FSCS levy changes: Managers of Collective Investment Schemes – 18/5

31st May 2018

Introduction

The FCA have now implemented changes to the FSCS levy that extend protection to a wider range of consumers. The changes, first proposed in consultation papers CP16/42  and CP17/36, and brought into effect as of April 2018, extend FSCS protection to participants of Collective Investment Schemes (“CIS”), consumer credit with respect to debt management activities, intermediation and investment of structured products and certain Lloyds of London contributions to the retail pool. This regulatory briefing focuses on the impact of the changes to managers of CISs.

The FCA have decided to bring consistency to the circumstances in which the FSCS can compensate CIS consumers if an authorised fund manager or depositary is declared in default. The rationale for such is that participants in CISs have historically found it difficult to pursue valid civil liability claims. The new changes enable the FSCS to ‘look through’ a CIS (or any intervening fund operators, managers, depositaries or trustees) claim against an authorised fund manager directly to its participants whom, if they are eligible claimants, can be compensated.

What does this mean?

FSCS will now extend to participants of CISs, including those which are unit trusts, ICVCs and limited liability partnerships (LLPs). FSCS protection does not extend to alternative investment funds (AIFs) which are not CISs.

Authorised CIS fund managers and depositaries whose participants qualify as eligible claimants and who do not currently pay, or pay reduced levies, will start to pay higher levies.

How do I know if the participants in the CIS I manage are Eligible Claimants?

Eligible claimants are certain persons who have a protected claim against an authorised person who is in default. This includes most clients of the defaulting firm, except:

  • other authorised firms
  • overseas financial institutions
  • supranational institutions, governments and central administrative authorities
  • provincial, regional, local and municipal authorities
  • large companies (other than for protected deposits) – defined as any company exceeding the conditions for a small company. A small company must possess at least two of the following three criteria:
    1. Turnover not more than £10.2 million
    2. Balance sheet total not more than £5.1 million
    3. 50 or less employees.
  • large mutual associations.

Refer to Annex 1 which, as per COMP 4.2  sets out who is and is not an Eligible Claimant.

What exactly is a Collective Investment Scheme?

Please refer to Annex 2 for the definition of a collective investment scheme.

Is an AIF a Collective Investment Scheme?

The definition of a collective investment scheme does not exclude an AIF (see Annex 3), therefore it is very possible that the AIFs under management are collective investment schemes. The current guidance from the FCA in PERG 16 does not determine whether an undertaking is a collective investment scheme, however the main example given of an AIF that is not a collective investment scheme is an AIF in the form of a body corporate other than an open-ended investment company. This means that if the AIF you manage is a body corporate i.e. a limited company, it is unlikely to be considered a collective investment scheme.

What are your options?

  • Calculate your annual eligible income based on income attributable to business conducted with or for the benefit of eligible claimants; OR
  • If it is not possible to identify income attributable to business conducted with or for the benefit of eligible claimants, include all annual income.

Further reading

If you would like to learn more about the history of FSCS and its funding sub-classes, please see our briefing: FSCS Levy – Lessons from 2011 (12/11).

 

Annex 1. Eligible Claimants under the FSCS

All individuals that are participants within collective investment schemes ARE eligible claimants.

  • An FCA authorised and regulated sole trader, a credit union a trustee of a stakeholder pension scheme (which is not an occupational pension scheme)

A personal pension scheme (a firm carrying on the regulated activity of operating or winding up)

A stakeholder pension scheme (which is not an occupational pension scheme)

A small business (annual turnover less than £1 million)

*In each case, only where a claim arises out of a regulated activity for which they don’t have a permission, they

ARE eligible claimants.*

  • A trustee of a personal pension scheme or a stakeholder pension scheme or a stakeholder pension scheme (which is not an occupational pension scheme)

A trustee of a an occupational pension scheme insofar as members’ benefits are money-purchase beenfits

A trustee of an occupational pension scheme (pension scheme established for the purpose of providing benefits to people with service in employments of a prescribed description) of an employer which is not:

  • a large company (a body corporate which does not qualify as a small company under section 247 of the Companies Act 1985 , or section 382 of the Companies Act 2006 as applicable),
  • a large partnership (a partnership or unincorporated association with net assets of more than £1.4 million )or
  • a large mutual association (a mutual association or unincorporated association with net assets of more than £1.4 million )

ARE eligible claimants.

  • If the relevant person in default is a mutual association which is not a large mutual association (with net assets of more than £1.4 million )and the directors do not receive a salary or other remuneration for services performed by them for the relevant person in default;

In respect of a claim against a successor (a person who has assumed responsibility for liabilities arising from acts or omissions of a relevant person) in default, the relevant person or a successor, to whichever the directorship relates, is a mutual association which is not a large mutual association and the directors do not receive a salary or other remuneration for services performed by them for the relevant person or a successor

If the relevant person in default is a credit union (a body corporate registered under the Industrial and Provident Societies Act 1965);

They ARE eligible claimants.

Note: the FSCS may determine a relevant person to be in default if it is satisfied that a protected claim exists (other than an ICD claim), and the relevant person is the subject of one or more of the following proceedings in the United Kingdom (or of equivalent or similar proceedings in another jurisdiction):.

