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The FCA is currently drafting handbook rule changes for consultation, expected in ~September 2025.
To help with the cost-benefit analysis the FCA would value insights from interested firms on the number and type of funds that could utilise D2F, and the estimated size of efficiency savings that could be gained by it. This may include a reduction in the cost of capital needing to be set aside.
It is acknowledged that the UK’s authorised fund manager (‘AFM’)-dependent fund operating model is an outlier relative to European and other domiciles, but that D2F is an optional alternative and firms wishing to retain existing practices will be able to do so.
As per the proposals, the AFM would retain the responsibility for the investor relationship, be expected to make good any implications to the fund of any late or non-payment by investors, manage the AML and KYC status of the investor and otherwise assist with the smooth running of the operations of the fund.
While CASS requirements will largely fall away, D2F does not entirely remove an AFM’s CASS obligations and they will likely still require Client Money-handling permissions. The IA’s D2F analysis has previously identified that there are scenarios where CASS still applies to a firm. We understand that the FCA is not currently intending on making any CASS handbook rule changes.
See IA circular 150-25 for full update
Direct2Fund ('D2F') is the optional, alternative investor-fund dealing model for UK funds.
D2F enables investors to transact directly with their desired investment fund, bypassing the Authorised Fund Manager (AFM). The AFM has traditionally acted as a counterparty between investors and the funds they offer.
Removing the AFM from the chain:
- Replicates as much as possible the model operated in a number of non-UK fund domiciles (such as Luxembourg and Ireland);
- Eliminates completely the small risk of loss to the investor arising from a failure of the AFM (and remove the majority of the applicability of CASS);
- Bolsters the competitiveness of the UK investment management industry and delivers the best possible outcome for investors, business and the UK economy.
Adoption of the D2F model is intended to be optional and can run alongside the existing model.
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Publications
Regulatory & Legal Analysis, dated May 2023 - an executive summary of the regulatory changes that may be necessary to implement D2F
Contact
John Allan | Head of Innovation and Operations Unit
