Seeking a more efficient dealing model for UK funds
Direct2Fund (D2F) is the IA proposal to provide an optional, alternative investor dealing model for UK funds from the existing model where the AFM acts as principal to the transaction to one where investors instead deal directly.
We consider that the traditional arrangements with the AFM standing between the investor and the fund are less efficient than they could be, provide counterparty risk through exposure to the AFM and make UK funds less competitive than their European counterparts.
Investors are currently exposed to the risk of the insolvency of the AFM which is currently mitigated to an extent by the client money rules. Removing the AFM from the chain eliminates this risk altogether. Equivalent funds domiciled in Europe have run a similar model very effectively for many years.
Our proposals have been discussed and refined within the membership for some time and we made good progress in discussions with the regulator last year. D2F was included in the Treasury’s consultation earlier this year on the future UK Funds Regime. Following an exchange of letters with FCA in Q1 2021, we have made further progress in detailing the legal aspects and operational practicalities.
A group of expert fund lawyers from seven law firms has been carefully analysing the proposals and listing out the areas of regulation and legislation that may need changing. So far, no changes to FSMA or other statutory instruments have been identified. There will be a need to make certain changes to COLL but these are not expected to be extensive and the more significant are broadly in line with our previous expectations notified to the FCA.
A small group made up of depositaries, investment firms and transfer agents is currently detailing the operational aspects of the model and devising the underlying principles intended to be used by fund groups when running this model, including how to handle common exception scenarios.
The Legal group hopes to conclude its analysis this year. We will then be able to present its findings to the FCA and advocate for an industry consultation in short order on necessary rule changes in order for D2F to become a reality. The Guidance group will publish industry guidance at a later stage in order to support the go-live process.
We recognise that the model will not suit all types of funds, but hope that new funds housing straightforward investment strategies and distribution channels will be able to launch using this model in future. We hope to be able to make the transition process for existing funds straightforward in order to enable wider exposure to the benefits of D2F.