FCA Measures To Support Direct 2 Fund Dealing And Fund Tokenisation

The Direct 2 Fund proposals set out in CP25/28 represent a welcome evolution for UK authorised funds. We have been delighted to work extensively with the Investment Association (chairing the Legal Working Group) on this initiative.

We are also encouraged to see the FCA, within the same CP, propose guidance to support firms looking to implement the Blueprint model for fund tokenisation. This is supported by a clear willingness to work alongside industry stakeholders to facilitate the future of fund tokenisation, as indicated by its "fund tokenisation roadmap" and proposed measures to support the evolution of tokenisation models.

The publication of this CP further demonstrates the regulator's commitment to responding positively to industry initiatives, being supportive of innovation, efficiency and the international competitiveness of UK asset management. The CP will be of broader interest to the wider digital assets and fintech ecosystem, in addition to managers of authorised funds.

1. WHAT IS DIRECT 2 FUND?
2. WHAT ARE THE BENEFITS OF THE D2F MODEL?
3. KEY ELEMENTS OF THE PROPOSALS
4. NEXT STEPS FOR FIRMS
5. MEASURES TO SUPPORT FUND TOKENISATION

WHAT IS DIRECT 2 FUND?

Direct 2 Fund (or D2F) is an alternative, optional, investor dealing model for UK authorised funds:

• Currently investors in UK authorised funds purchase the fund shares or units from, and redeem or sell them back to, the authorised fund manager of the fund, acting as a principal.

• Under D2F investors would purchase or sell directly with the fund rather than the authorised fund manager.

WHAT ARE THE BENEFITS OF THE D2F MODEL?

• D2F removes the authorised fund manager as a counterparty from the dealing process, so investors no longer have any credit risk on the manager.

• The D2F model facilitates the adoption of fund tokenisation (see below) and fits well with further digitalisation initiatives.

• This CP provides authorised fund managers with the flexibility to adopt an investor dealing model which aligns with that of many other jurisdictions, including Ireland and Luxembourg.

• For authorised fund managers, there is likely to be some operational simplification and efficiency (for example, the manager will no longer need to operate a client money dealing account subject to CASS, although client money considerations are not completely eradicated under the D2F model).

• Funds operating under the D2F model will need to establish an "Issue and Cancellation" bank account (IAC), which operates as a collection account to receive investor's subscription money and from which redemption proceeds will be paid to investors.

• The fund dealing process will be modified so that investors' subscriptions would be received directly into the IAC and payments would be made to investors directly from the IAC.

• The IAC may operate at sub-fund level or at umbrella fund level if certain conditions are met. Where the IAC is used for more than one sub-fund, the authorised fund manager and depositary must ensure that the assets of one sub-fund are not used to discharge the liabilities of another sub-fund.

• Under the proposals, the authorised fund manager and depositary must ensure that the IAC is not overdrawn at the end of any business day.

• The operation of the IAC will be underpinned by detailed transaction and accounting records, maintained by the authorised fund manager. Under the proposed rules, all cash sums received into the IAC will need to be attributed to a sub-fund promptly and any unattributed amounts returned to the sender or paid into a client money bank account by the close of business on the day following receipt

• The IAC will be considered scheme property and included in the financial statements of the fund (although unattributed balances will be disregarded for certain purposes including valuation and pricing).

• The D2F model generally seeks to preserve substantively the same responsibilities for the authorised fund manager and the depositary/trustee. Although one notable departure is that the CP suggests that, if the fund constitution permits this, the authorised fund manager rather than the depositary or trustee could be the entity which issues and cancels units in the fund under the D2F model.

NEXT STEPS FOR FIRMS

• The consultation period is relatively short, closing on 21 November 2025. Firms may wish to engage with industry bodies to provide feedback on the proposals.

• Authorised fund managers wishing to use the new direct dealing approach will need to:
  • Amend the fund's constitutional documents and prospectus to reflect D2F arrangements – prior FCA approval will be required.
  • Notify investors – the FCA indicates that the adoption of D2F could be treated as a pre-notifiable change from an investor perspective, meaning that appropriate advance notice will need to be given to the investors.
  • Engage with the depositary and service providers - there will be some operational impact although in practice operational processes are expected to be very similar to current arrangements. However existing contracts and service levels with depositaries, transfer agents and fund accountants may need to be reviewed and updated.
  • Amend ancillary fund documentation – for example, application forms, top up investment forms, renunciation forms.

MEASURES TO SUPPORT FUND TOKENISATION

• The FCA's CP also contains guidance to support managers operating tokenised fund registers in complying with current rules in the Collective Investment Schemes sourcebook (COLL) and Open-Ended Investment Companies Regulations 2001 (the OEIC Regulations), as well as potential amendments to COLL to allow authorised funds to hold tokenised forms of money (such as stablecoins) for limited purposes.

• This latter amendment is proposed in the context of a broader roadmap set out in the CP to advance fund tokenisation beyond the Blueprint model originally set out by the Technology Working Group of the Asset Management Taskforce. This includes considering longer term use cases for tokenisation (beyond simply tokenising the register of holders) including settlement of transactions in fund units taking place entirely on-chain, using tokenised money or money-like instruments such as central bank digital currencies, tokenised deposits or stablecoins.

• There is a natural interaction between tokenisation and D2F – the streamlined dealing model is seen as helping to encourage tokenisation by enabling subscriptions and redemptions to be processed efficiently "on-chain" through the "minting" and "burning" of digital tokens, without the need for tokenised units to be first transferred to or by the manager.

• The largest part of the new content is the insertion of a new Annex 4 to COLL 6 containing guidance on how authorised fund managers can comply with existing regulatory requirements when using distributed ledger technology (DLT) to maintain the register. The proposed guidance (in many places, implicitly) reminds fund managers, in essence, that these obligations remain, but that DLT is entirely compatible where the technology can be used in a way that is compliant.

• For example, the register is required to be accurate and up to date which requires the manager to be able, where necessary, to make unilateral amendments. The FCA explains that it is up to the firm responsible for the register to ensure it has the necessary ability to amend the DLT-based register (whether through "master node functionality" or otherwise).

• The guidance does not impact the actual application of the rules relating to the maintenance of registers. Nonetheless, it is helpful and encouraging to see the FCA adopt a "technology positive" approach, and take proactive action to support firms navigating tokenisation projects adopting the Blueprint model.

• We encourage firms to give the FCA their views on any other areas of the regulatory regime where increased clarity or flexibility would encourage them to embark on their own tokenisation initiatives.

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