marketing purpose, is not a contractually binding document or an information document required by any legislative provision, and is not sufficient on which to take an investment decision. A marketing communication should include a prominent disclosure of the terms “marketing communication” and a disclaimer.

  • Description of risks and rewards: Both risks and rewards should be described equally prominently and in the same font, size and position. Information on risks should not be disclosed in footnotes or in small characters within the main body of the communication.

  • Fair, clear and not misleading information: The level of information and its presentation may be adapted to the type of investor (i.e. retail or professional).  The information should also be consistent with the other legal and regulatory documents of the relevant fund.  Any description of the features of the investment should be kept up to date and contain sufficient information to enable the key elements of those features to be understood. 

  • Information on costs: Information on the costs associated with purchasing units or shares should allow investors to understand the overall impact of costs on the amount of their investment and on the expected returns.

  • Information on past performance and expected future performance: Information on past performance should not be the main information of the marketing communication and any change that affected significantly the past performance of the fund should be prominently disclosed. Expected future performance should be based on reasonable assumptions supported by objective data and disclosed on a time horizon which is consistent with the recommended investment horizon of the fund. Certain disclaimers may also be required. 

  • Information on sustainability-related aspects: Information on the sustainability-related aspects of the fund should not be disproportionate to its relevance in the fund's strategy and marketing communications should indicate that any decision to invest in the fund should take into account all the characteristics or objectives of the fund.

The draft guidelines also include some examples of what ESMA proposes should and should not be considered a marketing communication for these purposes.  Examples of marketing communications include communications describing the characteristics of a fund provided to distributors which are then sent to investors (regardless of whether that was the intention) and advertising messages, irrespective of their medium.  Examples of communications which are not marketing communications include legal and regulatory documents of a fund, corporate communications describing market developments which do not refer (explicitly or implicitly) to a specific fund and/or short online messages linking to marketing communications but which do not themselves contain any information on a specific fund.

The consultation closes on 8 February 2021 and the final guidelines are expected to be issued by 2 August 2021.

Social Security for internationally mobile workers from 1 January 2021

WHAT IS THIS? The post-Brexit rules on social security for internationally mobile workers.

WHO DOES THIS APPLY TO? Internationally mobile workers going to the EU from the UK or vice versa and their employers.


For UK employers with workers in the EU, the EU/UK Trade and Cooperation Agreement (TCA) contains some welcome clarification on their social security obligations from 1 January. Importantly, a new Protocol on Social Security Co-ordination has been agreed, replicating many of the existing EU rules, including those for ‘posted’ workers (to be known as ‘detached’ workers). Crucially, however, each EU member state had until 1 February 2021 to decide whether it wanted to adopt the new rules in respect of detached workers (which effectively replicate the previous rules for posted workers). We have had confirmation that all EU member states have opted to apply the detached worker rules.

Potential changes to the REIT rules

WHAT IS THIS? Potential changes to the UK REIT rules as part of the review of the UK funds regime (discussed here).

WHO DOES THIS APPLY TO? REITs, their investors, joint ventures and those considering how to structure real estate investments.

WHEN DOES THIS APPLY? The Government is currently aiming to introduce a first batch of changes next year (2022).

As part of the fund review, the Government is considering changes to the REIT regime in two phases.

The first phase, running in parallel with the new AHC regime proposals (discussed above), considers prioritised, targeted reforms to the UK REIT rules to reflect practical concerns and offer more operational flexibility. These include the option of an unlisted REIT for certain institutional investors, restricting the effective prohibition on corporate shareholders having an interest of 10% or more so that it only applies to those not entitled to receive gross distributions from the REIT (so would not apply to UK companies), more flexibility of the 75% "balance of business test" and the extension of the list of eligible institutional investors (relevant to the "non-close" requirement), alongside the introduction of a widely held rule into the relevant definition. For more detail, please click here.

The second phase, forming part of the call for input (also discussed above), includes proposals to abolish the interest cover test, allow a REIT to hold a single property and amend the three year development rule. 

Suggestions on improving the tax position for international investment by REITs are also on the table, though it is not clear yet whether these will be able to be moved to the first phase.

These proposals are very welcome. In particular, the option of an unlisted REIT should facilitate the use of REITs in joint venture and clubs deals and as a vehicle for institutional investment, without the need for the additional costs and administration of listing offshore. We expect, however, to see the listing requirement retained for the regime in relation to the wider market. Other changes mooted should help offer more operational flexibility and would get rid of a few quirks.

The introduction of a widely held requirement in the institutional investor rule, may, however, mean that some investors who currently qualify as "institutional investors" may cease to do so.

Developments in relation to VAT

Review of VAT treatment of fund management fees

WHAT IS THIS? An upcoming Government review on the VAT treatment of fund management fees.

