UK regulatory divergence – HMT and FCA publish proposals to revise the regulatory framework for UK AIFMs

On 7 April 2025 two papers were published that could have a significant impact on the future of asset management in the UK and herald the beginning of real regulatory divergence between UK and EU regulation of managers of alternative investment funds. Notably, the proposals do not track the amendments made in the EU under AIFMD 2.0¹ that come into effect on 16 April 2026.

The Treasury (HMT) published a consultation on Regulations for Alternative Investment Fund Managers² and the Financial Conduct Authority (FCA) published a Call for Input on the future regulation of alternative fund managersᶾ.

There are four main parts to the work that HMT and the FCA are undertaking to reform the regime for Alternative Investment Fund Managers (AIFMs):

1. Revising the perimeter that determines which firms must be authorised and regulated.
2. Establishing the legislative framework for the proposed new regime.
3. Reviewing existing requirements for firms.
4. Revising firm-facing provisions and moving all such requirements into FCA rules.

HMT’s consultation focuses on the perimeter of the regulation and whether the current regulatory framework for AIFMs and depositaries should be simplified, enabling the FCA to establish a more graduated and proportionate approach to regulation. Alongside HMT’s consultation, the FCA’s Call for Input sets out its proposed approach to regulating AIFMs within the revised framework.

Current Regulatory Framework

The regulation of AIFMs was harmonised across the EU in 2013 under the Alternative Investment Fund Managers Directive (AIFMD). The firms within scope of AIFMD include managers of investment funds (other than Units in Collective Investments in Transferrable Securities (UCITS) authorised under the UCITS Directive), including hedge funds, private equity funds, investment companies, real estate funds and some retail investment funds. AIFMD also includes requirements for firms acting as depositaries of AIFs whose managers are subject to AIFMD and requirements in respect of delegations of functions by AIFMs. AIFMD was implemented in the UK through a combination of regulations issued by HMT (such as the Alternative Investment Fund Managers Regulations 2013) and FCA rules.

HMT Consultation

The HMT consultation covers topics such as which AIFMs should be subject to the regulations and whether any changes are needed to be made to key provisions which they propose be retained in the revised legislation. Importantly for firms that operate in multiple jurisdictions, HMT specifically states that any changes considered will take into consideration the impact on non-UK domiciled funds being marketed into and/or managed in the UK.

HMT’s Consultation covers the following main areas:

• Requirements for Sub-threshold AIFMs

Under the current regime, there are three categories of AIFM (i) firms within the Small Authorised Regime that are required to be authorised by the FCA to manage AIFs but are not subject to Full-Scope requirements; (ii) firms within the Small Registered Regime that are sub-threshold managers not required to seek FCA authorisation; and (iii) full scope firms.

The government proposes to remove the legislative assets under management (AuM) thresholds for the Small Regimes. Currently, the threshold is set at €100 million for sub-threshold AIFMs, except for where a manager only manages Alternative Investment Funds that are unleveraged and have no redemption rights for the first five years, where it is set at €500 million. The FCA’s Call for Input provides an initial outline of its intended approach to the future regulation of AIFMs, including how this could be differentiated dependent on the size and activities of the firm.

• Policy Proposal for Listed Closed-Ended Investment Companies

Listed Closed-Ended Investment Companies are investment funds that are admitted to the Official List and traded on the Main Market of the London Stock Exchange. The Government is proposing that all Listed Closed-Ended Investment Companies remain in-scope of the AIFM regulations.

