AIFM Regime Overhaul: FCA and HM Treasury propose rules to simplify rules and cut costs for asset managers

The Financial Conduct Authority (FCA) has launched a major consultation (CP26/28) to change the regulatory framework for alternative investment fund managers (AIFMs) in the UK, most notably by establishing a new 3-tier structure (small, medium, and large) to update size thresholds and scale the rules more proportionately to a firm’s risks. The consultation accompanies the Treasury’s parallel consultation for draft Alternative Investment Fund Managers (AIFM) regulations, along with a policy note (alongside a few specific changes, this Treasury consultation broadly seeks to grant the FCA rule making power, and to facilitate the FCA replacing existing regulations with its own appropriate handbook rules). The implementation date currently envisaged for the new regime is 2028. This note covers the above documents.

As part of this package of documents, the FCA has also launched separate consultations with a broader scope, as follows:

• (CP26/26) a CP covering Fund Reporting for Asset Management Entities (FRAME), setting out a new regulatory reporting framework intended to simplify and improve how asset management firms report fund data to the FCA. You can find our note on the FRAME CP here.  This CP applies to a number of other categories of firm beyond AIFMs; and

• (CP26/27) which aims to simplify remuneration rules by replacing overlapping remuneration codes with a clearer, more proportionate framework. Our client note on CP 26/27 can be found here. This CP applies not just to AIFMs but also to investment firms, UCITS management companies, or firms in the same group as at least one of those three types of firms

A table linking to all the primary resources can be found below.

FCA CP26/28 – Headlines:

• The changes in size thresholds would mean that firms with net assets of up to £750m would be considered small AIFMs and thus subject to fewer obligations – a substantial increase from the current threshold of £100m.

• Clarifying the legislative definition of an “AIF” to clarify grey areas between AIFs and collective investment schemes (CIS) and to make it clearer when a firm is managing a fund that is an AIF and should be authorised as an AIFM and with the Part 4A permission for the regulated activity of managing an AIF.

• Streamlining obligations on valuations, risk management and fund liquidity based on AIFM size.

• Narrowing the scope of certain delegation and reporting/disclosure obligations;

• A new sourcebook is proposed – the Alternative Investment Funds Sourcebook (ALTS) – to unite rules applicable to AIFMs and residual CIS operators in one location.

• The FCA also proposes further discussion on changes to rules applicable to the appointment of depositaries, the AIFM business restriction, and prudential matters.

Read on for further detail on the proposals.

FCA CP26/28: The UK AIFM Regime

This section summarises the FCA’s key proposed changes to the UK AIFM regime.

AIFM Size Thresholds

The current UK AIFM regime applies differently for AIFMs based on the aggregate size of the AIFs they manage, with small AIFMs subject to fewer obligations than larger (full scope) AIFMs. Under the new regime, Treasury is proposing to remove the legislative threshold for AIFM size categories and transfer powers to the FCA to determine firm size thresholds within its own rules.

The FCA proposes a 3-tier regime based on aggregate NAV of any AIFs and residual CIS it manages (rather than the current leverage-based metric of assets under management), which we have set out in the table below:

The lower threshold was increased from the initial Call for Input proposal of £100m to £750m in response to industry feedback.

A firm will be required to calculate and determine its size whenever there is a “material change” to the value of its business which may impact its AIFM classification, and whenever there is a “significant change in the value of assets being managed by the firm”.

A material change is a defined term in regulation and refers to a non-exhaustive list of events that a firm must respond to. However, a significant change in value is not a defined term, so firms will be expected to exercise good judgement in deciding when a change in investments might cause a change in the firm’s size. This ambiguity could lead to inconsistent practice and potential regulatory risk, in particular for open-ended funds, which must be valued at least once a month or at such lesser frequency as permitted under the valuation rules.

Firms crossing a threshold upwards have 6 months to comply with new obligations, and 12 months to appoint a depositary (if required). When a firm crosses a threshold, whether to a larger or smaller size category, it will have to notify the FCA (but will not be required, as under the current regime, to apply for a Variation of Permissions).

Changes to the AIF definition

The Treasury’s draft SI includes a new definition of an “AIF”, namely:

“a collective investment undertaking, including a sub-fund of such an undertaking, which— (a) raises, has raised or intends to raise capital from a number of investors, with a view to investing it in accordance with a policy as to how the capital is to generate a return or investment outcome or the benefit of these investors, and (b) is not a UK UCITS”. 