(1) the passing of a resolution for a creditors’ voluntary winding up;

(2) a determination by the relevant person’s Home State regulator that the relevant person appears unable to meet claims against it and has no early prospect of being able to do so;

(3) the appointment of a liquidator or administrator, or provisional liquidator or interim manager;

(4) the making of an order by a court of competent jurisdiction for the winding up of a company, the dissolution of a partnership, the administration of a company or partnership, or the bankruptcy of an individual;

(5) the approval of a company voluntary arrangement, a partnership voluntary arrangement, or of an individual voluntary arrangement.

  • Bodies corporate in the same group as the relevant person in default, if that body corporate is a trustee that falls within 1 or 4 above or carrying on the regulated activity of operating or winding up a stakeholder pension scheme (which is not an occupational pension scheme) or personal pension scheme (a scheme or arrangement which is not an occupational pension scheme or stakeholder pension scheme)

ARE eligible claimants

  • Persons who are not responsible for, in the opinion of the FSCS, or have contributed to, the relevant person’s default

ARE eligible claimants.

  • Companies which are not large companies, and therefore qualify as a small company under section 382 of the Companies Act 2006:

– The qualifying conditions are met by a company in a year in which it satisfies two or more of the following requirements—

1. Turnover Not more than £5.6 million
2. Balance sheet total Not more than £2.8 million
3. Number of employees Not more than 50
ARE eligible claimants.
  • Partnerships or mutual associations with net assets of less than £1.4 million

ARE eligible claimants.

  • Persons whose claim does not arise from transactions in connection with which they have been convicted of an offence of money laundering

ARE eligible claimants.

  1. Persons whose claim does not arise under the Third Parties (Rights against Insurers) Act 1930

ARE eligible claimants.

  • A claim in relation to a protected contract of insurance (a contract of insurance which is covered by the compensation scheme) or protected non-investment mediation (insurance mediation activities which are covered by the compensation scheme), body corporate, partnerships (not including limited liability partnerships), mutual associations and unincorporated associations and unincorporated associations which are small businesses (annual turnover of less than £1 million)

ARE eligible claimants.

The following are NOT eligible claimants under the FSCS

  • Authorised financial institutions

ARE NOT eligible claimants.

ARE NOT eligible claimants.

  • Collective investment schemes (any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income; and which are not excluded by the Financial Services and Markets Act (Collective Investment Schemes) Order 2001)

Anyone who is the operator or trustee of such a scheme

ARE NOT eligible claimants.

  • Pension and retirement funds, and anyone who is a trustee of such a fund

ARE NOT eligible claimants.

  • Supranational institutions, governments, central administrative authorities, provincial, regional, local and municipal authorities

ARE NOT eligible claimants

  • Provincial, regional, local and municipal authorities

ARE NOT eligible claimants

  • Directors of the relevant person in default or, in respect of a claim against a successor in default, directors of any successor or directors of the relevant person

ARE NOT eligible claimants

  • Bodies corporate in the same group as the relevant person in default or, in respect of a claim against a successor in default, bodies corporate in the same group as a successor or the relevant person,

ARE NOT eligible claimants.

  • Persons who, in the opinion of the FSCS, are responsible for, or have contributed to, the relevant person’s (or, where applicable, a successor’s) default

ARE NOT eligible claimants.

  • Large companies

ARE NOT eligible claimants.

  • Large Partnerships

ARE NOT eligible claimants.

  • Persons whose claim arises from transactions in connection with which they have been convicted of an offence of money laundering.

ARE NOT eligible claimants.

  • Where the claim is in relation to protected non-investment insurance mediation, bodies corporate, partnerships, mutual associations and unincorporated associations which are not small businesses.

ARE NOT eligible claimants.

  • Alternative investment funds, and anyone who is the AIFM or depositary of an alternative investment fund.

That is, a collective investment undertaking, including investment compartments thereof, which:

(a) raises capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors; and

(b) does not require authorisation pursuant to article 5 of the UCITS Directive.

ARE NOT eligible claimants.

  • Large mutual associations

ARE NOT eligible claimants.

  • Where the claim is in relation to protected debt management business, any person other than a natural person.

ARE NOT eligible claimants.

 

Annex 2. Definition of a Collective Investment Scheme

As defined by section 235 of the Financial Services and Markets Act 2000:

(1) “Collective investment scheme” means any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income.

(2)The arrangements must be such that the persons who are to participate (“participants”) do not have day-to-day control over the management of the property, whether or not they have the right to be consulted or to give directions.

(3)The arrangements must also have either or both of the following characteristics—

(a) the contributions of the participants and the profits or income out of which payments are to be made to them are pooled;

(b) the property is managed as a whole by or on behalf of the operator of the scheme.

(4)If arrangements provide for such pooling as is mentioned in subsection (3)(a) in relation to separate parts of the property, the arrangements are not to be regarded as constituting a single collective investment scheme unless the participants are entitled to exchange rights in one part for rights in another.

(5)The Treasury may by order provide that arrangements do not amount to a collective investment scheme—

(a)in specified circumstances; or

(b)if the arrangements fall within a specified category of arrangement.

 

Annex 3. Definition of an AIF

An AIF is a collective investment undertaking, including investment compartments thereof, which:

(a) raises capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors; and

(b) does not require authorisation pursuant to article 5 of the UCITS Directive.

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