Reforming fund regulation in the UK: HM Treasury and FCA proposals for regulating alternative investment fund managers

The future for alternative investment fund managers (AIFMs) in the UK became a little bit clearer on 7 April 2025 when HM Treasury published a consultation paper setting out its plans to streamline the regulatory framework. On the same day, the Financial Conduct Authority published a call for input, setting out its proposed approach to regulating AIFMs within the framework proposed by HM Treasury. 

The overall aim of HM Treasury’s consultation paper and the FCA’s call for input is to foster growth in the asset management sector and the UK economy, by streamlining the regulatory requirements for AIFMs while maintaining core protections for consumers and markets. This aligns with the UK government’s pro-growth agenda (see our blog post and briefing for implications on financial services regulation) and the FCA’s strategy for the next five years (see our blog post for detail).    

The government’s approach is also consistent with its post-Brexit strategy of replacing assimilated EU law repealed by the Financial Services and Markets Act 2023 (FSMA 2023) with rules set by the financial services regulators, enabling them to take a more graduated and proportionate approach to regulation. At the same time, it signals further divergence away from the EU, which has made its own changes to the regulatory regime for AIFMs (for more on that, see our briefing). 

Background to the consultation paper and call for input

The Alternative Investment Fund Managers Directive (AIFMD) was introduced to address the risks posed by alternative investment funds (AIFs) and harmonise the relevant regulations across the EU. The UK implemented the AIFMD through a combination of legislation (including the Alternative Investment Fund Managers Regulations 2013 (AIFMR)) and FCA rules. 

In 2023, the FCA published a discussion paper (DP23/2) in which it sought views on how to update and improve the UK asset management regime, including for AIFMs. Respondents suggested making the AIFM rules less complex, more proportionate, and better tailored to the UK market, without replacing the regime entirely. 

The consultation paper and call for input are the next steps in that process. They identify and seek to address a number of issues identified with the current regulatory regime for UK AIFMs, including: 

• outdated and inflexible legislative thresholds for AIFMs that have not accounted for market movements or inflation; 
• cliff-edge effects created by a significant increase in regulatory requirements for small registered or authorised UK AIFMs to become full-scope UK AIFMs, which may disincentivise growth; 
• complexity of the current regime, which may mislead consumers about the level of regulatory oversight; and 
• inflexible and prescriptive requirements that do not allow for a proportionate approach to regulation based on the size and activities of different firms. 

Key proposals in the consultation paper

Removal of legislative thresholds in relation to sub-threshold UK AIFMs: Currently, sub-threshold AIFMs operate as either small authorised UK AIFMs (which are subject to some but not all of the requirements for full-scope UK AIFMs) or small registered UK AIFMs. It is proposed that the legislative thresholds in relation to sub-threshold AIFMs will be removed to allow the FCA to set proportionate rules based on size and activities of the firms. Consequential changes will need to be made to the definitions relating to acting as a trustee or depository of an AIF in light of the proposed removal of the legislative thresholds.

Regulation of small registered UK AIFMs: Small registered UK AIFMs are expected to require FCA authorisation following the removal of the legislative thresholds as noted above. The affected AIFMs include:

• managers of social entrepreneurship funds (SEFs) and registered venture capital funds (RVECAs);
• managers of unauthorised property collective investment schemes (i.e., non-FCA authorised funds that invest mostly in land); and
• managers of internally managed investment companies (i.e., investment companies which are not collective investment schemes and which do not appoint an external AIFM).

Managers of SEFs and RVECAs are subject to requirements in other regulations in addition to the AIFMR. It is proposed that those requirements will be retained in full for now and reviewed as a separate workstream. The regulation of venture capital funds will be considered as part of a future workstream.

Regulation of managers of listed closed-ended investment companies (LCICs): Managers of LCICs (which can be traded on the London Stock Exchange) are currently subject to the AIFMR and the Listing Rules (which include certain requirements that overlap with those under the AIFMR). It is proposed that LCICs will remain within the scope of the AIFMR. This includes bringing internally managed, sub-threshold LCICs into the scope of the AIFMR. 

