The EU and UK trade deal, which was finally concluded right before the transitional period ended on 31 December 2020, contained no special provisions for UK funds. The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – “BaFin”) had anticipated this, announcing on 19 November 2020 that UK funds could already carry out the distribution notification procedure. In this announcement, BaFin highlighted the new rules for the distribution of UK funds that apply from 1 January 2021 in order to ensure a smooth transition without interrupting distribution activities.
Regulatory situation before 2021
Until 31 December 2020, the distribution of UK funds to German (semi-)professional investors was allowed after having completed a simple notification procedure pursuant to section 323 German Capital Investment Code (Kapitalanlagegesetzbuch – “KAGB”) based on the European passport regime.
The UK supervisory authority (Financial Conduct Authority, “FCA”) had to submit a confirmation that the UK fund manager held the relevant licence and a notification letter for the fund to be marketed in Germany to BaFin. The notification letter had to include specific information on the fund, including the investment conditions, key investor information document (i.e. in Germany the wesentlichen Anlegerinformationen – wAI) and information document pursuant to section 307 para. 1 and 2 KAGB.
Regulatory situation since 2021
As of 1 January 2021, the UK finally became a third country within the meaning of the European funds regulation, which now means that the European passport regime can no longer be used by UK funds / fund managers. The distribution of UK funds intending to market to Germany must now comply with section 330 KAGB, imposing additional requirements for the distribution of UK funds in Germany.
Accordingly, the distribution of UK funds is in principle only possible under the following conditions:
BaFin and the FCA entered into an agreement to this effect (a so-called Memorandum of Understanding, MoU) back in April 2019;
Distribution to professional investors – limited applicability of KAGB
Where these prerequisites are met, BaFin must be notified of the intended distribution of the UK fund in Germany. In addition to the requirements that already applied for a notification under the European passport regulations (see above), a third country UK fund manager must now submit the following further information to BaFin if it intends to distribute to professional investors:
Distribution to semi-professional investors – full applicability of KAGB for retail investors
Where the UK fund manager also intends to distribute the fund to semi-professional investors in Germany, they must comply with all provisions of the KAGB.
Semi-professional investors are a special category between private investors and professional investors in Germany (and not harmonised throughout the EU by AIFM-Directive). Semi-professional investors are treated like private investors in case of cross-border distribution of funds.
This means – somewhat camouflaged – that while the provisions of the KAGB apply only in part in case of a distribution to professional investors (for example regarding certain reporting obligations and investor information), full KAGB regulation for retail investors applies to the distribution to semi-professional investors.
Therefore, third country UK fund managers intending to distribute a fund to semi-professional investors in Germany must, among other things, submit the following further documentation / information to BaFin:
UK funds therefore need to be aware of the additional efforts needed for distribution to (semi-) professional investors in Germany since 1 January 2021.