Consultation on UK AIFM Regulation: Industry Groups Raise Questions Over FCA Three-Tier Proposals and Propose Further Reduction of Regulatory Burden

A number of responses to the Consultation and Call for Input: Future regulation of alternative fund managers published by HM Treasury and the FCA on 7 April have been recently published. These reveal a diversity of views about many aspects of the proposed reforms of the regulatory framework for alternative investment fund managers (AIFMs) in the UK. We previously summarised the key proposals from the Consultation and Call for Input here.

In particular, responders made a number of observations on the proposed three-tiered approach to regulating UK managers. They expressed general support for replacing the legislative thresholds with an FCA-devised regulatory framework, but questioned the thresholds used to divide different regulatory tiers. 

Industry groups also put forth new and valuable proposals regarding a further reduction of regulatory burden for UK AIFMs.   

Questions over the FCA’s three-tiered approach 

The HM Treasury and FCA proposal splits UK AIFMs into three tiers, depending on their net asset value (NAV):

• Firms with a NAV of more than £5 billion would be considered large firms;
• Firms with a NAV of more than £100 million but less than £5 billion NAV would be considered mid-sized firms; and 
• Firms with a NAV of less than £100 million would be considered small firms. 

The scope of rules applicable to a firm would depend on its tier. 

One industry association expressed concern that the lower threshold of £100 million NAV is too low, and would result in an increased regulatory burden for many sub-threshold authorised AIFMs (currently the threshold for sub-threshold managers is set at less than €500m AUM unleveraged). As a result of the proposed changes, sub-threshold authorised AIFMs would move into the mid-sized firm category, to which the majority of the requirements would apply.  This does not seem to be in line with the objective of creating a simpler, more proportionate regime for UK AIFMs. 

Suggested amendments to HM Treasury and FCA’s proposed framework included setting the lower threshold at £1 billion NAV – to preserve a broad sub-threshold regime, avoid abrupt regulatory changes for large numbers of fund managers, and give greater leeway to smaller and early-stage managers in a position to grow over time. One industry association suggested in its response that the highest tier – for firms managing assets over £5 billion NAV – should be structured as an opt-in category rather than a mandatory regime triggered by crossing the upper threshold.

Reduced regulatory burden

Whilst the three-tiered approach has been the subject of criticism, a number of respondents emphasised the importance of reducing regulatory burdens across the board – not just for small- and medium-sized firms.  This is particularly important for the UK to remain a global hub for private capital, despite the loss of the marketing passport post-Brexit.   

The FCA Practitioner Panel (a statutory panel set up by the FCA to represent the interests of practitioners in larger firms) stated that, in addition to devising an applicable regime based on fund size and strategy, the FCA should also craft its regulatory controls depending on whether the fund targets retail or professional investors. Both HM Treasury and the FCA should broadly consider which requirements remain appropriate for professional investors who – in principle – should be given the freedom to negotiate their own terms with AIFMs.  Any change in this direction would be very much welcomed by the industry. 

One industry association proposed the removal of the notification requirements relating to the acquisition or disposal of major holdings and control of non-listed companies.  The notifications impose a disproportionate regulatory burden on firm, providing little value to regulators, investors, or the market more broadly.  Respondents also suggested that rules prohibiting share redemptions or other distributions within two years of investment should be revoked, on the grounds that these restrict normal commercial activity and negatively impact the competitiveness of the UK market. 

The Panel was broadly supportive of the FCA’s proposal to expand the scope of regulated activities that an AIFM can undertake – as this would allow financial services groups to maintain one regulated entity in future, as opposed to a MiFID firm and a management company as is currently the case with many UK regulated fund managers.   

Next steps

The consultation and Call for Input closed on 9 June 2025. The FCA has stated that it plans to consult on detailed rules in the first half of 2026, subject to Treasury feedback, and will provide further details on a timeline for implementation at a future date. 

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