Potentially significant changes expected for UK fund managers

On 7 April 2025, HM Treasury published a consultation exploring whether the UK Government should simplify the regulatory framework for alternative investment fund managers (“AIFMs”) in the UK (the “Consultation”). At the same time, the Financial Conduct Authority published a call for input alongside the Consultation, which indicates its approach for regulating AIFMs within the framework proposed by the Consultation (“Call for Input”). 

Whilst the proposals are preliminary, they provide a helpful indication of the aim and spirit of the UK Government and the FCA in seeking to streamline the regulatory requirements for fund managers and reduce compliance burdens, while maintaining protections for consumers and markets. If implemented, the proposals will see a reduction in the requirements for the majority of UK AIFMs, with rules that are better targeted to their size and business models, in the hope that this will promote growth and international competitiveness of the UK economy – some of the FCA’s key objectives. Below is a summary of the Consultation and Call for Input proposals: 

Key proposals in the Consultation and Call for Input: 

• New thresholds: The current rules set an AUM threshold of EUR 100 or EUR 500 million to determine whether a UK AIFM is full-scope and subject to all  of UK AIFMD. 

The first important change is to the calculation of the thresholds – these would be calculated on the basis of net asset value (assets minus liabilities). This is a more common measure of size in the industry and easier for firms to understand than the current basis of measurement, leveraged assets under management.

It is proposed that the thresholds and ensuring regulatory frameworks are reformed as follows:  

1. The largest firms (greater than £5bn net asset value) are expected to be subject to a regime similar to the current regime for full-scope UK AIFMs with certain unnecessary burdensome rules disapplied for all firms and certain rules applied only to firms doing specific activities. It is expected that prescriptive detail will be removed from the disclosure and reporting requirement to investors.  
2. Mid-sized firms (between £100m and £5bn net asset value) are expected to be subject to a simpler, more flexible and less onerous regime without the prescriptive requirements set out in the Level 2 regulations (except where necessary to set appropriate standards). It is hoped that this lighter regime would reduce costs for firms, improve their efficiency and promote more competition in the market.  
3. Small firms (up to £100m net asset value) would be subject to core requirements appropriate to their size and activity. The rules would set baseline standards essential for maintaining appropriate levels of consumer protection and market integrity.

The proposed changes to the thresholds are meant to reflect the rapid growth of the alternative asset industry since it first became subject to regulation through the introduction of AIFMD in 2011.  The new thresholds will most benefit medium-sized firms which currently may be subject to the full-scope regime but with the proposed changes will be able to take advantage of lighter touch regulation. 

Moving up a category: 

The more flexible regime would mean that firms would not need to apply for a variation of permission as they change size category. There may be a requirement that firms notify the FCA of their size category, but this would be a much simpler process than the existing requirements that apply when a firm passes a threshold. Firms will also have the option to comply with the rules applicable to larger firms, but will not be required to do so.  This is something that firms could decide to do in order to attract investors looking for a more regulated offering. 

• Application of the rules to firms undertaking different activities: The FCA recognizes that the current Level 2 Regulation, which focuses on managers of diversified portfolios of transferrable securities, is not always suitable for managers of funds focused on less liquid investment types, such as private equity and real estate. This is particularly the case in relation to rules on risk limits, with private equity managers not being able to easily categorize risks into market risk, credit risk, liquidity risk and operational risk as a result of their risk being dependent on individual investments. The FCA expects firms to comply with rules where they are relevant, but does not want to impose unnecessary standards on firms. It is also expected that the FCA will introduce a separate regime for venture capital and growth funds and will reform the rules relating to listed-ended investment companies. These proposals will be welcomed by the private capital industry, which since the introduction of AIFMD has criticized its ‘one-size-fits-all’ approach.

Other proposals: 

• National Private Placement Regime (“NPPR”): It is not expected that any changes will be introduced in relation to the existing NPPR regime, which is deemed to be fit for purpose. 
• Private Equity Notifications: The requirement for UK AIFMs and above-threshold overseas AIFMs to notify the FCA of any funds they manage acquiring control of non-listed companies and issuers may be removed or required to be notified elsewhere.
• Remuneration rules: The FCA is expected to review the operation and effectiveness of the remuneration rules for AIFMs to consider whether changes should be adopted. 
• Prudential requirements: In light of changes to the perceived balance of risks post-financial crisis, the FCA recognizes that there may be scope to recalibrate the existing requirement to hold a liquid capital buffer. 
• Business restrictions: The business restrictions prohibiting full-scope AIFMs from performing other regulated activities will be reviewed by the FCA in light of the increased costs and inefficiencies it imposes on managers, who are often obligated to seek top-up permissions or create new legal entities once a firm passes a threshold. 
• Regulatory reporting: The FCA wants to achieve a more effective reporting regime that is proportionate in its demands on firms, and they will consider how to achieve this outcome. 

Timing and next steps

Both the Consultation and Call for Input are open for feedback until 9 June 2025. Subject to feedback, and any decisions made by HM Treasury on the future regime, the FCA plans to consult on detailed rules in the first half of 2026. The FCA is also expected to provide more detail on the timeline for implementation, which is expected to give firms sufficient time to adapt to the new regime while removing unnecessary rules relatively quickly.  As mentioned, any changes to the existing regime are at a very preliminary stage. However, the proposals, if implemented, may make it more attractive for managers to establish their fund management entity in the UK.