On 14 October 2025, the Financial Conduct Authority (FCA) launched a significant consultation paper, CP25/28, proposing reforms intended to advance the tokenisation of UK authorised funds and introduce new direct dealing arrangements. This initiative marks a pivotal step in modernising the UK’s fund management landscape, aiming to enhance efficiency, reduce administrative burdens, and strengthen the country's position as a premier global asset management hub.

Currently, UK authorised funds operate through a distinctive system wherein Authorised Fund Managers (AFMs) act as principals in unit transactions. This model necessitates investors to transact indirectly with funds via AFMs rather than dealing directly with the fund or its depositary. While unique to the UK, this structure has been criticised for imposing increased administrative complexity and regulatory risk, placing UK fund managers at a competitive disadvantage compared to their international counterparts in key markets such as Ireland and Luxembourg. The FCA's proposal would allow investors direct interaction with funds via Issues and Cancellations Accounts (IAC), thereby eliminating the need for interim exposure to an AFM and associated client money requirements. This alignment with international practices is expected to yield significant operational cost savings, with net estimated benefits ranging from £27 million to £57 million over the next decade.

The consultation extends beyond procedural adjustments to include comprehensive guidance for implementing distributed ledger technology (DLT) within authorised funds. Following the launch of the first tokenised UK UCITS authorised fund earlier this year, the FCA’s proposed framework clarifies how fund managers can use DLT for maintaining fund registers on private or public networks. Key areas of guidance address the authority to execute unilateral register updates through smart contracts or master-node functionalities, the development of eligibility verification systems including “whitelisting” procedures, and ensuring compliance with Money Laundering Regulations. These clarifications seek to provide a robust infrastructure that supports transparency, security, and regulatory compliance in the tokenisation process.

The FCA also sets out a strategic roadmap for further integration of tokenisation within fund management. Notable proposals include supporting the use of tokenised money market fund (tMMF) units as collateral in derivatives transactions, with explicit confirmation of eligibility under UK EMIR regulations. Additionally, amendments to the Collective Investment Schemes Sourcebook (COLL) would permit funds to hold “ancillary digital assets” for operational purposes, recognising the growing role of digital instruments. Moreover, the consultation confirms that funds can invest in digital securities, including instruments involved in the Treasury’s DIGIT pilot programme, signalling governmental support for innovation in digital finance.

Looking further ahead, the FCA explores a phased evolution model for tokenisation. Phase one focuses on tokenised funds employing DLT for register maintenance and unit settlement. Phase two envisages direct holdings of tokenised assets, managed through smart contracts in “micro-model portfolios,” allowing increased automation and customization. The final phase anticipates the tokenisation of cash flows, breaking assets into tokenised cash-flow components to enable bespoke investment solutions tailored precisely to individual investor requirements. This phased approach reflects a forward-looking vision that anticipates transformative shifts in fund management enabled by blockchain and smart contract technology.

The FCA has invited feedback on the operational proposals by 21 November 2025, with responses on the future tokenisation models due by 12 December 2025. Final rules are expected to be published in the first half of 2026, offering clarity and legal certainty for market participants preparing to embrace these technological advances.

The FCA’s consultation should be considered within a broader context of regulatory reforms across the UK’s financial sector. Earlier in 2025, HM Treasury launched its own consultation aiming to streamline regulations for Alternative Investment Fund Managers (AIFMs) to make the UK asset management sector more competitive and efficient. Parallel consultations by HM Revenue & Customs and HM Treasury focus on enhancing regulatory oversight of cryptoassets through detailed reporting, due diligence requirements, and marketing scrutiny to ensure consumer protection and market integrity. These initiatives collectively highlight a coordinated governmental approach to fostering innovation while safeguarding stability and confidence in the evolving financial ecosystem.

Furthermore, the UK's active engagement in international dialogues, notably the 10th UK-Singapore Financial Dialogue held in July 2025, underscores a collaborative stance on digital finance innovation, including tokenisation. The dialogue reinforced shared ambitions to harness technology for sustainable and inclusive financial markets, further situating the UK within a global network of financial innovation.

Overall, the FCA’s consultation signals the UK’s intent to maintain its leadership in fund management innovation by embracing direct dealing and leveraging blockchain technology. If implemented, these reforms could streamline investment processes, reduce operational costs, and open new avenues for bespoke, tech-enabled investment solutions, thus reinforcing the UK’s stature as a forward-looking financial centre.

📌 Reference Map:

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  • Paragraph 7 – [2] (gov.uk), [3] (gov.uk), [4] (gov.uk)
  • Paragraph 8 – [7] (gov.uk), [1] (National Law Review)

Source: Noah Wire Services