WHO DOES THIS APPLY TO? Fund managers and their clients.

WHEN DOES THIS APPLY? It is currently unclear when the review will start. It is hoped that it will be early this year.

The Government announced in the 2020 March Budget a review of the VAT treatment of fund management fees. This has been delayed due to Covid-19 and we do not know exactly what the review will cover. However, as the current scope of the VAT exemption for fund management services is unclear, Brexit should provide the UK with the opportunity to consider this area afresh, allowing it to adopt a more coherent approach than its European competitors, and it is hoped that this is what the fund review will address.

Increased VAT recovery for supplies of financial services to EU member states

WHAT IS THIS? A change of rules allowing greater recovery of input VAT for those making certain supplies of financial services to EU member states.

WHO DOES THIS APPLY TO? Those making relevant supplies to the EU.


Prior to 1 January, input tax associated with most VAT exempt supplies of financial services could be recovered where the supply is made to a person belonging outside the EU. Since 1 January this ability to recover input VAT has been extended so that it applies to supplies made to persons belonging outside the UK (i.e. it will apply also to supplies to the EU). Relevant exempt supplies include making loans and transferring shares but do not include exempt fund management.

VAT grouping call for evidence

WHAT IS THIS? A change of rules allowing greater recovery of input VAT for those making certain supplies of financial services to EU member states.

WHO DOES THIS APPLY TO? Member and potential members of UK VAT groups.

WHEN DOES THIS APPLY? This is currently uncertain.

In November, an HM Treasury call for evidence in relation to VAT grouping closed. The call included views on potential changes to the current rules which would, if adopted, significantly recast the UK’s VAT grouping framework. We do not yet know which, if any, of the proposals contained in the call for evidence will be taken forward and so this is something to keep an eye out for this year. Of particular interest to asset managers will be the review of VAT grouping rules for limited partnerships and the impact of any changes to those rules on the VAT treatment of management fees.

New off payroll working rules come into effect on 6 April 2021

WHAT IS THIS? The introduction of new employment tax rules for off payroll workers.

WHO DOES THIS APPLY TO? Medium and large clients in the private sector who use workers that provide their services through intermediaries.

WHEN DOES THIS APPLY? On and after 6 April 2021.

New rules relating to off-payroll working come into effect on 6 April 2021 (having been delayed by a year due to the Covid-19 pandemic).

The new rules will apply to medium and large clients in the private sector that have a UK connection. They will affect fee payments made in respect of workers who provide their services through intermediaries such as personal service companies (PSCs). Asset managers and others in the funds sector engaging such intermediaries will need to decide whether, if the existence of the intermediary were ignored, the worker would be regarded as their direct employee (or office holder) for income tax purposes. If they would, then the client (or the agency paying the intermediary if different) must deduct income tax and NICs from the fees paid to the intermediary and account for employers’ NICs (and apprenticeship levy if relevant) as if the fees were payments of salary.

Those in the funds sector engaging workers through PSCs should be assessing which of these engagements they will have in place as at 6 April 2021 and ensuring that the contracts governing relevant ones provide for the new rules. For example, they should enable tax and NICs to be deducted from payments, (where possible) permit a repricing of the arrangement to take account of the additional costs to the firm (such as employers’ NICs charges and apprenticeship levy) and contain appropriate indemnities. Clients also need to put in place internal processes for making decisions about whether the new rules apply, issuing “status determination statements” and operating payroll on payments within the rules. The legislation prescribes a disagreement process which the client must follow if the worker or agency challenges its decision on status. Clients should review existing engagements that will continue beyond 6 April 2021 to see whether they come within the new rules. If they take on new workers and think the contract will extend beyond 6 April 2021, clients need to ensure that the contract takes the changes into account.

For more information on whether the new rules will apply to you and what needs to be done under them please click here and here.

Economic crime levy

WHAT IS THIS? The Government is planning to introduce a levy to fund combatting economic crime. 

WHO DOES THIS APPLY TO? Those in the AML regulated sector.

WHEN DOES THIS APPLY? The intention is for the first set of levy payments to be made in the financial year 2022/23 but this is subject to the findings of a consultation on the levy. 

The Government is planning to introduce a levy, to be imposed on all relevant persons under the UK Money Laundering Regulations, in order to pay for enhanced government action to tackle money laundering. It has consulted on different options for collecting the levy and it is now considering responses. If (as seems likely) it is introduced it will likely apply to many within the asset management sector including portfolio managers, collective investment undertakings and investment advisers. The government intends for the first set of levy payments to be made in the Financial Year 2022/23. However, this timeline is subject to the findings of the consultation. Further detail on the new levy will be something to watch out for this year.

Changes to the UK’s “hybrid” anti-avoidance rules

WHAT IS THIS? Proposed changes to the UK's "hybrid" anti-avoidance rules.

