Following on from our recent post on the Overseas Funds Regime (OFR), we turn our focus to the interaction between the OFR and the UK’s Sustainability Disclosure Requirements (SDR). If you would like to know more about SDR, we have numerous posts exploring what it means for our clients here. 

Currently, SDR does not extend to include funds recognised under the OFR. However, per the FCA’s and HM Treasury’s roadmap to implementing the OFR, the UK Government is aiming to consult imminently on whether SDR should be extended in its application to cover OFR funds. If the Government chooses to legislate accordingly, it plans to draft legislation by the end of this year. The FCA is then expected to consult during 2025 on rules and guidance to implement that extension, with a view to the legislative requirements taking effect in the second half of 2025. Whether this timeline remains on track should be determined as soon as we enter Q4 of this year. 

What might these changes mean for OFR funds? 

Respondents to a previous FCA consultation in July 2024 raised concerns over disparities between the EU’s Sustainable Finance Disclosure Regulation (SFDR), and SDR, particularly around the naming of a fund which they felt could be problematic if the fund had sustainability-related goals and the firm complied with SFDR but did not meet certain requirements under SDR, potentially resulting in the fund being refused OFR recognition on the basis of a misleading name. 

Complying with both SFDR and SDR may be difficult technically for fund managers and could create an uneven playing field between sustainability-focused EU and UK funds, as well as potentially increasing compliance costs for funds.

There is also the added risk that firms experiencing difficulties in navigating the complexities of the two regimes could be deterred from applying under the OFR to have their funds distributed to the UK market. 

Nevertheless, the FCA is keen to align SDR with SFDR, but only time will tell if the two regimes will be compatible or run the risk of divergence. It may be that these uncertainties persist as the “landing slots” begin to open from the 1 October, and may be ironed out with time, but this does not negate the fact that funds that are first alphabetically may struggle in due course due to the lack of guidance on the issue. With the looming possibility of legislation being drafted by the end of the year, we hope the Government and the FCA work together to rectify these uncertainties as early as possible. We will be following how this unfolds and providing further updates. 

Written by Madeleine Chambers