• Additional Proposals
  The government intends to legislate in other areas as part of the new regulatory framework for AIFMs, which are broadly summarised below:
  • Definitions and Other Perimeter Issues – The government proposes to move definitions relating to the regulatory perimeter into the Regulated Activities Order to ensure they continue to work as intended. No changes to the definitions or regulatory perimeter are intended to be made as part of this transition and the drafting of the definitions will be subject to consultation when the draft legislation is published. In addition, assuming the legislative AuM thresholds are revoked, the related definitions will need to be reviewed.
  • National Private Placement Regime (NPPR) – HMT proposes broadly restating the marketing regime for overseas AIFMs in legislation. Any technical changes will be subject to consultation when the draft legislation is published.
  • Marketing Notifications – HMT sees no need to notify the FCA 20 working days prior to marketing commencing.
  • Private Equity Notifications – HMT is considering whether to remove the requirement for firms to submit notifications to the FCA regarding any AIFs they manage that acquire control of non-listed companies and issuers, or whether this information should be notified elsewhere
  • External Valuations – HMT is consulting on whether removing the legal liability of the external valuer, proposing that the external valuer would have contractual liability to the AIFM, and the AIFM would still have legal liability to the fund and its investors, but the final responsibility would rest with the AIFM.

Next Steps

HMT’s consultation closes on 9 June 2025. HMT will consider the responses to the consultation and depending on the outcomes from the consultation, the government will publish a draft statutory instrument for feedback.

FCA Call for Input

The FCA published a Discussion Paper⁴ in 2023 on updating and improving the UK regime for asset management. Respondents were in favour of making the rules for AIFMs less complex, more proportionate and better tailored to the UK market. Respondents were not in favour of replacing the AIFMD regime altogether. Many saw benefits in the UK remaining broadly aligned with the EU. Respondents also saw advantages in moving towards a clearer and more consistent set of rules for firms subject to requirements derived from the UCITS Directive, AIFMD or the Markets in Financial Instruments Directive (MiFID), but argued this should happen gradually.

As set out above, HMT is proposing to change the scope of firms subject to the UK AIFM regime and remove the AuM threshold that determines when a firm is subject to the full AIFMD regime from legislation. HMT would then transfer the firm-facing requirements to FCA rules, including the determination of the new thresholds. The FCA is considering how to apply the regime across different size firms and those doing different activities after the legislative changes have been made by the government.

The FCA identifies several issues with the current regulatory framework:

• When the value of an AIFM’s AuM crosses the current full-scope threshold, it is required to hold substantially more regulatory capital and meet stricter regulatory requirements. Small AIFMs are also not subject to the AIFM business restrictions, which limit the other regulated activities that full-scope AIFMs can carry out in addition to managing AIFs, so moving up to the full-scope classification can restrict a firm’s business activity.
• The current rules also include detailed procedural requirements, but arguably, the same outcomes might be achieved through less prescription.
• The UK market for AIFMs includes many specialist and boutique firms currently subject to the same regulatory burden as full-scope UK AIFMs, but without the same level of market presence or posing the same level of risk as the largest full-scope AIFMs.
• AIFMs’ activities vary widely. Some rules are relevant to all AIFMs, while others are only relevant to firms undertaking specific activities, such as trading in financial instruments.

In the Call for Input, the FCA sets out its proposal to try and address these issues.

• Size Categories – Large, Medium and Small FirmsThe most significant change is arguably the FCA’s proposal to introduce a three-tiered approach to regulation of AIFMs, with only the largest firms being subject to a regime similar to the current rules for full-scope UK AIFMs.
  • The largest firms would be subject to a regime like the current rules for full-scope UK AIFMs. The FCA plans to disapply unnecessarily burdensome rules from all firms and apply certain rules only to firms doing specific activities.
  • Medium-sized firms would follow a comprehensive regulatory regime that is consistent with the rules that apply to the largest firms⁵. The FCA does not plan to impose more detailed procedural requirements, except where necessary to set appropriate standards, specify exceptions or clarify expectations.
  • 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. For existing small AIFMs, the FCA expects to set basic standards that reflect a minimum standard appropriate to a firm that is entrusted with managing a fund but does not anticipate that most existing small AIFMs will need to materially raise standards.

