Modification by consent of COLL 5.6.22R
This modification will enable managers and depositaries of authorised funds that invest in immovable property to provide guarantees and indemnities to third parties where required by the terms of the purchase to do so. It will also allow for such guarantees and indemnities to be backed by the scheme property.
What is the purpose of the modification?
Under the unmodified rules, Investment Companies with Variable Capital (ICVCs) and depositaries of authorised retail funds are prevented from providing a guarantee or indemnity in respect of the obligation of any person. Nor may they use any of the scheme property of the fund to discharge any obligations arising under a guarantee or indemnity with respect to the obligation of any person. For a fund that invests in immovable property (land and buildings), this may cause difficulty in relation to contracts for transferring commercial property. Many of these contracts impose certain obligations or liabilities on the transferee, for which the transferee must give a guarantee of performance to the transferor. Such obligations are typically about ensuring the payment of rent and other financial liabilities, maintaining the fabric of the property, or covenanting to refrain from undertaking certain commercial activities. These are likely to be seen as normal commercial terms for immovable property, which do not affect its marketability.
We acknowledge that a fund dedicated to investing in immovables is likely to be unduly restricted in its ability to achieve its aims, if it cannot purchase properties because the transferee (who is usually the depositary of the fund) is forbidden to provide the necessary legal undertakings to the transferor. We also acknowledge that our rules currently provide for other circumstances in which it is considered reasonable to use scheme property to cover the liability under an indemnity. This modification will ensure authorised funds can invest in immovable property of the kinds permitted by our rules, provided the terms of the purchase do not involve taking on obligations or liabilities that would represent an undue risk to investors.
Which firms does this apply to?
This modification will apply to the depositary of a non-UCITS retail scheme (NURS) whose investment objective and policy include the power to invest in immovable property. For a NURS constituted as an ICVC, it also applies to the ICVC itself.
What does this mean for firms?
The practical effect of the modification is that depositaries can provide guarantees to third parties for contracts for immovable property to be purchased for the fund, in accordance with certain conditions. The depositary must be satisfied on reasonable grounds that the terms of the guarantee or indemnity will not result in undue risk for unitholders. To meet this condition, we would expect it to base its assessment on appropriate expert advice as to whether the obligations or liabilities are normal commercial terms for a property of that type in that market.
We have set out the changes in detail in the modification direction [PDF].
This modification is valid for 5 years from the start date of the direction unless subsequently withdrawn.
How can firms make use of this modification?
If you want to take advantage of the modification by consent described here, you should write to:
Central Waivers Team
The Financial Services Authority
25 The North Colonnade
Canary Wharf
London
E14 5HS
Or email us at: centralwaiversteam@fsa.gov.uk
We will then write to you to confirm that the modification has been granted, and we will publish each modification direction we grant on our website.
