UK overhaul of the regime for alternative investment fund managers

Background

On 7 April 2025 HM Treasury (HMT) published a consultation paper (Consultation Paper) on proposed changes to the UK alternative investment fund managers (AIFM) legislative framework, and the Financial Conduct Authority (the FCA) published a call for input on how to create a more proportionate, streamlined and simplified regime.

This is an important opportunity for AIFMs, depositaries and other stakeholders to engage with the UK government and the FCA to ensure that the proposed future AIFM regime is sufficiently tailored for the UK market and increases the UK's attractiveness as an asset management hub.

 

HMT Consultation Paper

The existing framework applicable to AIFMs is principally derived from the EU Alternative Investment Managers Directive (the AIFMD). Broadly speaking, the application of the regime and the accompanying rules depend on whether the AIFMs assets under management (AUM) exceed certain thresholds.

HMT notes that the thresholds have not been updated or reviewed since the introduction of the AIFMD in 2013 and has created an unhelpful “cliff-edge” effect where sudden market fluctuations or changes in AUM valuations have inadvertently brought smaller AIFMs within scope of the full scope AIFM regime with all of the associated costs and regulatory burdens. Therefore, the UK Government is minded to eliminate the current fixed legislative thresholds that currently require AIFMs with AUM above EUR100m or EUR500m (for funds that are unleveraged) to be authorised by the FCA and comply with the full-scope requirements, and give the FCA the power to introduce a proportionate tiered rules regime, which would apply the rules to AIFMs based on their size, scope of activities, and the associated risk profile of the AIFs that they manage.

Impact on sub-threshold AIFMs

HMT notes that the UK currently operates two regimes for sub-threshold managers¹: (a) an authorisation regime; and (b) a registration regime.

Managers that fall within the scope of the authorisation regime must be authorised by the FCA to manage AIFs but they are subject to a lighter touch oversight and compliance rules regime.

There are currently three categories of managers that fall within the scope of the registration regime, namely, (i) managers of Social Entrepreneurship Funds (SEF) and Registered Venture Capital Funds (RVECA); (ii) managers of Unauthorised Property Collective Investment Schemes (Property Fund Managers); and (iii) Managers of ‘Internally Managed Companies’ (Managers of IMCs).

Property Fund Managers and Managers of IMCs are required to register with the FCA and comply with certain limited reporting requirements. HMT is proposing to require Property Fund Managers and Managers of IMCs to seek authorisation from the FCA, as managers. This will result in such managers incurring certain significant up-front costs to become authorised and comply with a set of FCA rules based on their size. HMT welcomes feedback from impacted firms on the impact of having to seek FCA authorisation.

Managers of SEF and RVECA funds are registered with the FCA and subject to certain limited and tailored requirements. At this stage, HM Treasury intends to maintain the existing framework for managers of SEF and RVECA funds but it will consult on proposed changes in a separate consultation process. Nevertheless, market participants are encouraged to provide feedback on how the regulatory regime could be best adapted to suit the needs of SEFs and venture capital funds.

Listed Closed-Ended Investment Companies

HMT is proposing that all Listed Closed-Ended Investment Companies² remain in-scope of the AIFM regulations.

They note that there is evidence that some funds are being structured as internally managed companies in order to qualify for the light touch registration regime, even where this is not consistent with the business model of the fund. Therefore, HMT is considering requiring the managers of sub-threshold internally managed companies to apply for FCA authorisation, as managers of AIFs. HM Treasury welcomes feedback on the feasibility and likely costs associated with this approach.

NPPR, marketing, private equity notifications and valuations

HMT does not intend to make any changes to the UK National Private Placement Regime. and notes that any "technical changes" will be subject to consultation when the draft legislation is published.

However, HMT is considering making the following changes to the marketing notification, private equity notification and external valuation rules:

• remove the requirement for full-scope UK AIFMs of UK or Gibraltar AIFs to give the FCA 20 working days notification of their intention to market to UK investors;
• remove the requirements on full-scope UK AIFMs and above threshold overseas AIFMs to submit information to the FCA regarding any AIFs they manage, which acquire control of non-listed companies and issuers; and
• remove the legislative/legal liability on external valuers for any losses caused by the valuer being negligent or intentionally failing to perform its tasks. This would mean that the external valuer would have contractual liability to the AIFM, but the AIFM would still have legal liability to the fund and its investors. In other words, the buck would stop with the AIFM.

Definitions and Perimeter Issues

Finally, HMT intends to transfer key definitions underpinning the regulatory AIFM perimeter to the Regulated Activities Order to provide greater clarity and consistency.

 

FCA: Call for Input

The FCA Call for Input is intended to give AIFMs and stakeholders: (a) clarity around the FCA's intention to recalibrate the rules applicable to AIFMs to make them more proportionate and streamlined; and (b) an opportunity to comment before the FCA develops detailed rules and guidance for consultation. The Call for Input includes a series of questions that AIFMs and other stakeholders are invited to comment on.