WHO DOES THIS APPLY TO? UK corporation taxpayers and counterparties to transactions with them.

WHEN DOES THIS APPLY? Assuming they are introduced, the different proposals have different dates for coming into force with some being retrospective back to 1 January 2017. 

Following on from a consultation that closed in the summer, on 12 November, HMRC proposed a number of significant changes to the UK rules which aim to counteract "tax mismatches" which arise from arrangements with a hybrid element or which are designed to create that mismatch (the Regime). We set out below some of the key proposals relevant to the Funds sector.

Acting together

It is proposed that the situations in which parties are considered to "act together" for the purposes of the Regime are reduced. This is important because when parties act together in relation to another person, broadly, the aggregate rights and interests those parties have in the other person are attributed to each other when assessing whether either of those parties controls or is related to another person. The presence of a control relationship or persons being related is often critical for the hybrids rules to apply.   

One aspect of the proposals relating to the "acting together" concept is that a partner in a partnership will, from the date of royal assent to the Finance Bill 2021, no longer be deemed to be acting together with all the other partners where the partnership in question is a collective investment scheme in which the partner holds an interest of less than 10% (subject to rules preventing partners with larger interests fragmenting them in order to fall within the new exclusion).  We do not have any draft legislation for this change and so will have to wait for the detail, but it is potentially good news for investment funds and sounds as if it may be a similar approach to that taken by Luxembourg in its adoption of ATAD II.

Dual inclusion income

The Regime includes provisions that counteract arrangements that generate double tax deductions for payments made by a hybrid entity that are also deductible for an investor in it. Broadly, these provisions can apply if the hybrid or the investor is within the charge to corporation tax and either they are related or the arrangement is designed to deliver (or share the economic benefit of) the double deduction.

An example of when the provisions could potentially apply would be expenses (e.g. employee salaries) incurred by a UK subsidiary of a US parent where a "check the box election" (CTB Election) has been made to disregard the subsidiary for US tax purposes. Absent the Regime, these expenses would be deductible for both the US parent and UK subsidiary (subject to any normal (non-hybrid) restrictions on deductibility).

There is an exemption from the disallowance where the double deduction is used against "dual inclusion income" but that term has been too narrowly defined, leading to UK taxpayers being unable to claim tax deductions in some common benign situations, typically involving supplies between a UK service provider which has been subject to a CTB Election and a related overseas customer.

In 2018 HMRC tried to remedy the situation by allowing the deduction to be set off against a further type of income ("section 259ID income") as well as dual inclusion income. However, the concept of section 259ID income is itself too narrowly drawn to be relevant in many situations and, under the proposals, will be replaced, with retrospective effect back to the introduction of the Regime, by a definition of "dual inclusion income" that will be expanded (in double deduction situations) to catch "inclusion/no deduction income” of a hybrid payer. Broadly, that is taxable income of the payer which is not deductible for any person where the reason for such non-deductibility is the hybridity of the payer.

The proposed extension of the definition of dual inclusion income is an improvement on the concept of section 259ID income but, unfortunately, not a complete answer. Helpfully, it should broaden the situations in which payments from US parents to UK subsidiaries are eligible to count as dual inclusion income and should also potentially apply where the payment is made by a US sister entity which has also been disregarded for US tax purposes as a result of a CTB Election.  However, payments from related entities in other jurisdictions are still unlikely to fall within the definition (as the related entities are likely to get a local tax deduction for the payments they make to the UK company).

The definition of dual inclusion income is proposed to be similarly extended in the section of the Regime that potentially denies deductions where a UK company that has been subject to a CTB Election for US purposes makes a payment to its US parent. In that situation, as the US parent would not recognise any taxable income (due to the election), the Regime would potentially deny the UK company a corporation tax deduction unless there is dual inclusion income from the arrangement.

In addition, the proposals envisage introducing rules that will enable companies to surrender dual inclusion income to other members of their group who would otherwise be subject to a counteraction under the hybrids rules. This proposal would come into effect in relation to accounting periods of claimant companies ending after 1 January 2021.

Tax exempt investors

Currently, under the Regime, situations in which a corporation tax deduction can be denied to a UK corporation tax payer include where:

  • a payer makes a potentially tax deductible payment to a hybrid entity which does not give rise to taxable income for either the hybrid or an investor in it (e.g.  if the hybrid is tax transparent in its own jurisdiction but seen as opaque in the jurisdiction of an investor); or

  • a (potentially) tax deductible payment is made by a hybrid which is not recognised as taxable income for the investor (e.g. where a payment is made to its US parent by a UK company that has made a CTB Election for US tax purposes).

