UK: FCA consultation CP25/28 on fund tokenisation and Direct2Fund

This is one of a series of three briefings on CP25/28, focussing on the Direct2Fund aspects

Why should I read this?

In consultation paper CP25/28 “Progressing Fund Tokenisation” the FCA is consulting on proposals relating to the introduction of fund tokenisation as well as the Direct2Fund (D2F) dealing model.  While there is no requirement for funds to be tokenised in order to take advantage of D2F, which will be available to all authorised funds, the FCA believes that D2F and tokenisation are highly complementary.

D2F is a proposed new, optional, alternative investor-fund dealing model for UK funds, which will enable investors to transact directly with a fund or its depositary as principal, bypassing authorised fund managers (AFMs) who have traditionally acted as counterparties between investors and funds.  D2F aligns more closely with the investor dealing models in other key fund jurisdictions including Luxembourg and Ireland.

Disintermediating (removing from the chain of transactions) the AFM should have cost savings relating to the AFM’s compliance costs, which the FCA hopes will be passed on to investors in the form of lower fees.

This also eliminates the small credit risk that investors take on the AFM, as money passing from investor to fund and fund to investor passes through its hands. In reality that limited credit risk is highly mitigated by the AFM’s requirements under the client asset safeguarding rules in CASS, but there are a number of other benefits to D2F that we explore below.

It should be noted that the FCA has no concerns about the current dealing model and there will be no requirement for any fund to adopt D2F, though the choice to opt in provides welcome flexibility for the regulated funds industry.

See also the other briefings in this series:

• UK: FCA consultation CP25/28 on fund tokenisation: tokenisation of authorised funds
• UK: FCA consultation CP25/28 on fund tokenisation: tMMFs; the roadmap; future tokenisation models

What do I need to know about D2F?

Why now?

The Investment Association (IA) first proposed the D2F model in 2019 as part of a broader package of reforms aimed at enhancing the competitiveness of the UK funds industry, particularly in the context of the post-Brexit regulatory landscape. The IA identified that the UK’s current model was out of step with international norms in jurisdictions including Luxembourg and Ireland, where investors often deal directly with the fund.

The IA argued that removing the AFM as counterparty would:

• Reduce investor credit risk in the event of AFM failure
• Simplify fund operations by reducing the application of CASS and limiting (but not eliminating) the instances in which the AFM needs to manage client money accounts
  • AFMs may still need to hold dealing cash as client money if funds can’t be reconciled or payments to client bank accounts are returned
• Enhance investor protection and reduce systemic risk
• Improve efficiency and enhance digital innovation in fund operations

The IA established a Legal Working Group (of which Eversheds Sutherland was part) that worked closely with the FCA over several years to refine the D2F model.  CP25/28 confirms the positive regulatory response to the IA’s proposals and reflects the FCA’s current focus on efficiency and innovation.

While tokenised funds don’t need to adopt D2F and D2F funds won’t have to be tokenised,  the FCA saw sufficient links between the two to include D2F as part of its proposals for progressing fund tokenisation.  D2F is expected to be beneficial for firms transitioning to a tokenised fund environment because it will provide flexibility, choice and efficiency.

Changing the dealing model

The current dealing model in the UK requires the AFM to deal as principal, so deals flow through the manager’s account (or “box”) and are then replicated in back to back transactions with the fund.  This model imposes significant operational overheads on the AFM, including the costs of complying with the client asset safeguarding rules in CASS, as well as exposing investors to some counterparty credit risk on the AFM.

Under D2F, the investor’s cash will go directly to the fund through an issue and cancellation (IAC) account and settlement will be directly between the fund and the investor, with unitholder deals effected through direct issue and cancellation of units in the fund.

Introduction as an optional, alternative operating model

The proposals are that AFMs will be able to adopt the D2F model or stick with the existing box/principal model, however, the choice is binary and there will be no hybrid option. If a fund opts into D2F then the AFM will not be permitted to deal in units as principal.

Impact on the FCA Handbook

The FCA intends to retain the current definitions in so far as possible, however new definitions will be included to explain direct dealing and the IAC. 

Under COLL the AFM is expected to arrange for payment of cash or cleared funds to the ICVC or depositary following the issue of units.  For a D2F fund, new drafting will reflect that investors will be contractually obliged to make this payment.  The AFM must be satisfied that the target investors will be able to settle deals in the specified time period.

The AFM can cancel deals in fund units if an investor does not complete them in time.  Whether using the box/principal model or the D2F model, the AFM will bear the costs if it decides not to recover from the defaulting investor.  Under the D2F model if an AFM decides not to cancel deals it will be required to cover interest costs on late payments over a minimum level agreed with the depositary.

There will be other detailed new rules in COLL describing how the issue and cancellation of units will work in a direct dealing fund and how the IAC should be operated, including:

• Issue and cancellation of units can only be operated by an ICVC or, for an ACS or an AUT, by the depositary, however the CP suggests that, if the instrument constituting the fund permits this, the AFM could be the entity responsible for issuing and cancelling units in the fund even under the D2F model
• The IAC must be operated so that it is not overdrawn as at the close of any business day
• The IAC must be reconciled promptly
• There will be responsibilities for the AFM and the depositary to ensure that fund accounting, oversight and governance operate efficiently under the D2F model

Amendments will be made to COLL 3, 4, 5, 6, 7, 8 and 15, reflecting that D2F will be available for the full range of authorised funds (UCITS, NURS, QIS and LTAF).

