In April this year, HM Treasury (HMT) published a consultation proposing to streamline the framework for the regulation of Alternative Investment Fund Managers (AIFMs) in the UK (the Consultation). Alongside that, the Financial Conduct Authority (FCA) published a Call for Input, setting out the FCA's approach to regulating AIFMs within the proposed framework. Together, these form the Proposals.

The aim of the Proposals is to make the UK an attractive place for the asset management sector by having a more proportionate framework and reducing regulatory burdens to make it easier for firms to grow, compete, innovate and enter the market, while maintaining key consumer protections and encouraging firms to manage risks responsibly. The Proposals would effectively lead to a reduction in requirements for the majority of AIFMs, with rules that better correspond with their size and the nature of their business models. The Proposals will potentially mark the first area of significant regulatory divergence between UK and EU law since Brexit.

The feedback period for the Consultation and Call for Input closes on 9 June. This provides a valuable opportunity for stakeholders to engage with HMT and the FCA, share views on a future AIFM regime and assist the Government in making sure it is proportionate for the UK markets.

In this insight, we explore the key takeaways from the Proposals and set out the next steps in the consultation process.

Overview of the UK AIFM framework

The current UK AIFM framework (UK AIFMD) is based on the EU-wide Alternative Investment Fund Managers Directive (AIFMD), which is broad in nature, covering the management, administration and marketing of alternative investment funds (AIFs).

The requirements for AIFMs vary depending on asset size thresholds and, at present, are divided into three categories:

  • Full-Scope UK AIFMs (above-threshold) do not meet the definition of a 'Small AIFM', are subject to the full suite of requirements of UK AIFMD .
  • Small Authorised UK AIFMs (sub-threshold) are subject to a lighter-touch regime (although they can voluntarily opt up to be a Full-Scope UK AIFM), and these comprise AIFMs of portfolios of AIFs, the value of whose assets under management (AuM):

    1. does not exceed €500 million in total in cases where the portfolio of AIFs consist of AIFs that are unleveraged and have no redemption rights exercisable during a period of five years following the date of initial investment in each AIF; or
    2. does not exceed €100 million in total in other cases, including any assets acquired through the use of leverage.
  • Small Registered UK AIFMs are not required to be authorised by the FCA and are subject to the lightest regulatory requirements (namely reporting). They comprise small (sub-threshold) AIFMs which meet certain qualifying conditions.

HMT's proposals under the consultation

Responding to a 2023 FCA discussion paper seeking views on how to improve the existing UK regime, the Consultation looks to address highlighted problems raised about the existing Small Authorised and Small Registered UK AIFM regimes (Small AIFM Regimes) including:

  • the outdated thresholds for the regimes which have been in place since 2013, with no flexibility shown for market movements or inflation;
  • the threshold cliff-edge, which can mean that smaller AIFMs could face significant increases in regulatory requirements because of market movements or valuation changes, and can disincentivise growth; and
  • the potentially misleading nature of Small Registered UK AIFMs for consumers, implying a level of regulatory oversight which is not given by the FCA.

The Consultation proposes removing legislative thresholds for the Small AIFM Regimes, enabling the FCA to determine proportionate and appropriate rules for AIFMs of all sizes having regard to their investment activities and investor base, as well as the specific risks they pose.

As a result, it is expected that all firms currently within the Small Registered Regime would be required to obtain FCA authorisation, and comply with a proportionate set of rules, based on their size.

The categories of firm that will be impacted by a new requirement to seek FCA authorisation are:

  • Managers of social entrepreneurship funds and registered venture capital funds.
  • Managers of unauthorised property collective investment schemes, meaning AIFMs managing assets of unauthorised funds mostly holding land.
  • Managers of internally managed investment companies which are not collective investment schemes.

Listed Closed-Ended Investment Companies

Listed Closed-Ended Investment Companies (LCICs) are investment funds which are admitted to the Official List and traded on the Main Market of the London Stock Exchange. Managers of LCICs have been regulated by the AIFM Regulations[1] since their introduction, and market participants have raised several challenges with the application of these regulations to LCICs, given they operate differently to other AIFs. LCICs are also subject to parts of the Listing Rules, with some cross over between the two regimes, leading to calls that LCICs be removed from the scope of the AIFM Regulation.

However, removing these products from the scope of AIFM Regulation would impact general consumer protections which are important given the popularity of LCICs with retail investors, and could also pose risks for financial stability, allowing risks to grow undetected without the financial stability reporting required under AIFM regulations.

The Treasury, after careful consideration, is proposing that all LCICs remain in-scope of the AIFM Regulations to ensure continued financial stability and consumer protections apply. However, the FCA is asking for comments on whether it should take a different approach to the regulation of LCIC managers in relation to transparency, leverage and delegation requirements in recognition of their particular structure, and remove certain duplicative requirements.

Additional proposals include:

  • Moving the definitions underpinning the regulated activity of managing an AIF to the Regulated Activities Order to ensure they continue to work as intended. At present, key definitions are contained in UK AIFMD and the AIFM Regulations.
  • Broadly restating the National Private Placement Regime (being the marketing regime used by overseas AIFMs, and UK and Gibraltar AIFMs managing overseas AIFs, to market those AIFs in the UK) in legislation. Any technical changes will be subject to consultation when the draft legislation is published.
  • Removing the need for Full-Scope UK AIFMs of UK or Gibraltar AIFs to notify the FCA 20 working days prior to marketing to professional investors.
  • Removing the requirement for 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. These requirements are particularly relevant to private equity firms, and are not considered wholly relevant to the FCA's statutory objectives.
  • Considering whether to remove the legal liability of the external valuer, with the aim of facilitating growth in the market for external valuation services.