Other proposals that form part of the consultation paper: 

• Definitions relating to managing an AIF are proposed to be moved from other regulations and FCA guidance to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO). No changes are intended to be made to the definitions or the regulatory perimeter in this respect. 
• The National Private Placement Regime (NPPR) is proposed to be retained and broadly restated in legislation, and any technical changes will be subject to consultation.  
• HM Treasury is consulting on the removal of the requirement for full-scope UK AIFMs to notify the FCA 20 working days prior to marketing UK or Gibraltar AIFs to professional investors, as that requirement may cause unnecessary delay in launching and marketing funds in the UK.
• HM Treasury is considering if the notifications for acquiring control of non-listed companies and issuers should be abolished or directed elsewhere, as the FCA has limited powers to act in relation to the issues identified by these notifications, e.g., asset-stripping.
• HM Treasury is also considering if the legal liability on external valuers carrying out a valuation of an AIF should be removed from legislation, as this liability makes valuers cautious about taking on work and impacts their ability to obtain professional indemnity insurance, and these valuers would still be contractually liable to the relevant AIFMs. 

Key proposals in the call for input

Three-tiered approach to regulating AIFMs: The FCA proposes a three-tiered approach to the regulation of AIFMs. More specifically: 

• Large firms would be subject to a similar regime for full-scope UK AIFMs, with certain rules only applicable to firms doing specific activities and burdensome rules disapplied. 
• Mid-sized firms would be subject to a comprehensive regulatory regime that is consistent with the regime for the largest firms, including the key rules in the FCA Handbook, but detailed procedural requirements would not be included to allow for greater flexibility and proportionality. The FCA expects a large number of firms could be reclassified as mid-sized as the thresholds are increased (see below).
• Small firms would be subject to core requirements appropriate to their size and activity. The FCA does not expect most existing small AIFMs would need to materially raise standards. 

The thresholds are proposed to be set at £100 million and £5 billion of net asset value (NAV), instead of leveraged assets under management (AUM), which is used for the current thresholds. The FCA still underlines the importance of its ability to measure, monitor and manage the risks of high leverage in AIFs, and intends to evaluate the relevant AIFMD provisions in line with the forthcoming recommendations from the Financial Stability Board and consider if the expectations on risk management for high leverage firms should be clarified. 

Different rules for AIFMs undertaking different activities: Many requirements currently assume that the AIFM is managing a diversified portfolio of transferable securities, which are similar to those applicable to UCITS fund managers. They do not take into account AIFs which hold less liquid investments. Consistent with HM Treasury’s consultation paper, the FCA is seeking views as to whether venture capital and growth capital funds and LCICs should be regulated differently. For LCICs, the FCA is considering if a more tailored approach can be applied in respect of transparency requirements, leverage and delegation. 

Requirements for depositaries: While the FCA has not proposed any amendments to the depositary requirements, it is seeking views on whether any changes are required, including whether those requirements should be revised to align with regulatory standards in other jurisdictions. 

Issues that will be considered separately by the FCA: While they are not within the scope of the call for input, the FCA intends to review the requirements on remuneration, prudential requirements, the AIFM business restrictions and regulatory reporting requirements.

Next steps

The proposals set out in the consultation paper and call for input will be welcomed by the asset management industry, which has been calling for more proportionate regulation for some time. However, stakeholders will want to review the changes carefully, and make comments as appropriate to ensure the new rules are clear and will work for them. For example, if AIFMs are no longer required to notify the FCA when they acquire control of non-listed companies, will they still need to notify the target company and/or other regulators? It is also worth considering whether a depositary model based on the UCITS Directive continues to make sense for AIFs in the UK.   

The deadline for responses to the consultation paper and the call for input is 9 June 2025. The Government will then publish a draft statutory instrument for feedback. The FCA currently intends to consult on detailed rules in the first half of 2026.