This definition would explicitly exclude occupational pension schemes, holding companies, employee participation schemes and securitisation special purpose entities.

The intention of the revised definition is to clarify grey areas that have led to different interpretations of the definition of an AIF. If the definition of an AIF changes as proposed, some current collective investment schemes (“CIS”) will fall within the revised AIF definition and will be required by law to be re-categorised as AIFs (and thus subject to enhanced disclosure and reporting requirements). That said, the FCA expects firms remaining within the ‘residual CIS’ definition to include carried interest vehicles linked to private capital investments, vehicles with a single investor, joint venture arrangements, or arrangements to enable interests in a specific, pre-determined asset to be held efficiently by multiple persons. 

Residual CIS operators are not currently required to provide regulatory reporting. The FCA consider this impedes oversight, and thus intend to provide a limited set of data (as further set out in the FRAME CP). This would include the number of residual CIS the operate, the gross notional value of their funds, and the purpose of each vehicle (including carried interest vehicles). However, enhanced disclosure requirements for residual CIS operators will not apply to carried interest vehicles, joint ventures and single investor vehicles. 

Valuations

The proposed valuation rules are broadly similar to existing AIFMD rules but introduce valuation rules for the first time to firms that are currently small authorised AIFMs. Key proposals include:

• The FCA propose to require firms to keep records of their decision-making processes, and to consider when to undertake ad hoc valuations during market or asset-specific events, if they have evidence that the current valuation no longer represents the asset’s fair value.

• The Treasury is proposing to remove statutory provisions with respect to external valuers, including strict liability for valuations. Further to this, the FCA proposes that AIFMs may appoint an independent valuer only if it meets criteria: knowledge, skills, experience, sufficient resources, and ability to act independently.

• The current rules require functional independence. The FCA considers that a fully autonomous valuation function that has all the necessary skills to come to independent judgements on valuations across a wide range of assets is rarely seen outside the largest AIFMs. The FCA therefore proposes a more proportionate regimes, whereby small and medium AIFMs would be required to take all appropriate steps to manage and mitigate the risks of conflicts affecting a fund’s investors, even where there is not a fully independent valuation function within the organisation.

• The FCA also make some minor changes to reflect current IOSCO standards on valuations.

Leverage

The current regime has two mandatory calculations for firms that use leverage: the gross method and the commitment method. Based on feedback that these calculation methodologies are complicated, burdensome and open to interpretation, the FCA proposes removing both the gross and commitment method leverage calculations entirely. Instead, firms would disclose leverage using a method or methods best suited to their fund and investment strategy. Whilst this gives firms more flexibility, it undermines the ability of investors and regulators to compare leverage across funds. 

Moreover, the FCA introduces a hedging exemption such that funds using derivatives only for hedging (not investment purposes) would be classified as "unleveraged" for the purposes of the risk management and liquidity management rules.

Risk management

The Consultation Paper proposes a proportionate risk management regime for AIFMs of different sizes, and to tailor risk management requirements to firms managing different types of AIF. We have summarised the requirements in the table below. For all AIFMs managing only closed-ended, unleveraged AIFs, only the Baseline requirements below apply. 

Liquidity management

The FCA proposes target changes to the liquidity management rules, in particular:

• No liquidity rules apply to unleveraged closed-ended AIFs;

• Small AIFMs of open-ended AIFs must ensure consistency between redemption policy and investment strategy, both at design stage and on an ongoing basis. Small AIFMs must also conduct annual stress tests.

• Medium and large firms are subject to the same rules as small firms, but with the additional requirements in line with the current rules applicable to full-scope AIFMs. Medium and large firms managing open-ended AIFs investing in other open-ended funds will also be subject to a new "look through" requirement to consider not only the redemption terms of the fund itself, but also the liquidity profile of the underlying assets.

Delegation

The FCA proposes to retain the current delegation requirements in large part, especially as they apply to risk management and portfolio management, and reiterates the AIFM cannot transfer responsibility to other entities when delegating activities). Therefore, all delegation arrangements concerning AIFM management functions will be subject to general requirements (such as that delegates must have sufficient expertise and resources and be of good repute, and that delegation must not prevent the FCA from effectively supervising the AIFM or the AIF from being managed in the best interests of investors).

The FCA has also included narrowly defined term of ‘additional core AIFM functions’ which are subject to the same delegation controls as investment management functions. The ‘additional core AIFM functions’ are (a) valuations to a third-party valuer appointed under LATS 6.2.11R; (b) regulatory compliance monitoring; and (c) marketing of AIFs. 

