Background
On 7 April 2025, His Majesty’s Treasury (the Treasury) announced a consultation on regulations for alternative investment fund managers (AIFMs), (the Consultation). On the same day, the Financial Conduct Authority (FCA) announced a call for input on reforms to its regime for AIFMs (the Call for Input).
Subject to the outcome of the Treasury’s Consultation and feedback received by the FCA, the FCA expects to consult on detailed rules in the first half of 2026.
Aims of proposed reforms
The proposals aim to simplify the regulatory regime applicable to AIFMs. All AIFMs will fall into one of three tiers, depending on their fund size. The level of regulation applicable to each tier also depends on the fund’s investment activities and investor base. Even for larger AIFMs, the Treasury proposes to remove some prescriptive detail.
The changes are part of the Treasury and FCA’s push to encourage economic growth in line with the current Labour government’s growth mission. However, the FCA also wants to ensure that the new regime is consistent with international standards so that firms can continue to do business across borders.
Current rules
Currently, the UK derives its AIFM regulatory regime from the European Union’s Alternative Investment Fund Managers Directive (AIFMD). Under the directive, AIFMs with assets under management (AUM) over:
- £500 million; or
- £100 million for funds that (i) are leveraged or (ii) give investors redemption rights within the first five years,
fall within the scope of the AIFMD’s detailed requirements and are considered ‘full-scope’ firms.
Full-scope firms
AIFMs with AUM in excess of the above thresholds must meet risk management requirements, including reporting requirements, stress testing and liquidity management requirements, in addition to appointing an appropriately licensed depositary. Also, funds managed by such AIFMs must make certain disclosures to investors of their risks, leverage and fees.
Small firms
Firms with AUM that do not exceed the above thresholds (so-called ‘Sub-threshold AIFMs’) only need to meet lighter touch requirements, while a minority of AIFMs managing the smallest funds only need to register with the FCA (Small Registered AIFMs).
By categorising firms as falling either within the full-scope or outside of that regime, the current threshold test creates a cliff-edge risk whereby firms falling just above the threshold become subject to a significant increase in regulatory requirements. For example, if a sub-threshold firm crosses the threshold, it would have to appoint a depository quickly. In the FCA’s view, the effect of such increased compliance requirements (and costs) disincentivises growth.
Key proposals
1. The three-tier approach
The key proposal put forward by the Treasury and FCA is to introduce a three-tiered UK regime, using a more user-friendly net asset value (NAV) calculation (as opposed to the current AUM test) to determine the regulatory requirements applicable to a manager and the funds that it manages. The proposals aim to avoid imposing disproportionate regulatory obligations on smaller and medium-sized managers.
The following three tiers would apply:
- Larger firms: firms with a NAV in excess of £5 billion. A regime similar to the existing full scope UK AIFMD regime will apply to larger firms, however, the FCA proposes to apply certain rules to firms conducting specific activities only. For example, rules on risk limits which categorise risks as market risk, credit risk, liquidity risk, counterparty risk and operational risk are relevant to hedge fund managers but may not apply to other investment firms (e.g., private equity sponsors) in the same way. The FCA also proposes to remove overly prescriptive detail in disclosure and reporting rules.
- Mid-sized firms: firms with a NAV between £100 million and £5 billion. The FCA and Treasury propose that more detailed procedural requirements should not apply to mid-sized firms, except where necessary. For example, the FCA may disapply certain rules set out in the Level 2 Regulation for funds that invest in assets other than transferable securities on the basis that they are less relevant to such funds.
- Small firms: firms with a NAV less than £100 million. Small firms will be subject to core baseline standards. In most cases, requirements of the Level 2 Regulation will not apply to small firms.
As firms cross the proposed thresholds, they will not need to apply to vary their FCA permission. Instead, the FCA suggests that firms will need to notify the FCA of their size category.
Given the substantial increase in the thresholds outlined above, only the very largest firms would be subject to requirements that are similar to the existing regime for full-scope managers. The vast majority of firms should see a significant reduction in the prescriptive requirements with which they need to comply.
2. Authorisation of Small Registered AIFMs
The Treasury is proposing to remove the Small Registered AIFM regime and bring such AIFMs into the scope of the regulatory perimeter by requiring them to become authorised. The Treasury notes that the majority of such firms will fall within the ‘small firms’ category under its three-tiered system and therefore would not be subject to unduly onerous regulation. Additionally, consumers may currently expect a degree of FCA oversight when firms are registered with the FCA, which is not reflected in the limited requirements currently imposed on such firms. Notably, the AIFMs affected include small internally managed investment companies.
The Treasury does acknowledge that the firms would face initial costs of authorisation if this proposal were to proceed and is therefore interested in obtaining input on the proposal.
3. Notification requirements
The Treasury and FCA are proposing to remove notification requirements applicable when an AIFM acquires a controlling interest in a non-listed company. These complex requirements are particularly relevant to private equity funds and their removal will be welcomed by the industry.
4. Other areas
In addition to the key proposals outlined above, the following areas are also under review: (i) the proposal to create a separate regime for venture capital and growth capital funds, (ii) the proposal to take a more bespoke approach towards rules applicable to investment trusts (many of which may be particularly affected by the removal of the small registered AIFM regime referred to above), (iii) AIFM remuneration and reporting, (iv) AIFM business restrictions, and (v) conduct and prudential requirements.
Potential implications
A significant number of firms are likely to be reclassified under the proposed three-tier system from full-scope firms to mid-sized firms. Such firms should find that they are subject to less onerous regulatory requirements, improving their efficiency and reducing costs.
By contrast, other firms that currently fall outside of the regulatory perimeter as Small Registered AIFMs may find that they are brought within it.
Next steps
The deadline for responses to the Consultation and Call for Input is 9 June 2025. Firms that may be affected by the proposals should consider whether they wish to respond. In any event, all AIFMs should closely monitor how the proposals evolve.
Following the Treasury’s consideration of the Consultation’s outcome, it will publish a draft statutory instrument. The FCA currently expects to consult on more detailed rules in the first half of 2026.
Once the Treasury and FCA have decided on the reforms they will take forward, the FCA is likely to remove unnecessary rules quickly. In areas where firms will need time to adapt to the new rules, the FCA is likely to bring in changes more gradually.
If you wish to respond to the Treasury’s Consultation or the FCA’s Call for Input, you can visit the FCA’s Call for Input page or the Treasury’s Consultation page.
Client Alert 2025-107
