HMT and FCA Consultation on AIFM Regulations

Introduction

On 7 April 2025, both HM Treasury (“HMT”) and the Financial Conduct Authority (“FCA”) issued publications seeking input on reforming the UK regime for Alternative Investment Fund Managers (“AIFMs”).

The HMT consultation (available here) addresses the overall regulatory framework for AIFMs and relevant depositories, focusing on which AIFMs should be subject to the regulations and whether amendments are necessary to key provisions.

The concurrent FCA Call for Input (available here and following on from its earlier discussion paper DP23/2) seeks feedback on reforms to the detailed rules for AIFMs, including how rules will be made more proportional for different types of firms.

Both are open for comment until 9 June 2025.

Key Takeaways

The key takeaways from the HMT and FCA proposals are:

1. The government aims to streamline the regulatory framework for AIFMs to remove unnecessary regulations and foster economic growth.
2. It is proposed to remove legislative thresholds for sub-threshold AIFMs (delegating proportionality thresholds to the FCA), and remove the Small Registered Regime so that all firms currently within that regime fall within the regulatory perimeter.
3. Internal managers of Unauthorised Property Collective Investment Schemes and Managed Investment Companies are proposed to be required to seek FCA authorisation.
4. The FCA intends to create a three-tiered regime for AIFMs based on size – with less prescriptive / onerous rules applying to smaller AIFMs. The most prescriptive / onerous rules similar to the current full-scope AIFM regime will apply for firms with above £5bn net asset value (“NAV”) – which should result in a significant reduction in firms subject to such rules.
5. Special cases such as listed closed-ended investment companies will remain within the regime, but proposed to be subject to modified rules to reflect their specific features.

For more information – see the below where we dive into the details.

HMT’s Consultation Paper

The current rules for AIFMs comprise a combination of HMT regulations and FCA rules which implemented the Alternative Investment Fund Managers Directive (“AIFMD”) in the UK. As with other reforms under the “Smarter Regulatory Framework”, the intention going forward is for the FCA to set the detailed rules applicable to AIFMs, within an overall framework set by legislation. Hence, the HMT consultation focusses on issues related to the overall framework and regulatory perimeter.

Proposals

Sub-Threshold AIFMs

Presently, the Small Authorised Regime applies to all sub-threshold AIFMs who are required to be authorised by the FCA to manage AIFs but are not subject to the full-scope requirements of larger AIFMs. The Small Registered Regime exempts certain sub-threshold AIFMs from seeking FCA authorisation, requiring only registration with the FCA. This includes (i) managers of Social Entrepreneurship Funds (“SEF”) and Registered Venture Capital Funds (“RVECA”), (ii) managers of Unauthorised Property Collective Investment Schemes, and (iii) managers of ‘Internally Managed Investment Companies’.

The existing Small Authorised Regime and Small Registered Regime (the “Small Regimes”) present issues such as limited regulatory oversight and inconsistent reporting. The threshold for the Small Regimes was established in 2013 and has not been increased since its inception. Market participants also provided feedback on the operational challenges of the legislative threshold.

Therefore, HMT proposes to abolish the legislative thresholds for the Small Regimes, enabling the FCA to determine necessary and tailored rules for different fund managers. Three categories of firms captured by the existing Small Registered Scheme will be required to seek FCA authorisation and comply with proportionate rules based on their size.

• Managers of SEF and RVECA: As SEF and RVECA are subject to certain requirements under assimilated law in addition to the AIFM regime, HMT will retain the existing rules for the regulation of their managers and consider their regulation in full as a separate workstream.
• Managers of sub-threshold Unauthorised Property Collective Investment Schemes: HMT proposes requiring these managers to seek FCA authorisation, as managers of AIFs.
• Managers of sub-threshold ‘Internally Managed Investment Companies’: HMT proposes requiring these managers to seek FCA authorisation, as managers of AIFs.

Listed Closed-Ended Investment Companies (“LCICs”)

LCICs are subject to the FCA’s listing rules. Their managers have been regulated by the AIFM regime since their introduction. Market participants have raised challenges with the application of AIFM regime to these companies in view of their unique corporate structures and governance arrangements.

Despite mixed views on the applicability of the AIFM regime, HMT proposes that all LCICs remain within the scope of the AIFM Regulations and bring internally managed LCICs below the threshold into scope.

