HM Treasury (HMT) and the Financial Conduct Authority (FCA) yesterday issued the first in what is expected to be a series of proposals to revise the UK regime for regulating alternative investment fund managers (AIFMs).
The current regime for UK AIFMs – derived from the EU framework established by AIFM Directive – has remained essentially unchanged since Brexit. The aim of the new proposals is to streamline the regulation of AIFMs, and to adopt a more flexible approach to regulation that is more proportionate to an AIFM's size and activities.
Key proposals
The key proposals, set out in an HMT consultation paper and an FCA call for input, include:
- abolishing the distinction between "full-scope" and "sub-threshold" AIFMs – in its place, power would be given to the FCA to determine a more tailored approach and to decide which rules should apply to which AIFMs, based on factors such as their size, their investment activities, their investor base and the specific risks they pose (as to which, see more below);
- retaining the existing rules for managers of social enterprise funds (SEFs) and registered venture capital funds (RVECAs), albeit reserving the right to re-consider these rules in the future, but otherwise abolishing the "small registered AIFM" category, so that (apart from SEF and RVECA managers) all AIFMs must become authorised by the FCA; and
- keeping managers of investment trusts and REITs in-scope of the AIFM regulations, but with the FCA considering a bespoke streamlined regime that takes into account the other regulations to which investments trusts and REITs are already subject.
Three tiers of AIFM
Perhaps the most eye-catching feature of the proposals is the plan to categorise AIFMs into three tiers, determined by reference to the net asset value (NAV) of their funds, as follows:
- "large" AIFMs would be those with NAV over £5bn;
- "mid-sized" AIFMs would be those with NAV over £100m up to £5bn; and
- "small" AIFMs would be those with NAV up to £100m.
Interestingly, the FCA's preference is to use NAV for determining these thresholds, as it considers this to be a more commonly used measure in the industry and easier for firms to understand than leveraged assets under management (which is the measure currently used to determine whether an AIFM is "full-scope" or not under the AIFMD regime).
Streamlining the rules: proportional application
Having categorised AIFMs by size, the FCA then proposes to apply the rules proportionately to three categories of firms based on their size:
- large firms would be subject to a regime similar to the current rules for full-scope UK AIFMs;
- mid-sized firms would follow a regime consistent with the rules that apply to the largest firms but with fewer detailed procedural requirements; and
- small firms would be subject to core requirements appropriate to their size and activity – these essentially would be "baseline standards", necessary to ensure consumer protection and market integrity.
The FCA also intends to disapply "unnecessarily burdensome" rules across all categories , and only to apply some rules to AIFMs who carry out specific activities.
Other considerations flagged in the proposals
In addition to the points noted above, HMT and the FCA also propose to:
- review the impact and relevance of the "AIFM business restrictions" (i.e. the rules in FUND 1.4);
- retain the current National Private Placement Regime marketing regime;
- consider removing the requirement for full-scope UK AIFMs to give the FCA 20 working days' notice before marketing AIFs to professional investors;
- consider removing the requirement for AIFMs to notify the FCA if their AIFs acquire control of non-listed companies or issuers, or whether this notification should be submitted elsewhere;
- remove the strict liability of external valuers to AIFMs imposed under the rules;
- keep the existing rules relating to depositaries (although they are open to alternative suggestions);
- review the operation and effectiveness of the AIFM remuneration rules;
- review the prudential requirements that apply to AIFMs; and
- consider how to achieve a more effective and proportionate reporting regime for AIFMs.
Next steps
The proposals are open for comment until 9 June 2025, and the intention is for draft rules implementing the proposals to be made available for consultation in H1 2026.
While there is little detail at this stage as to which rules will apply to which AIFMs, and to what extent, the proposals do give a sense of the more nuanced and flexible approach HMT and the FCA intend to take. One of the common complaints about the AIFMD regime has always been its "one-size-fits-all" approach, treating all AIFMs alike regardless of their differing business models. With these proposals, it is clear that the UK intends to move away from this towards a proportionate and more tailored regulatory framework.
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