In terms of impact, the FCA believes that a significant number of full-scope firms should be reclassified as mid-sized, meaning they would be subject to a simpler, more flexible and less onerous regime. Those firms reclassified as small would see a significant reduction in detailed and prescriptive requirements. For firms moving to a higher category, the FCA plans to require a notification as opposed to the current position that requires firms to apply for a variation of permission as they change size category.

• Thresholds and Their Calculation

Linked to the proposed three tiers of firm are the FCA proposals relative to setting the thresholds that determine the size of firms. The current legislative thresholds use leveraged assets under management (AuM). The FCA is proposing basing these determinations on net asset value.

The FCA’s view is that the most appropriate threshold for large firms is £5 billion net asset value. For small firms, the FCA proposes setting the lower threshold at £100 million. The current threshold is set at €100 million of leveraged assets, calculated on a gross basis. The new lower threshold would be assessed against the net asset value of the funds managed by an AIFM. Medium-sized firms (i.e., firms over the new lower – but below the upper threshold) would be subject to a more flexible and proportionate regime than the current full-scope regime.

• Thematic Categories that Reflect Different Business Activities and Phases of the Product Cycle

The FCA proposes grouping rules into clearer, thematic categories that reflect different business activities and phases of the product cycle making it easier for the FCA to set clear requirements for firms of different sizes. The Call for Input is quite light on detail here, and it is not immediately clear how this would operate in practice.

• One Size Does Not Fit All

The FCA recognises that many of the current requirements assume that the AIFM is managing a diversified portfolio of transferable securities. However, the current rules 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. The FCA Call for Input includes an Annex providing an illustrative example of how rules might apply to firms proportionately within the framework.

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

The Call for Input addresses issues related to the regime for managers of unauthorised AIFs. It does not address at length other issues the FCA is considering and that it plans to address separately which include:

• Prudential rules for AIFMs – 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.
• Regulatory reporting under AIFMD – the FCA notes that the regime has not been reviewed since it was introduced. The FCA wants to achieve a more effective reporting regime that is proportionate in its demands on firms and will consider how to achieve this.
• Requirements for AIFMs around disclosure, distribution and marketing to retail investors – the FCA will consider these separately.
• Remuneration requirements for AIFMs – following changes to the Remuneration Code in 2023 and further reforms proposed in CP24/23: Remuneration Reforms, the FCA plans to review the operation and effectiveness of the remuneration rules for AIFMs, alongside the code for UCITS management companies and MiFID investment firms, to consider whether it should make changes to these requirements.
• The AIFM business restriction that applies to an external AIFM that is a full-scope UK AIFM – the FCA is of the view that the current rules appear to 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. Consequently, the FCA is considering the impact of these restrictions.

Next Steps

The Call for Input closes on 9 June 2025. Subject to feedback, and subject to decisions by HMT on the future regime, the FCA plans to consult on detailed rules in the first half of 2026. More details on the timeline for implementation will follow in due course, but the FCA intends to give firms time to adapt to the new regime, while removing unnecessary rules relatively quickly.

Conclusion

The proposals put forward by HMT and the FCA are at a nascent stage, and both bodies are keen to hear from stakeholders how best the UK can develop a regime that supports the UK asset management sector. The proposals could result in fundamental but arguably positive changes to the regulation of UK AIFMs.

1. Directive (EU) 2024/927 amending Directives 2011/61/EU and 2009/65/EC as regards delegation arrangements, liquidity risk management, supervisory reporting, the provision of depositary and custody services and loan origination by alternative investment funds, available here.
2. HMT’s paper is available here.
3. FCA’s Call for Input is available here.
4. The Discussion Paper (DP23/2) is available here.
5. It would cover all major aspects of fund management as outlined in the existing AIFMD-derived rules in Chapter 3 of the Investment Funds sourcebook (FUND), along with other AIFMD-derived standards in Senior Management Arrangements, Systems and Controls (SYSC) and the Conduct of Business sourcebook (COBS).