Additional Policy Areas

HMT has also set out their intentions in the following areas:

• Definitions and other perimeter issues: HMT proposes to move key definitions relating to the AIF regulatory perimeter to the Regulated Activities Order (since they are currently scattered across legislation and guidance). It is not intended that this would result in substantive changes.
• The National Private Placement Regime (“NPPR”): The NPPR is the existing marketing regime used by overseas AIFMs, and UK and Gibraltar AIFMs managing overseas AIFs, to market those AIFs in the UK. HMT proposes to essentially retain this marketing regime.
• Marketing Notifications: Under existing regulations, 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. HMT sees no need for such notification requirements and so proposes their removal.
• Private Equity Notifications: 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 under exiting regime. HMT is considering whether to remove this requirement or whether the information should be notified elsewhere given the FCA’s limited powers to act on this kind of activity.
• External Valuation: Currently, AIFMs can appoint external valuers to carry out a valuation of an AIF, but the external valuer is liable to the AIFM for any losses caused by the valuer being negligent or intentionally failing to perform its tasks. HMT is considering whether to remove this concept from the legislation.

FCA’s Call for Input

In collaboration with HMT, the FCA proposes reforms to its AIFM regime to facilitate market entry and growth for firms without undue regulatory burdens. The main focus of this is creating a tiered regime with proportional obligations for AIFMs of different sizes.

Proposals

The FCA views the current regime as presenting issues, particularly for smaller firms, creating ‘cliff-edge effects’ around going from a sub-threshold to full-scope AIFM that hinder growth. The FCA thinks the regime also does not adequately differentiate between various activities and risk levels of different AIFMs.

Considering the issues with the current regime, the FCA proposes several reforms to make the regime easier to understand and navigate.

Rule Structure

The FCA proposes a new rule structure for AIFMs, grouping the relevant rules into clearer categories reflecting different business activities and phases of the product cycle. Clear requirements will be set for firms of different sizes:

• Largest firms: The largest firms will be subject to a regime similar to the current rules for full-scope UK AIFMs, with unnecessary burdensome rules disapplied.
• Mid-sized firms: Mid-sized firms will follow a comprehensive regulatory regime consistent with the largest firms, but with less onerous prescriptive requirements.
• Small firms: Small firms will be subject to core requirements appropriate to their size and activity, which set baseline standards and will be broadly consistent with the rules that apply to larger firms.

Moving Up to a Higher Category

The FCA proposes a simplification of the requirements that apply when a firm passes a threshold. The rules will set minimum standards for differently sized firms, but firms will not need to apply for a variation of permission as they change size category. Firms will have the option to comply with rules that apply to larger firms in response to client requests (as the FCA anticipates investors may want AIFMs to go beyond the applicable regulatory minimum), but they will not be required to do so.

Thresholds Setting

The current legislative thresholds use leveraged asset under management (AuM), which includes assets acquired using leverage. The FCA proposes to base determinations of the size of firms and setting of thresholds on NAV: an AIFM’s assets minus its liabilities, which is a more common measure of size used in the industry and may be easier for firms to understand. The proposed thresholds are as follows:

• Largest firms: NAV over £5bn
• Mid-sized firms: NAV between £100m to £5bn
• Small firms: NAV up to £100m

Given the setting of the threshold for the largest firms at £5bn, and the move from leveraged AuM to NAV, these changes should result in a significant reduction of the number of firms subject to the most onerous requirements.

Application of Rules to Firms Undertaking Different Activities

Many of the existing requirements assume that the AIFM is managing a diversified portfolio of transferable securities, but they are not always suitable for managers of funds focused on less liquid investment types.

The FCA is considering bespoke regimes for venture capital firms and LCICs (investment trusts) due to their distinct characteristics. The FCA noted HMT’s intention to retain the current RVECA regime and keep LCICs within the scope of AIFM regulation. When HMT has made its decisions, the FCA will consider how to adapt its regime accordingly.

Depositaries

The FCA does not see an immediate need for radical changes to asset safekeeping and fund oversight for large and mid-sized AIFMs, and does not expect to change the rules that are unique to depositaries of authorised funds in any material way. The FCA also does not propose to make small authorised AIFMs and those full-scope AIFMs that manage overseas AIFs not marketed in the UK appoint a depositary. The Client Assets sourcebook (CASS) will continue to apply to small authorised AIFMs.

Remuneration, Prudential Requirements, Business Restrictions and Regulatory Reporting

The FCA is reviewing the requirements in these areas and considering how they apply to firms under the new regime.

Next Steps

Both HMT’s consultation and FCA’s Call for Input are open for comment until Monday 9 June 2025, following which HMT will publish a draft statutory instrument on the regulatory framework for AIFMs. The FCA intends to consult on detailed rules for AIFMs in the first half of 2026.

Co-authored by Rowena Lee, Trainee Solicitor