UK: Investment Funds 2018

Government's Investment Management Strategy II

In December 2017, the UK Government published an updated version of its strategy paper on the UK investment management industry. This paper, "Investment Management Strategy II", is an important signpost to the UK's post-Brexit approach to financial services. It also has wider, international implications because the UK asset management industry is the largest in Europe with £8.1 trillion of assets under management.

The strategy is described as a comprehensive long- term approach, to create "an environment in which firms can deliver the best possible outcomes for investors" and strengthen "the UK's brand for asset management, enabling firms to respond effectively to the UK's withdrawal from the European Union and capitalise upon future trading opportunities".

The Investment Management Strategy II targets a broad range of policy areas. It sets out the policy initiatives that the Government, in collaboration with the industry and the FCA, will take forward to:

  • enhance the Government, regulator and industry dialogue through a newly established Asset Management Taskforce. The Government will use the Asset Management Taskforce to identify opportunities to enhance the UK's competitiveness as a global centre for asset management and oversee the delivery of this strategy;
  • maintain stable tax and regulatory environments and promote the competiveness of the UK regime in the area;
  • strengthen the domestic asset management skills pipeline;
  • advance the development of asset management FinTech solutions to capitalise on the UK's world-leading status in FinTech;
  • support UK asset managers to be global leaders in developing innovative investment strategies. In particular, the paper highlights patient capital, social and impact investments, the financing of other technologies and the provisions of Sharia compliant products; and
  • continue a coordinated programme of international engagement to attract overseas firms to locate in the UK and promote UK firms overseas. The Government will seek to ensure that the UK's trade policy complements international regulatory cooperation and reflects the priorities of the UK asset management industry.

The ambitions set out in the paper are welcome but, as may be expected, the paper is light on details of what the Government will actually do. There will also be challenges ahead to

reconcile the strategy with the agreed position set out in the Phase 1 Brexit negotiations that the UK will maintain full alignment with the rules of the Single Market as between Northern Ireland and the Republic of Ireland, but will also ensure no new regulatory barriers develop between Northern Ireland and the rest of the UK.

Limited Partnerships Act reforms come into force

In April 2017, the Legislative Reform (Private Partnerships) Order (the "Order"), to modernise the UK limited partnerships regime for private funds by way of amendments to the Limited Partnerships Act 1907 (the "1907 Act"), came into effect. The reforms have been introduced with a view to simplifying the pre- existing law, reducing uncertainty and administrative costs and burdens, and ensuring that the UK remains an attractive and competitive location for private investment funds in comparison to other jurisdictions.

The reforms apply only to a limited partnership that is "designated" as a "Private Fund Limited Partnership" ("PFLP"). The pre-existing law continues to apply to all other English and Scottish limited partnerships.

A PFLP is a limited partnership that satisfies the following two conditions:

  • it is constituted by an agreement in writing; and
  • it is a "collective investment scheme" within the meaning of section 235 of the UK Financial Services Markets Act 2000 ("FSMA") but ignoring any exemptions pursuant to section 235 (5) of the FSMA (for example, the "group" exemption).

Most private investment funds (such as private equity and venture capital funds and their related vehicles such co-investment vehicles, and feeder funds) will fulfil these conditions.

The new regime is not mandatory: it is open to a limited partnership that satisfies the conditions to be a PFLP to choose not to apply to be designated as a PFLP, in which case the pre-existing limited partnership law will continue to apply to it.

The reforms make significant changes to the existing regime and largely relate to (i) introducing a list of matters (the 'white list activities') that limited partners can participate in without jeopardising their limited liability status; (ii) no longer requiring a limited partner to contribute capital to a UK limited partnership; and (iii) other miscellaneous changes relating to winding-up, filing/advertising requirements etc.

Further details on the reforms are contained in our client briefing.

Review of limited partnership law

Separately, in January 2017, the Business, Energy and Industrial Strategy Department ("BEIS") published a call for evidence on limited partnership law. BEIS conducted the review in light of concerns voiced in the media that some limited partnerships registered in Scotland are being used for criminal activity. The consultation also dealt with some more general points about limited partnership law. Depending upon the outcome of that consultation, further amendments to the 1907 Act may come into effect in 2018.

PSC Register extended to include Scottish limited partnerships

In June 2017, regulations making changes to the PSC regime came into force. The Information People with Significant Control Regulations 2017 the "Regulations") conform the UK PSC regime to the requirements of the EU Fourth Money Laundering Directive ("MLD4"). The Scottish Partnerships (Register of People with Significant Control) Regulations 2017 also came into force yesterday, and extend the PSC regime to Scottish limited partnerships and Scottish general partnerships in which the partners are all corporate bodies ("eligible Scottish partnerships").

Eligible Scottish partnerships are now required to identify their PSCs and register their PSC information at Companies House. They are not required to maintain their own PSC register. New statutory guidance on the meaning of "significant influence or control" over eligible Scottish partnerships has been published by Companies House. Links to the relevant Companies House PSC forms for eligible Scottish partnerships can be found here.

LGPS opt-ups

As noted in the Regulatory section of this briefing note under the heading of 'MiFID II', there is now a new retail client categorisation and opt-up criteria in respect of local government pension schemes ("LGPS"). This is relevant not only for the purposes of fund managers being able to market to LGPS, but also determining whether the PRIIPs Regulations will apply (and, therefore, whether a key information document is needed to market to the LGPS). The Local Government Pension Scheme Advisory Board has produced some useful guidance on how a LGPS can assess if the new opt-up process is available and also the documentation that a LGPS should provide to fund managers to request elective professional client status (see - For funds with LGPS as investors or which are being marketed to LGPS, the manager should expect to receive such applications for such existing and new funds.

Patient Capital Review and the British Business Bank

In his Autumn Budget, the Chancellor announced £2.5bn of new resources for the British Business Bank ("BBB") in response to the HM Treasury's Patient Capital Review and its consultation on Financing Growth in Innovative Firms. This, together with existing resources, will unlock up to £13bn of finance to support UK smaller businesses looking to scale-up and realise their growth potential and has received support from the British Private Equity & Venture Capital Association ("BVCA").  British Business Investments – the Bank's existing commercial arm – will cornerstone a  small number of large scale, private sector managed funds of funds, which will in turn catalyse patient investment into high potential businesses. A 'Request for Proposals' to manage the first phase of these funds (up to £500million) will be issued early 2018, and two subsequent phases are possible subject to the market response.

The Government also intends to set up a working group of fund managers and institutional investors to unlock further supply of patient capital, including tackling barriers holding back DC pension investment in illiquid assets.

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