Guidance

Money Market Funds (Amendment) (EU Exit) Regulations 2019: explanatory information

Updated 8 August 2019

1. Context

The European Union (Withdrawal) Act 2018 (EUWA) repeals the European Communities Act 1972 on the day the UK leaves the EU and converts into UK domestic law the existing body of directly applicable EU law. The purpose of the EUWA is to provide a functioning statute book on the day we leave the EU.

The EUWA also gives Ministers powers to make Statutory Instruments (SIs) to prevent, remedy or mitigate any failure of EU law to operate effectively, or any other deficiency in retained EU law. We refer to these contingency preparations for financial services legislation as ‘onshoring’.

HM Treasury is using these powers to ensure that the UK continues to have a functioning financial services regulatory regime in any scenario.

This SI is part of the wider work the government is undertaking to prepare for the UK’s withdrawal from the EU. It is not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition. The changes made in this SI would not take effect on 29 March 2019 if, as expected, we enter an implementation period.

2. Notice

The accompanying draft SI is intended to provide Parliament and stakeholders with further details on our approach to onshoring financial services legislation. The draft instrument is still in development. e. The drafting approach, and other technical aspects of the proposal, may change before the final instrument is laid before Parliament.

3. Policy background and purpose of the SI

3.1 What does the underlying EU regulation and UK law do?

The EU Money Market Fund Regulation (MMFR) applies to money market funds (MMFs) that are established, managed or marketed in the EU with the objective of making these more resilient and mitigating risks to financial stability. This is achieved by restricting the assets in which MMFs may invest and imposing requirements related to, for example, liquidity, valuations, stress testing and transparency. MMFs are liquid investments used as an alternative to bank deposits and are typically invested in liquid assets such as cash, repos, government debt and corporate debt.

MMFs can be established using either of the fund structures that exist in the EU legislative framework: Undertakings for Collective Investments in Transferable Securities funds (UCITS) or Alternative Investment Funds (AIFs). These funds and/or their managers are currently regulated by the UCITS Directive or the Alternative Investment Fund Managers Directive (AIFMD) respectively. Such funds and managers will also be subject to changes made to under separate statutory instruments brought forward under the EU Withdrawal Act: the Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2018 (relevant to UCITS and managers of UCITS) or the Alternative Investment Fund Managers (Amendment) (EU Exit) Regulations 2018 (relevant for AIFs and AIFMs).

3.2 Deficiencies this SI remedies

This SI will make amendments to the MMFR, in its capacity as retained EU law, to ensure that it continues to operate effectively in the UK once the UK has left the EU. Changes introduced by the SI include:

Regulatory Framework

The MMFR applies only to schemes established in the EEA. If the UK leaves the EU without a deal, UK authorised schemes will no longer be established and authorised in the EEA, and will no longer be subject to the MMFR. Amendments made by this instrument will change the scope of the retained MMFR to apply to MMFs established in the UK only.

Distribution of non-UK MMFs

Article 6 of the MMFR requires that any fund with the characteristics of an MMF must be authorised under MMFR. Article 4(1) of MMFR states that MMFs cannot be established, authorised, or managed in the EU unless they are authorised under the MMFR. Articles 4 and 5 also operate to require the manager of an MMF to be established in the EU. Therefore, to operate as an MMF under MMFR, the fund must be registered in the EEA and have a EEA manager.

Amendments made by this instrument will change the scope of the MMFR so that it applies only within the UK, and requires that the manager of an MMF is established in the UK – with the temporary exception of EEA MMFs currently marketed in the UK via a passport, as set out in the section below.

EEA MMFs marketed in the UK via a passport

MMFs are either UCITS or AIFs, and can be marketed across the EU under the marketing passports in the respective directives. If the UK leaves the EU without a deal, the passporting system will cease, and any references in UK legislation to the EEA passporting system will be redundant at the point of exit.

To ensure that UK investors have continued access to EEA funds that are currently marketed in the UK, the government announced on 20 December 2017 that it would put forward legislation to establish a “temporary permissions regime” (TPR). This will enable EEA funds (and sub-funds) that satisfy the relevant conditions to continue to access the UK market on the same basis as they did before exit day. The regime will last for three years from exit day, with a power for HM Treasury to extend the regime by no more than 12 months at a time in certain circumstances.

The design and structure of the regime (including the relevant conditions for entry to the TPR) is set out in the Collective Investment Schemes (Amendment) (EU Exit) Regulations 2018 for EEA UCITS (including MMFs which re UCITS), and the Alternative Investment Fund Managers (Amendment) (EU Exit) Regulations 2018 for AIFs marketed by EEA AIFMs (including MMFs which are AIFs).

A transitional arrangement is included in this instrument, which enables all MMFs that have a temporary marketing permission to be able to continue to be marketed for the duration of the TPR.

After exiting the TPR, funds will be able to access the UK market through the relevant regime for third country funds – either by notifying under the national private placement regime under the Alternative Investment Fund Managers Regulations 2013 (as amended), or becoming recognised under section 272 of the Financial Services and Markets Act – without further authorisation under the UK MMFR.

As set out in the explanatory information for the Collective Investment Schemes (Amendment) (EU Exit) Regulations 2018, the Government is committed to reviewing the regime for UCITS exiting the TPR, and will bring forward legislation as necessary.

Transfer of Functions

Functions previously held by the Commission will be transferred to the Treasury, and functions previously held by the European Securities and Markets Authority (ESMA) will be transferred to the FCA.

3.3 Relevant Rulebook and Binding Technical Standard changes

The FCA will be updating its Handbook of rules and guidance and Binding Technical Standards to address any deficiencies as a result of the UK leaving the EU. The FCA has confirmed its intention to consult on these changes in the Autumn.

3.4 Stakeholders

This SI is relevant for fund managers operating MMFs registered in the UK.

The intention of this SI is not to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition to this position. HM Treasury has engaged with industry bodies where possible to ensure awareness of these changes.

This SI does not include provisions that may be necessary to ensure Gibraltarian financial services firms’ continued access to UK markets in line with the UK Government’s Statement in March 2018, and other provisions dealing with Gibraltar more generally. Where necessary, provisions covering Gibraltar will be included in future SIs.

4. Next steps

HM Treasury plans to lay this instrument before Parliament before exit.

5. Further information

Read HM Treasury’s approach to financial services legislation under the European Union (Withdrawal) Act 2018.

6. Enquiries

If you have queries regarding this instrument, email FSlegislationEUWA@hmtreasury.gov.uk.