However, a problem with the rules is that this counteraction is not disapplied where there would be no tax on the receipt of the payment, even if there was no hybridity present, due to the recipient being a tax exempt investor (e.g. a pension fund). Under the proposals these rules will be amended, from the date of royal assent to the Finance Bill 2021, to prevent counteraction where the recipient falls within a category of tax exempt investor akin to the category of "qualifying institutional investor" within the corporation tax substantial shareholding exemption. We do not have any draft legislation for this change and so will have to wait for the detail.

Imported mismatches and equivalent regimes

The Regime contains provisions which can deny deductions to UK corporation tax payers where, in essence, the payment funds a hybrid mismatch between two non-UK entities. A key condition for these "imported mismatch" rules to apply is, broadly, that there is no "equivalent provision" under the laws of a foreign jurisdiction which would apply to the mismatch. HMRC recognises that this can be problematic because, in order to determine equivalence, consideration is required of specific provisions within the foreign regimes which must be equivalent to specific provisions of the Regime, rather than the overseas regime as a whole being assessed. In addition, it also raises the question of whether equivalent provisions can be said to “apply” where no counteraction ultimately results. To address both these issues, under the proposals, the condition will be changed so that it tests whether an overseas regime as a whole can be seen as equivalent to the Regime as a whole.  Again, we do not have the draft legislation for this measure (which is proposed to come into force from the date of royal assent of the Finance Bill 2021) and so will have to wait for the detail.

Taxation of gains realised by non-residents on disposals related to collective investment vehicles holding UK real estate: introduction of 10% holdings threshold for non-resident insurance companies and funds

WHAT IS THIS? The proposed introduction of a 10% holdings threshold before the non-resident CGT rules apply to certain disposals involving non-resident funds and insurance companies.

WHO DOES THIS APPLY TO? Funds and insurance companies in certain UK property holding structures.

WHEN DOES THIS APPLY? Under the proposals, the change would have retrospective effect back to 6 April 2019.

Since April 2019, where non-residents hold an interest in a UK property rich collective investment vehicle (CIV), they will potentially be subject to UK tax on gains on any disposal of that interest, regardless of the size of their holding (ie the usual 25% threshold is disapplied).  Helpfully, the government proposes to change this, with retrospective effect to 2019, and has published draft regulations, for consultation, for a new 10% threshold before the charge bites for disposals of interests in CIVs for, broadly, (i) a non-resident life insurance company that does not have a UK permanent establishment, and (ii) a widely held offshore CIV for whom holdings of UK land and UK property rich companies are not expected to be more than 40% of the market value of its investments.

We expect the Government to introduce the proposed changes in a form substantively similar to the draft to date.

This will be a welcome development for UK real estate funds with actual or potential non-resident investors that are either overseas insurance companies or collective investment vehicles. To date, the lack of such a threshold has made it unattractive for those investors to take minority stakes in UK real estate funds, not only because of the UK tax liabilities that may arise on any disposal, but also due to the consequential administrative burden that it would otherwise result.

WHAT IS THIS? Introduction of a 2% stamp duty land tax (SDLT) surcharge on non-residents acquiring UK dwellings.

WHO DOES THIS APPLY TO? Non-residents acquiring UK dwellings.

WHEN DOES THIS APPLY? To transactions with an effective date on or after 1 April 2021.

For transactions with an effective date on or after 1 April 2021, a new 2% SDLT surcharge will apply (subject to transitional rules) to most acquisitions of a major interest in one or more dwellings where one or more purchasers is "non-resident". In determining "residence", there is a brand-new test for individuals and different rules for companies and other entities (such as partnerships and trusts). In addition to companies that are not UK resident for corporation tax purposes, the new rules also treating as non-resident companies that are UK resident if, broadly, they are close companies and under the control of non-resident participators.

Importantly for the asset management sector, there is no exclusion from the surcharge for offshore funds.

Introduction of a 2% stamp duty land tax (SDLT) surcharge on non-residents acquiring UK dwellings

WHAT IS THIS? Introduction of a 2% stamp duty land tax (SDLT)
surcharge on non-residents acquiring UK dwellings.

WHO DOES THIS APPLY TO? Non-residents (and some UK residents) acquiring UK dwellings.

WHEN DOES THIS APPLY? To transactions with an effective date on or after 1 April 2021.

For transactions with an effective date on or after 1 April 2021, a new 2% SDLT surcharge will apply (subject to transitional rules) to most acquisitions of a major interest in one or more dwellings, where one or more purchasers is "non-resident". In determining "residence", there is a brand-new test for individuals and different rules for companies and other entities (such as partnerships and trusts). In addition to companies that are not UK resident for corporation tax purposes, the new rules also treating as non-resident companies that are UK resident if, broadly, they are close companies and under the control of non-resident participators.

Importantly for the asset management sector, there is no exclusion from the surcharge for offshore funds.


Return to Funds Annual Briefing 2021.

Get in touch

Meet the team

Back To Top