Simplified rule structure

The FCA acknowledges that the current rule structure and application is unnecessarily complex and difficult to navigate so they intend to make the AIFM regime easier to understand by grouping the rules into clearer, thematic categories that reflect different business activities and phases of the fund product cycle, as follows:

• Structure and operation of the AIFM firm: (i) general standards of governance and behaviour; and (ii) basic systems and controls requirements;
• Pre-investment phase: (i) requirements during product design and development; and (ii) disclosure requirements to prospective investors;
• During investment: (i) ongoing obligations while a product is in operation; and (ii) periodic investor information disclosure requirements; and
• Change-related: (i) rules that apply when an AIFM changes something about the product; and (ii) rules that apply or require disclosure when something specific happens³.

Setting the threshold and implementing a proportionate regime

• Under the proposed future regime, the FCA intends to classify firms into three broad categories: Larger AIFMs (with GBP5 billion NAV or more) would be subject to rules that are similar to the current full scope UK AIFM regime but with certain burdensome requirements removed entirely and others only applying to AIFMs when conducting certain types of activities and strategies. The FCA also intends to simplify the disclosure and reporting requirements.
• Mid-sized AIFMs (with NAV between GBP100 million and GBP5 billion) will be subject to a regime that is consistent with the rules that apply to the largest firms but with less prescriptive rules (where appropriate), which is intended to allow firms to comply with rules in a manner that works best for them. The FCA anticipates that a significant number of AIFMs will be reclassified as mid-sized firms when the FCA increases the thresholds. mid-sized AIFMs will also benefit from the removal of unnecessary burdensome rules across the board and applying certain rules only to those undertaking specific types of activities and strategies.
• Small sized AIFMs (with NAV up to GBP100 million) will be subject to certain core requirements appropriate to their size and activity. This will principally consist of baseline standards essential for maintaining appropriate levels of consumer protection and market integrity. The FCA does not expect that existing small authorised AIFMs will need to materially raise their standards to comply with this framework.

Whilst the FCA has considered whether retaining the existing gross measure of AUM as a basis for determining the size of firms and setting thresholds for different categories in the future regime, the FCA is leaning towards applying a threshold based on the AIFM's net asset value ( ie, an AIFM's assets minus its liabilities (NAV). It welcomes feedback from AIFMs and stakeholders on the appropriateness of the upper threshold of £5 billion NAV for larger AIFMs and the lower threshold of GBP100 million NAV for smaller AIFMs.

This proposed change in approach to thresholds would mean that AIFMs would no longer be required to apply to the FCA to vary the scope of their permissions to move between size thresholds and categories. Rather they would simply be required to notify the FCA of their new classification, including any decision to voluntary opt into a higher category (e.g., to satisfy professional investors' expectations or to comply with non-UK rules where the AIFMs also conducts cross border business).

The FCA acknowledges that some of the rules applicable to AIFMs may not be appropriate or suitable for certain types of AIFMs and so is considering aligning the application of certain rules to the activities and strategy pursued by the AIFM (eg, the FCA notes that a hedge fund manager would have risk limits as an integral part of its investment process, whereas a private markets fund manager might not need to set all risk limits in the way the rules envisaged). Annex 1 of the call for input includes further examples of how the rules might apply to AIFMs conducting different activities and pursuing different strategies.

Leverage

The FCA notes that much of the leveraged exposure of AIFMs is concentrated in firms with the largest NAV. The FCA intends to evaluate the effectiveness of the current AIFM provisions in addressing risks from leverage whilst taking account of the upcoming Financial Stability Board recommendations. The FCA is also considering whether it needs to be clearer about its expectations of the risk management policies, procedures, and controls that highly leveraged firms need to have in place to effectively manage this risk.

Sector specific approach

The FCA recognises that different types of AIFs operate under different models, structures and techniques and therefore is considering whether to introduce a tailored regime to such managers. This will be relevant to listed closed ended investment companies but in due course, it may also apply to venture capital and social enterprise funds.

Depositories

Whilst the FCA recognises that professional and sophisticated investors may not require or appreciate the benefit of the protections afforded by the current depositary regime, it does not intend to make material changes to the depositary rules for large and medium sized AIFMs. Nevertheless, market participants are invited to comment on whether proportionate alternatives that meet global regulatory standards could be introduced as a viable alternative which could reduce costs whilst maintaining adequate protection to investors.

Future consultations

The FCA intends to provide additional colour on the shape of the future regime by publishing separate consultations on the following items: (a) prudential rules for AIFMs, (b) regulatory reporting for AIFMs, (c) rules in relation to disclosure, distribution and marketing to retail investors, (d) AIFM remuneration requirements, (e) potentially extending the scope of activities that can be performed by an AIFM within the same legal entity; and (f) the creation of a simplified single set of rules for AIFMs.

 

Conclusion

AIFMs, depositaries and other stakeholders have until 9 June 2025 to respond to the HM Treasury consultation paper and the FCA Call for Input.

Following feedback to the consultation, HM Treasury will publish a draft statutory instrument which will include changes to the AIFM regulatory framework. The FCA plans to consult on detailed rules in the first half of 2026, subject to feedback and decisions taken by HM Treasury.

If you have any comments or questions, please contact Karen Butler.

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¹The existing threshold is set at EUR100 million, except for where a manager only manages AIFs that are unleveraged and have no redemption rights for the first 5 years, where it is set at EUR500 million.
²Broadly speaking, Listed Closed-Ended Investment Companies are investment funds which are admitted to the Official List and traded on the Main Market of the London Stock Exchange. These companies are subject to the FCA’s Listings Rules.
³Page 9 of the FCA Call for Input paper.