FCA and HMT review AIFM regulatory framework

HM Treasury (HMT) and the FCA commenced their review of the regulatory framework governing Alternative Investment Fund Managers (AIFMs) on 7 April 2025. This initiative seeks to create a more proportionate, flexible and growth-oriented environment for AIFMs while maintaining robust consumer protections and market integrity. HMT consulted on the legislative approach in Regulations for Alternative Investment Fund Managers, with the FCA’s Call for Input: Future Regulation of Alternative Fund Managers setting out its initial direction of travel.

What does this mean?

The UK government previously onshored existing EU AIFMD rules, which were introduced in 2013. As part of the post-Brexit approach, the government and FCA are now seeking to transfer rules to the FCA handbook, while simultaneously tailoring and refining obligations to better suit domestic market dynamics, priorities and growth aspirations.

Framework

The existing criteria for ‘full scope’ and smaller-firms is set out in legislation. However, HMT is proposing to pass this to FCA, and FCA is proposing to change the threshold for full scope firms from £100 million leveraged-AUM to £5 billion net-AUM.

While existing PE, hedge and alternatives will remain in scope, HMT has considered the approach for Managers of Social Entrepreneurship Funds (SEF), Registered Venture Capital Funds (RVECA), and Listed Closed-Ended Investment Companies (investment trusts). It is undertaking separate work on SEF and RVECA funds and their regimes, but is proposing that investment trusts will remain in the scope of the new framework.

FCA's Strategic Direction

Complementing the government's consultation, the FCA's Call for Input outlines its approach to overhauling the regulatory framework for AIFMs. Key aspects of the FCA's approach include:

Three-Tiered Regulatory Framework:

Large Firms: Firms with AUM exceeding the proposed £5 billion threshold would be subject to a regime similar to the current full-scope regulations, albeit with potential reductions in prescriptive details to allow greater flexibility.

Mid-Sized Firms: A new category for firms managing assets between the current threshold and the proposed £5 billion. These firms would face a comprehensive regulatory regime covering all essential areas but with fewer prescriptive requirements, enabling more operational flexibility.

Small Firms: Firms below the current threshold would be subject to core baseline standards, ensuring fundamental protections without imposing undue regulatory burdens.

Building on its approach that emphasises achieving desired outcomes rather than adhering strictly to prescriptive rules, the FCA is considering how to remove detailed procedural requirements in the existing rules. This will allow firms the option to comply in a way that works best for them, delivers greater cross-border efficiencies and supports evolution of financial markets and technologies.

The FCA wants to group handbook rules into clearer, thematic categories that reflect different business activities and phases of the product cycle.

Some aspects of the broader framework will remain unchanged, such as the National Private Placement Regime (NPPR) or the depositary model, whereas the prudential, reporting and remuneration elements of the rules will be considered, with more detail expected in the next consultation.

What do firms need to do?

Evaluate both the HMT and FCA proposals in the context of your own business, considering AUM, leverage and business model.

Engage proactively with FCA and industry bodies, where industry-led and widely supported solutions are likely to be welcomed.

Consider cross-border implications - whether within a group, or for international clients, particularly given the wider review of AIFM in the EU.

Firms need to engage holistically with both the HMT and FCA proposals, as they will form one final regime. Depending on the size and business model of your firm, the impact will vary. Understanding your net-AUM and how that would see you classified is important, but as is understanding the potential scope and approach of the revisions to the rules even within a tier, and the removal of prescriptive rules.

The EU is also undertaking a review of AIFMD, so understanding alignment with other relevant jurisdictions, and any potential complexity should also be a critical part of this.

Next steps

The FCA welcomes comments on its Call for Input until 9 June 2025. It expects, following confirmation of HMT’s approach, to consult on detailed rules in the first half of 2026, with a subsequent appropriate implementation timeline.