The UK’s proposals to streamline the rules for AIFMs

Introduction

On April 7, 2025, HM Treasury (HMT) published an open consultation “Regulations for Alternative Investment Fund Managers” setting out the Government’s proposed approach for a streamlined framework for the regulation of AIFMs and the depositories they use. The Financial Services and Markets Act 2023 (FSMA 2023) repeals assimilated law (formerly known as retained EU law) in financial services. This allows the Government to replace assimilated law with rules set by the UK’s independent and expert regulators, operating within a framework set by the government and parliament. It is under the FSMA 2023 remit that the Government is reviewing the regulations for AIFMs.

The FCA also issued a Call for Input alongside the HMT consultation paper, which indicates its approach to regulating AIFMs within the framework proposed by HMT.

The proposals have been in general welcomed by the market. Michael Moore, the Chief Executive of the British Private Equity & Venture Capital Association, said the proposal would make the UK more competitive and help boost investment. Jiri Krol, the Deputy CEO of the Alternative Investment Managers Association (AIMA) stated that “a rethink of the crude monetary thresholds applying to managers is long overdue” and the Investment Association (IA) said that it considers that the “proposals will allow the UK investment management industry to better serve its customers in the UK and around the world, to deploy capital effectively to support growth and to make a broader contribution to the UK economy.” 

This article delves into HMT’s and the FCA’s proposals and their impact.

What is the goal?

With a backdrop of growth as the Government’s No. 1 priority and an acknowledgement that asset management plays a significant role by channeling capital from investors to investment opportunities, the Government understands that it is essential that the regulations underpinning this sector are proportionate for UK markets to foster this growth. With that in mind, the Government set out a streamlined framework for the regulation of AIFMs.

From the FCA’s perspective, its goal is to make the regime easier to understand and navigate, making it simpler for new entrants to join the market and for existing firms to grow without unnecessary regulatory burdens.

In this regard the FCA proposes to simplify its rules and group them into clearer, thematic categories that reflect different business activities and phases of the product cycle. The proposed thematic categories cover:

• Structure and operation of the firm: (i) general standards of governance and behavior; and (ii) basic systems and controls requirements.
• Pre-investment phase: (i) requirements during product design and development; and (ii) disclosure requirements to prospective investors.
• During investment: (i) ongoing obligations while a product is in operation; and (ii) periodic investor information disclosure requirements.
• Change-related: (i) rules that apply when a manager changes something about the product; and (ii) rules that apply or require disclosure when something specific happens.

The Proposals: Sub-threshold AIFMs

The Alternative Investment Fund Managers Directive (AIFMD) required EU Member States to establish at a minimum a registration regime for sub-threshold AIFMs, with the thresholds set at assets under management of up to €100 million, or up to €500 million where the AIFM manages portfolios of alternative investment funds (AIFs) that are unleveraged and have no redemption rights exercizable during a period of five years following initial investment. The UK chose to implement this by establishing two regimes: firstly, the Small Authorised Regime, whereby AIFMs are required to be authorized by the FCA to manage AIFs, but are not subject to the full scope requirements; and secondly, the Small Registered Regime which applies to three categories of firm: 

• Managers of Social Entrepreneurship Funds and Registered Venture Capital Funds.
• Managers of Unauthorised Property Collective Investment Schemes, being AIFMs managing assets of unauthorized funds mostly holding land. 
• Managers of ‘Internally Managed Companies’, meaning investment companies which are not collective investment schemes, and which do not appoint an external AIFM.

The Small Registered Regime applying to these three categories of sub-threshold AIFMs exempts them from the requirement to seek FCA authorization when managing certain AIFs.

In its consultation, HMT proposes to remove the legislative thresholds for the Small Regimes which it says will enable the FCA to determine proportionate and appropriate rules for AIFMs of all sizes having regards to their investment activities and investor base as well as specific risks they pose. As a consequence, AIFMs currently within the Small Registered Regime will fall within the regulatory perimeter.

How does the FCA propose to regulate AIFMs of different sizes?

The FCA proposes to create three levels of firms based on their size to achieve proportionality – largest firms, mid-sized firms and small firms. The largest firms would be subject to a regime like the current rules for full-scope UK AIFMs, but certain burdensome rules will be disapplied and some rules will only apply to firms doing specific activities.

Mid-sized firms would follow a comprehensive regulatory regime consistent with the rules that apply to the largest firms. So, this would cover all major aspects of fund management as outlined in the existing AIFMD-derived rules in the Investment Funds sourcebook (FUND), along with other AIFMD-derived standards in the Senior Management Arrangements, Systems and Controls (SYSC) and the Conduct of Business (COBS) sourcebooks. But to allow greater flexibility and proportionality, the FCA states it does not plan to impose more detailed procedural requirements such as some of those set out in the Level 2 Regulation.