FCA's proposals in the Call for Input

In the Call for Input the FCA sets out how it intends to regulate AIFMs within HMT's proposed framework, with the aim of making it easier for firms to grow, compete, innovate and enter the market. The FCA intends its approach to be proportionate to firms' size and activities, allowing for growth without sudden or undue regulatory burdens.

The FCA is proposing a three-tiered approach, setting clear requirements for firms of different sizes. The size determination would be based on net asset value rather than AuM, being a more common measure of size used in the industry, and would allow the regime to operate more simply.

Large firms

The FCA is proposing an upper threshold of £5 billion net asset value to distinguish the largest firms. These firms would be subject to a regime similar to the current Full-Scope AIFM requirements.

The proposed £5 billion threshold represents a significant increase on the current Full-Scope threshold of €100 million (leveraged) or €500 million (unleveraged), providing substantial opportunities for firms to grow without undue burdens.

The FCA will also be looking to disapply some unnecessarily burdensome rules for all firms and apply certain rules only to firms carrying out specific activities. In areas such as disclosure and reporting to investors, the FCA will also be removing some detail where prescription is not necessary to achieve the intended outcome.

Mid-sized firms

Firms with a net asset value of between £100 million and £5 billion would be considered mid-size.

These firms would follow a comprehensive regulatory regime that is consistent with the rules that apply to the largest firms, covering the major aspects of fund management as outlined in existing rules in FUND 3 of the FCA handbook, but without more detailed procedural requirements being included, allowing greater flexibility and proportionality.

A significant number of existing Full Scope firms would be re-classified as mid-sized under the new rules, meaning they will be subject to a simpler, more flexible and less onerous regime.

Small firms

Small firms, being those with a net asset value of below £100 million, would be subject to core requirements appropriate to their size and activity. Baseline standards would be set, ensuring appropriate levels of consumer protection and market integrity are maintained.

The new rules will set minimum standards for differently sized firms. Firms will not need to apply for a variation of permission as they change size categories, and instead would simply be required to notify the FCA when they pass a threshold.

However, the FCA does recognise that many of the current requirements assume the AIFM is managing a diversified portfolio of transferable securities and that these are not always suitable for managers of funds focused on less liquid investment types, such as private equity and real estate, or which hold significant positions in these assets. Annex 1 to the Call for Input sets out examples of how the FCA might rewrite rules to apply to firms proportionately with the revised framework.

Additional proposals

Depositaries: The FCA sees no immediate need to make radical changes to how asset safekeeping and fund oversight should be carried out for large and mid-size AIFMs, but welcomes input from stakeholders on whether they would like the FCA to explore proportionate alternatives that meet global regulatory standards.

In respect of authorised funds, the FCA does not expect to change the rules that are unique to depositaries in any material way.

Small authorised AIFMs and those Full-Scope AIFMs that manage overseas AIFs not marketed in the UK are not currently required to appoint a depositary and the FCA does not propose to make them do so in future.

The FCA's Client Assets sourcebook (CASS) applies safekeeping rules to small authorised AIFMs and would continue to apply to small firms in the new regime.

Remuneration: Following changes to the Remuneration Code in 2023 and further remuneration reforms proposed in a recent consultation, the FCA intends to review the operation and effectiveness of the remuneration rules for AIFMs, alongside the code for UCITS management companies and investment firms, to consider whether changes should be made to these requirements.

Prudential requirements: The AIFMD regime includes prudential rules for AIFMs, for example, requiring authorised firms to hold a liquid capital buffer. The FCA will review the regime's prudential requirements and how they apply to different-sized firms.

Business restrictions: The AIFM business restrictions allow an external full-scope AIFM to undertake only AIFM management functions and the management of UCITS of other collective investment undertakings as its principal activities. If they have the necessary permissions, they can also carry on the management of portfolios of investments and can provide specific additional services. The FCA considers that these current rules create costs and inefficiencies, requiring firms to seek top-up permissions for some activities or create new legal entities once a firm passes the size threshold. The FCA will include the impact of these restrictions in the considerations of the new regime.

Regulatory reporting: The FCA notes that the reporting regime has not been reviewed since it was introduced, and that a more effective reporting regime that is proportionate to its demands on firms is required. The FCA will consider how best to achieve this.

Next steps in the UK AIFM reform journey

HMT and FCA are keen to hear from stakeholders on how the regime can be developed. After the deadlines for response to both the Consultation and the Call for Input have closed, HMT and the FCA will consider the responses and produce draft legislation and revised rules for further feedback. The FCA expects to consult on detailed rules in the first half of 2026.

To discuss these proposals, and the impact they may have on your firm contact Kris Rogers or Sushil Kuner from our Financial Services Team.

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Footnotes

1The UK Government implemented AIFMD in the UK through a combination of Treasury Regulations and FCA rules, the first of which came into force on 22 July 2013.