Miscellaneous Unauthorised Co-ownership alternative investment funds (AIFs)
Since March 2020, the government has been conducting a review of the UK’s funds regime to identify options to make the UK a more attractive location to set up funds and to support a wider range of more efficient investments that are better suited to investor needs. This review encompasses the fund structures available in the UK, their legal form, their regulation and their taxation.
	In January 2021, the government sought stakeholder views on the wider components of the review by publishing Review of the UK funds regime: A call for input ("Call for Input"). The Call for Input set out the objectives and scope of the review and requested feedback on which reforms should be taken forward and how they should be prioritised.
	Prior to the launch of the Call for Input, the asset management sector had made representations to the government pointing out that there is a gap in the range of fund structures offered by the UK for which FCA authorisation is not required. Stakeholders argued that there is demand for a flexible, tax-efficient, unauthorised fund structure that can invest in asset classes other than stocks and bonds ("alternative asset classes") , aimed only at professional investors. These funds cannot currently be set up in the UK. The government sought views on this potential gap as part of its Call for Input.
	A significant proportion of the respondents to the Call for Input on these areas called for the creation of a new fund structure: the unauthorised contractual scheme. The unauthorised contractual scheme was proposed to be a contractual scheme, as per section 235A of FSMA 2000, that is: unauthorised, unlisted, closed-ended 18 , only available to professional investors, unconstrained in terms of investment approach, tax transparent for income 19 , and has tradeable units.
	In February 2022, the government published Review of the UK funds regime: a call for input - Summary of responses ("Summary of Responses"). This publication summarised the responses the government received following the Call for Input, set out the government’s response to respondents’ feedback, and the next steps the government proposed to take to ensure that the UK funds regime review delivers on its objectives. In the Summary of Responses, the government committed to further explore options for the introduction of the unauthorised contractual scheme.
	At present, the rights and liabilities of participants under sections 261M to 261O and section 261P(1) and (2) of FSMA 2000 only applies to a contractual scheme, that is structured as a co-ownership scheme and which benefits from an authorisation order (typically abbreviated to CoACS). As a result, if a new investment vehicle that is similar to the unauthorised contractual scheme was introduced in statute, it would not benefit from the same provisions in relation to the contracts in the scheme, statutory rights and limitation and segregation of liability as a CoACS does. The absence of these provisions means that if an unauthorised contractual scheme was introduced in statute it is unlikely to be commercially viable and may present inappropriate risk to participants.
	The Act provides HM Treasury with a power to essentially apply relevant rights and liabilities that a CoACS would already benefit from, to the proposed unauthorised contractual scheme in order to ensure its commercial viability (in the event that such an investment vehicle were to be introduced).
	Before making the unauthorised contractual scheme available in the UK, the government must ensure that it is subject to the appropriate legal, regulatory and tax treatment. That work continues, however it is clear that this scheme will not be a commercially viable product without having the appropriate rights and liabilities in place, especially for participants. Therefore, the government is legislating for this power now to ensure that – should it decide to proceed with this fund structure in the future – it can do so successfully.