Lastly, small firms would be subject to core requirements appropriate to their size and activity. The rules for small firms would set baseline standards essential for maintaining appropriate levels of consumer protection and market integrity.

How does the FCA propose to determine which AIFMs will sit within each category of large, medium or small AIFM?

Currently, the legislative thresholds use leveraged assets under management as the measure of value for the thresholds. However, the FCA propose that it would be better to set thresholds for different categories using net asset value (NAV), that is, an AIFM’s assets minus its liabilities, because this is a more common measure of size used in the industry.

In terms of the thresholds themselves, the FCA proposes an upper threshold of £5 billion NAV to distinguish the largest firms. The threshold for small firms would be £100 million of NAV. The current threshold for small firms is set at €100 million of leveraged assets, calculated on a gross basis. As the new lower threshold would be assessed against the NAV of the funds managed by an AIFM, this effectively increases the threshold before firms are deemed to be mid-sized. Lastly, firms with NAV over the new lower threshold, but below the upper threshold would be subject to the mid-sized regime.

The proposals: 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. With the exception of certain LCICs which are currently able to benefit from an exemption from authorization under the Small Registered Regime as an “internally managed investment company,” managers of LCICs have been regulated by the Alternative Investment Fund Managers Regulations 2013 (as amended) (AIFM Regulations) in the UK since their introduction.

LCICs operate differently to other AIFs. Their corporate structure means that investors hold securities with associated shareholder rights. Their governance arrangements differ because a LCIC has an independent board of directors whose responsibilities include oversight and monitoring of the fund. Therefore, unlike other AIFs  which have different fund structures, the requirement for authorized AIFMs to comply with AIFMD complicates this model. Further to this, LCICs must also comply with the Listing Rules. As a result, some in this sector have called for LCICs to be entirely removed from scope of AIFM Regulations.

However, LCICs are popular with retail investors, and removing these products from the scope of AIFM Regulations would impact general consumer protections under the Consumer Duty. Further LCICs could also pose risks to financial stability through their use of leverage, and the potential for their shares to become illiquid in times of stress. Therefore, the Government is proposing that all LCICs remain in-scope of the AIFM Regulations to ensure continued financial stability and consumer protections apply. As mentioned above, currently internally managed LCICs below the threshold can benefit from an exemption from authorization pursuant to the Small Registered Regime. The consequence of removing the legislation thresholds as proposed and of keeping LCICs within scope of the AIFM Regulations will mean that these sub-threshold internally managed LCICs will need to be fully authorized.

It is interesting where the Government has landed here in the sense that despite its proposal to keep LCIC’s in scope of the AIFM Regulations, the FCA clearly acknowledges the issues by proposing a couple of ways in which a different approach could be taken with respect to LCIC managers. For example, these include:

• With respect to transparency: the FCA is considering disapplying certain requirements around the provision of investor information and the provision of an annual report on the AIF.
• Likewise, with respect to leverage: the FCA is considering the possibility of disapplying the liquidity requirements where an LCIC uses an insignificant amount of leverage.
• Lastly, with respect to delegation: the FCA is considering tailoring the rules for managers of LCICs to reflect the structure of LCICs since, in practice, is it often the LCIC board which has delegated certain functions, and which must per the legislative requirements justify with objective reasons for doing so.

Are there other proposals to note?

There are a few other proposals in the HMT consultation which warrant a mention:

• Notifications – Currently full-scope UK AIFMs of UK or Gibraltar AIFs are required to notify the FCA of their intention to market such AIFs to professional investors, and the FCA has 20 working days to grant or refuse approval. Because the AIFs are marketed predominantly to professional investors, the Government sees no need to notify the FCA 20 working days prior to marketing.
• FCA acquisition information – Full-scope UK AIFMs and above threshold overseas AIFMs must submit information to the FCA regarding any AIFs they manage which acquire control of non-listed companies and issuers. The Government is considering whether to remove the requirement for firms to submit these types of notifications to the FCA, or whether this information should be notified elsewhere.
• Valuation services – AIFMs may appoint external valuers to carry out a valuation of an AIF. However, the external valuer is liable to the AIFM, for any losses caused by the valuer being negligent or intentionally failing to perform its tasks. The Government is considering whether growth in the market for external valuation services would be facilitated by removing the legal liability of the external valuer and removing this concept from legislation. In this scenario, the external valuer would have contractual liability to the AIFM, and the AIFM would still have legal liability to the fund and its investors; the final responsibility would rest with the AIFM.

The FCA Call for Input also notes a number of other issues which the FCA will be considering in due course, including:

• The operation and effectiveness of the remuneration rules for AIFMs.
• Prudential requirements for AIFMs.
• The AIFM business restriction that applies to an external full-scope AIFMs.
• The regulatory reporting regime which has not been reviewed since it was introduced.

Looking forward

The HMT consultation and FCA Call for Input close in early June and formal engagement in proposed new rules is expected in Q1 2026.