Rules Britannia – the UK considers streamlining its regulation of alternative investment fund managers

The UK government has been clear that reducing the burden of regulation is a key component of its plans to bolster economic growth and attract investment. It has previously committed to delivering a regulatory reform programme by the end of the current Parliament (see our article on the UK government's Action Plan from March 2025).

It is in this context that, on 7 April 2025, the FCA and HM Treasury (HMT) published a call for input and consultation paper, respectively, proposing reforms to the regulatory framework for alternative investment fund managers (AIFMs).

What is being proposed?

The UK government intends to replace the current regulatory regime, largely governed by the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD), with a new framework to be set out under FCA rules and secondary legislation as part of an effort to streamline regulations applying to asset managers and make the UK a more attractive place for doing business in the future.

The planned reforms have been split into the following four workstreams, which HMT and the FCA will work in conjunction on delivering:

• Establishing a perimeter that determines which firms must be authorised and regulated.

• Establishing a legislative framework for the regime, such as provisions for marketing alternative investment funds (AIFs) in the UK.

• Reviewing existing requirements for firms.

• Transferring firm-facing provisions currently in secondary legislation to FCA rules.

What changes are being suggested?

The call for input outlines plans to create a more proportionate, flexible, and internationally aligned regime, that supports growth, innovation, and competition while ensuring consumer protection and responsible risk management. While further initiatives are expected in 2025-26, specific changes have been proposed in the following areas.

Three-tiered approach to AIFM classification

The FCA proposes that AIFMs should be categorised into three tiers based on their Net Asset Value (NAV) and not assets under management (AuM) as applies under the current regime:

• Large Firms (more than £5bn NAV): Subject to comprehensive regulatory regimes similar to current full-scope UK AIFMs.

• Mid-Sized Firms (between £100m and £5bn NAV): Follow comprehensive yet flexible rules consistent with those applied to large firms.

• Small Firms (up to £100m NAV): Subject only to core requirements appropriate for their size and activity, including maintaining consumer protection and market integrity standards without excessive detail.

It is also suggested that firms moving between thresholds would simply need to notify the FCA rather than vary their permissions as is currently the case for small AIFMs moving to full-scope AIFM status.

Sub-threshold AIFMs

HMT proposes to remove the legislative thresholds for regimes that apply to managers falling within, as referred to in the consultation, "small regimes". The FCA will then determine proportionate rules for AIFMs of all sizes, having regard to their investment activities, investor base, and risks, with the hope that this will avoid issues with regulatory "cliff edges" seen under the current regime.

Categories where bespoke regimes are being considered include managers of social entrepreneurship funds, registered venture capital funds, unauthorised property collective investment schemes and internally managed investment companies.

Making rules clearer

The FCA intends to group its rules for AIFMs into the following categories to make the regime easier to navigate going forward:

• Structure and operation of the firm: general standards of governance and behaviour and basic systems and controls requirements.

• Pre-investment phase: requirements during product design and development and disclosure requirements to prospective investors.

• During investment: ongoing obligations while a product is in operation and periodic investor information disclosure requirements.

• Change-related: rules governing product changes or where disclosures are required in relation to specific events.

Other considerations

Depositary Requirements & Remuneration Rules: The FCA does not expect to make substantial changes to the depositary rules for large and medium-sized AIFMs. However, given industry concerns around the cost and inflexibility of depositary requirements, it is seeking feedback on whether proportionate alternatives could be introduced as an alternative, providing these align with global regulatory standards.

AIFM Business Restriction: The FCA will consider removing the business restriction for full-scope AIFMs when they assess how conduct and prudential rules will apply to firms in the new regime, given the costs and inefficiencies this imposes once firms pass a certain threshold.

Prudential Requirements: The FCA will review the prudential requirements and how they apply to different-sized firms to ensure that they remain proportionate and appropriate to each firm's risk.

External Valuation: HMT has proposed removing the statutory liability of external valuers to AIFMs for any losses caused by negligent valuations. While valuers would still have contractual liability to the AIFM, it is hoped the change will make it easier for them to obtain professional indemnity insurance.

National Private Placement Regime (NPPR): No changes are being proposed to the UK's NPPR (the marketing regime used by overseas AIFMs), and any technical changes will be subject to consultation at the point when draft legislation is published.

Next steps

The deadline for stakeholders to provide comments on the FCA call for input and the HMT consultation is 9 June 2025. The FCA intends to consult on detailed rules in the first half of 2026, subject to feedback and decisions by HMT on the future regime. HMT intends to publish a draft statutory instrument for feedback, depending on the outcome of the consultation.

Our takeaways

The reforms are designed to ensure the UK regime is applied in a more tailored and proportionate manner and, for this reason, are likely to be welcomed by the industry. Specifically, basing the three-tier approach to categorising AIFMs on NAV and removing the thresholds for sub-AIFMs should reduce the impact of "cliff edges" under the current regime and align more closely with industry metrics while the potential changes to the depositary regime and external valuation are intended to mitigate perceived deficiencies in the current market.

It is clear that these proposals represent the "opening shot" in the HMT and FCA's broader reform efforts, with further proposals expected in 2026 regarding the simplification of the rulebook, remuneration requirements, regulatory reporting and prudential requirements.

If you'd like to discuss what the proposed reforms mean for your business, please contact a member of our Financial Services Regulatory team.