UK resolves tax obstacle to retail access to alternative funds of funds

The Financial Services Authority has announced further progress for its plans to allowing retail consumers to invest in funds of hedge funds and other alternative investments authorised in the UK.

The UK regulator says the progress follows resolution of a tax problem in co-operation with the UK Treasury. Following a period of consultation with the industry, it hopes to finalise the rules for retail alternative funds and announce a date for their implementation before the end of 2008.

The regulator has issued a fresh consultation paper, following one published last June, confirming its intention of introducing retail-oriented funds of alternative investment funds (Faifs) into the FSA's regulatory regime.

The paper is also the basis for a further round of consultation on various key issues that the FSA says have been raised by fund managers and other interested parties during the previous consultation exercise, and which require resolution before the final regime is introduced.

'Permitting consumers access to a wider range of innovative investment strategies through authorised onshore vehicles will allow more choice and a better opportunity for risk diversification, while maintaining consumer protection through our proportionate rules on the operation of the product,' says Dan Waters, director of retail policy and themes and asset management sector leader at the FSA.

'We aim to make the final adjustments to the new regime before the end of the year, including the additional areas on which we are consulting today.

'As we have previously stated, there are a number of difficult tax issues involved in the operation of onshore Faifs regime. Following constructive discussions with the Treasury on tax issues, we welcome the publication of their tax framework, setting out a new elective regime which aims to allow Faifs to operate competitively within the UK retail market.'

To avoid any regulatory regime being used to gain unintended tax advantages, the FSA also propose to include a 'genuine diversity of ownership' condition in its rules, similar to those proposed by the Treasury in its discussion paper on property authorised investment funds last December.

The new consultation period will close on May 22, following which the FSA will finalise the draft rules in light of the responses and publish a policy statement giving feedback towards the end of the year. This will set out the finalised rules for Faifs as a whole and the date on which they will come into effect.

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