The IAC

As mentioned above, the FCA proposals are that COLL will be amended to provide for the IAC, a specific bank account to receive payments from, and make payments to, investors, consistent with practice in Ireland and Luxembourg.

The IAC will generally form part of scheme property, however sums in the IAC which the AFM reasonably believes are not attributable to a particular sub-fund must be excluded for the purpose of valuation and pricing.

IACs will be able to operate at either sub-fund or umbrella level.  Draft FCA guidance suggests that an umbrella IAC should only be set up if the AFM is satisfied that this presents only minimal risk of adverse consequences for unitholders, such as contagion risk between sub-funds.  If the IAC operates at umbrella level it will be required to operate in line with the standards of the protected cell regime.

The IAC account will be held in the name of the fund, or, if the fund doesn’t have legal personality, held in the name of the depositary on behalf of the fund.

Under the D2F model, payments from multiple individual investors for deals carried out at a given valuation point will be able to be aggregated in the IAC so that a single bulk transfer is made from the IAC to the relevant sub-fund on the settlement date for that valuation point. 

The AFM must identify individual payments and attribute them to a specific sub-fund.  Sums that cannot be attributed must be returned to the sender or moved to a client money account by close of business on the day following receipt.

How to opt in

Assuming the FCA rules come into effect as currently drafted, in order to opt in to D2F firms will need to:

• Amend the constitutional document of the fund to permit use of direct dealing
• Amend the fund’s prospectus to build in mandatory D2F disclosures, including to explain the implications for investors in the event of insolvency or missed payments and the application of the FSCS in these scenarios
• Apply to the FCA for approval of the above changes
• Notify investors, which the FCA has confirmed could be on a notifiable rather than significant basis

Dealing with small sums arising from fund operations

The FCA plan to allow AFMs and depositaries of D2F funds to dispose of very small amounts of orphan monies left over following schemes of arrangement, or during or following termination or winding up of a fund in circumstances where the dormant asset scheme (DAS) isn’t applicable.  The FCA will permit disclosures within schemes of arrangement or winding up notifications allowing non-material sums to be paid to a recognised charity. The AFM and depositary should agree a de minimis amount on a per unitholder or per fund basis and should agree how these sums should be treated.

Benefits of the D2F model

There are a number of possible benefits to using D2F compared to the traditional UK dealing model, including:

• D2F removes the AFM’s credit risk
• D2F reduces the application of CASS (although some client money rules will continue to be relevant)
• D2F can facilitate the adoption of fund tokenisation by providing a simpler, more efficient and more easily digitalised dealing model
• D2F will permit firms and service providers to apply global operating models across their ranges
• D2F could lead to lower fees, costs and risks and a more efficient trading model.

Although there may not be an immediate uptake of D2F for existing widely distributed funds, given the possible difficulties in switching a large number of investors to a new dealing model, we believe D2F will be a valid option for certain categories of funds.

For example, new funds in the pipeline could be set up under the D2F model from launch.  Funds holding less liquid assets, especially LTAFs, might also find the switch worthwhile, as the direct dealing structure is likely to be more compatible with infrequent dealing cycles and to reduce operational complexity for funds with already sophisticated dealing arrangements.

The FCA has also suggested that firms could consider introducing D2F as part of addressing the T+1 securities settlement changes coming in 2027.

Implications for ISAs

ISA Regulations require ISA subscriptions to be made to an ISA manager and therefore ISA subscriptions cannot go direct to the fund. Currently there are no proposals to change this. If these regulations aren’t revised, ISA subscriptions will continue to go to the ISA manager and be treated as client money, therefore D2F will not be applicable. 

Possible solutions to this problem include enabling the ICVC to act as the ISA manager or only permitting ISA subscriptions of assets rather than cash.  However, those possible solutions have tax consequences and other challenges.  It would be preferable for the ISA Regulations to be reviewed by HMRC to enable funds that permit ISA subscriptions to use the D2F model.

Next steps

The consultation on Chapters 2-4 of the paper closes on 21 November 2025. The Chapter relating to D2F is Chapter 3. Responses can be submitted on the form on the FCA website or by email to cp25-28@fca.org.uk.  We will be responding to the consultation.  We are able to assist with your response to the consultation.  If you would prefer for us to include your response with ours, we can do so on an attributed or anonymous basis.

There will be a follow up consultation on the application of AML and KYC rules to D2F.  A policy statement and final rules are expected in H1 2026 and the new rules may come into effect immediately.

How Eversheds Sutherland can help

We are a leading legal adviser to the investment funds sector, with a top-tier team in funds, asset management, and regulation based in the City of London.

Our work routinely covers the formation, operation, restructuring, and termination of UK-authorised and unauthorised funds. With over 40 years’ experience, we advise on complex fund structures across key jurisdictions including the UK, Luxembourg, and Ireland.

We support both global asset managers and boutique firms, offering end-to-end legal guidance on fund establishment, authorisation, and post-authorisation matters. Our expertise spans UCITS, NURS, QIS, and structures such as OEICs, AUTs, and ACSs.

We are active members of industry bodies including the Investment Association, TISA, AIMA, AREF, and ISDA, and regularly engage with HM Treasury on regulatory initiatives, most recently the Long-Term Asset Fund (LTAF).