Annual Reporting and Disclosures

The FCA intends to apply to apply annual reporting requirements only to medium and large UK AIFMs only (for each unauthorised AIF). Small AIFMs and in-scope residual CIS operators must only prepare an annual summary (not a full audited report) containing a concise set of core information. The level of prescription in such reports is also being reduced.

Under the proposed rules, the professional investor disclosure regime would become more principles-based, supported by limited mandatory disclosures (valuation methodology, liquidity risk management). By contrast, the FCA maintains that maintain that retail investors in unauthorised funds need more predetermined disclosures to help them understand relatively complex products.

The FCA also propose a new rule requiring AIFMs and residual CIS operators to meet investors’ reasonable demands for information.

Closed-Ended Investment Funds and Investment Companies

The FCA proposes a tailored approach for closed-ended investment companies (CEICs) admitted to trading on UK regulated markets, given their unique characteristics and the broader regulatory framework (UKLRs, DTRs, MAR, company law) that already applies. The Treasury's draft SI exempts small internally managed investment companies listed on a UK recognised exchange from the AIFM regime entirely, but above-threshold and externally managed CEICs remain in scope.

NPPR 

The Treasury proposes retaining the NPPR with limited improvements (including that (i) authorised UK AIFMs will no longer need to seek permission from the FCA to market an AIF, but rather make a notification, and (ii) the requirement to notify the FCA 20 days prior to marketing will be removed). In particular, the FCA may be given enhanced powers to suspend or revoke marketing rights for non-complaint AIFMs under NPPR (e.g. where they do not submit required reporting).

Discussion Chapters

The FCA also seeks feedback ahead of future formal consultations. Key themes here include:

• Depositaries: The FCA is considering allowing a "split depositary" model — more than one depositary for the same AIF, each performing different functions (e.g., separate safekeeping and oversight). Small AIFMs would not be required to appoint a depositary.

• AIFM Business Restriction: The FCA would like to remove the AIFM business restriction entirely, relying instead on the wider regulatory framework and authorisation gateway to manage risks.

• Prudential Rules: The FCA's direction of travel is to bring fund managers within the scope of COREPRU — the FCA's integrated prudential framework — for greater consistency.

What is not included in the Consultation Paper?

• Non-Listed Portfolio Company Disclosures: The current regime imposes a suite of obligations on AIFMs acquiring interests in non-listed companies. These provisions were criticised during the DP23/2 and Call for Input phases as disproportionate, but despite this the CP does not include the removal or reform of these obligations. The only reference in the entire document is a single bullet point buried in the CBA at paragraph 56 (page 102), which states:

  "Some firm notifications will be removed, such as private equity control notifications, or streamlined, such as focusing delegation notifications on information that is more useful for oversight.”

  The Treasury’s Policy Note for its part retains most of the regulations in this area, the comment being that the Government has not seen sufficient evidence that would justify total removal at this stage“. The Government is however “satisfied that the requirement for AIFMs to notify the FCA of their control of voting rights in a portfolio company at regular intervals is unnecessary and burdensome, given that the FCA has no means to use this data” and the draft statutory instrument therefore removes this specific requirement (but retains the obligation to provide certain information to the FCA about non-listed companies an AIF controls, among other things, around managing conflicts of interest).

• Loan Origination: In the EU, AIFMD II introduced a dedicated framework for EU AIFMs managing loan-originating AIFs. However, the CP does not include any proposals or even a discussion chapter on loan origination. This may reflect a deliberate policy choice to rely on the general risk management framework rather than sector-specific rules.

• Authorised Funds: There is nothing specific in the CP regarding authorised funds (NURS, LTAFs, QIS). However, a second consultation will cover "reforms to the authorised AIF regimes…to more clearly distinguish [the FCA’s] rules between authorised and unauthorised funds, removing overlap and creating more consistency in authorised funds intended for retail investors.”

Documents and Timings

CP 26/28 closes on 22 October 2026 (with some discussion chapters having an earlier 18 September close date).  Once the FCA have taken account of feedback to the discussion topics it intends to consult on its proposals and draft rules. In addition, the second consultation will cover reforms to the authorised AIF regimes (NURS, LTAF and QIS), to more clearly distinguish the rules between authorised and unauthorised funds, removing overlap and creating more consistency in authorised funds intended for retail investors. 

On 14 September 2026, the FCA will host a roundtable on reviewing the prudential regime for Fund Managers. Email fundmanagersreview@fca.org.uk to register interest.