AIFM reform: key takeaways from the Treasury and FCA Proposals

On 7 April 2025, HM Treasury (the Treasury) and the Financial Conduct Authority (FCA) both published initial proposals relating to the reform of the regulatory regime for Alternative Investment Fund Managers (AIFMs). These papers contain wide-ranging proposals, and in this briefing we discuss the proposed changes and their potential impact on the asset management industry.

The proposed reforms build on work done under the previous Government to reform the asset management regime post-Brexit. The Treasury notes the significant role the asset management industry plays in the Government’s growth mission by directing capital from investors to investment opportunities.

The papers do not contain draft rules or detailed proposals, which will be consulted on further in the first half of next year.

Background

The EU introduced the Alternative Investment Fund Managers Directive (AIFMD) in 2011, which came into force in 2013, harmonising the rules relating to the management of alternative investment funds (AIFs) across the EU. Firms within scope included managers of hedge funds, private equity funds, investment companies, real estate funds and certain retail investment funds. The Directive covered areas including capital requirements, conduct of business standards, depositaries and marketing. These rules were implemented in the UK through legislation including the AIFMD UK Regulation, and changes to the FCA handbook including the Investment Funds sourcebook (FUND).

As provided for by the AIFMD, the UK requires alternative investment managers above the thresholds provided for in the legislation [1] to be authorised. Below the threshold the FCA operates two regimes:

• A Small Authorised Regime, under which firms must be authorised but are not subject to full-scope requirements; and
• A Small Registered Regime, which only applies to managers of Social Entrepreneurship Funds (SEFs), Registered Venture Capital Funds (RVECA Funds), Unauthorised Property CISs, and “Internally Managed Companies”, and has fewer requirements than full authorisation.

Following the UK’s departure from the EU, the Government and FCA “onshored” these rules, but did not make any policy changes. As part of the Smarter Regulatory framework, the bulk of assimilated EU law is being repealed and replaced, in a series of tranches.

In common with other areas of assimilated law, the AIFMD UK regulations will be repealed under provisions in the Financial Services and Markets Act 2023, subject to a commencement date which will be set once the new regulatory regime is in place.

What is wrong with the current regime?

According to FCA figures, the vast majority of assets managed by AIFMs fall under the full-scope regime – over 98% of total net asset value - are managed by firms in the full-scope regime. This covers the very largest firms and also smaller, boutique firms, which might not pose the same level of risk as the largest firms.

The current regime has also attracted criticism for a number of reasons, including:

• The thresholds have not been raised since 2013, which has led to regulatory creep in that fewer firms fall outside the full-scope regime than was intended when the regime came into force.
• There is also a regulatory cliff-edge, which firms can cross purely due to unexpected market movements, which therefore disincentivises growth. For example, firms needing authorisation will need to appoint a depositary.
• There is also the danger of the “halo effect” whereby investors may be confused by firms being FCA-registered and assume a higher level of protection.
• The rules are currently heavily prescriptive, which gives firms limited flexibility in how they comply.

Treasury proposals

The Treasury’s consultation paper focuses on establishing the perimeter of the new regime, setting out which firms will require authorisation.

 The Treasury is proposing to create a new regulatory structure, under which the FCA will be given powers to adopt a set of more streamlined rules for AIFMs and relevant depositaries, which can be adapted to changing market conditions more flexibly.

The Treasury is proposing the following changes to the regime:

• Removing the legislative thresholds, which will enable the FCA to set and amend thresholds as appropriate, based on the size, risk posed, and investor base of AIFMs. This will mean that most AIFMs, including those currently in the Small Registered Regime, will require FCA authorisation. However, the Treasury is proposing to exclude managers of SEFs and RVECA Funds from the scope of the current consultation, and consider their regulation in a separate workstream.
• Keeping Listed Close-Ended Investment Companies within scope of the regulatory regime, including those which are internally managed and below the current threshold.
• Making consequential changes to definitions, including moving a number of the definitions that underpin the regulated activity of managing an AIF to the Regulated Activities Order and reviewing the definition of acting as trustee or depositary of an AIF
• Removing the statutory legal liability of external valuers, which would have a contractual liability to the AIFM instead.

FCA proposals

The FCA’s Call for Input sets out its high-level proposals to amend its rules so that they are more outcomes-focused and less prescriptive, in line with its current regulatory agenda.

The FCA is proposing:

• To categorise firms according to net asset value (NAV), rather than leveraged assets under management (AuM) as they are currently.
• To divide firms into large (over £5bn of NAV), mid-size (over £100m of NAV) and small firms.
• To make the structure of its rules clearer, listing them according to phases of the product cycle to make them easier for firms to understand, depending on their size.
• Listed closed-end investment companies (investment trusts) will be subject to different rules.

The FCA is proposing that the regime for the largest firms will be similar to the current full-scope regime, with fewer procedural requirements for mid-sized firms. Small firms will be subject to baseline standards, in line with those applied to larger firms but with greater flexibility as to how they apply them.

The FCA will also consider the current business restrictions that apply to full-scope AIFMs which prevent AIFMs conducting non-AIFM activities within the same legal entity and can result in unnecessary costs and inefficiencies.   

Comment

The Government’s growth agenda is evident in this review and the desire to have an appropriately targeted and proportionate regime for UK markets to foster economic growth is welcome.   

However, for firms currently in the Small Registered Regime, these proposals will mean significant changes, in that they will need to seek FCA authorisation. This should however enhance investor protection, in ensuring that all firms are subject to full FCA rules and supervision. These firms may wish to start their preparations in anticipation of applying for authorisation once the new regime comes into force.

The FCA is expecting that a large number of firms will fall under its new regime for mid-sized firms, which should mean that they are subject to less onerous regulation than they are currently in the full-scope regime. However, we will need to wait for the detailed consultation to see the extent of the benefits for the smaller and mid-sized authorised AIFMs   

Next steps

The Treasury consultation and FCA’s Call for Input both close on 9 June.

The Treasury has indicated that it intends to publish a draft statutory instrument in Q1 2026, and the FCA will consult at the same time on its proposed rules for AIFMs.

[1] The threshold is set at €100m of assets under management, except for where a manager only manages AIFs that are unleveraged and have no redemption rights for the first 5 years, where it is set at €500m.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, May 2025