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The Financial Conduct Authority (FCA) has launched a consultation that could result in the most significant overhaul of the UK's Alternative Investment Fund Manager (AIFM) regime since it was first introduced over a decade ago. These proposals seek to create a more proportionate and practical regulatory framework for alternative investment managers. In practice, this means that many firms will be subject to a simpler and more proportionate regulatory framework than today, while some currently exempt firms could become regulated for the first time.
Key Points at a Glance
- New size categories based on NAV (Net Asset Value) rather than assets under management including leverage.
- Small firms would be those with NAV below £750m, significantly higher than previous thresholds.
- Depositary requirements may only apply to medium and large firms, reducing costs and administration for smaller managers.
- Leverage calculation rules could be simplified, removing current gross and commitment leverage calculations and excluding funds using derivatives solely for hedging as being treated as leveraged.
- Valuation requirements may apply to all AIFMs, regardless of size, albeit level of detail and requirement around independence proportionate to size.
- Proposal to tailor Risk and Liquidity management rules to the size and nature of the fund, particularly benefiting closed-ended funds and Small AIFMs.
- Small firms would no longer need audited annual AIF reports, replacing them with a simpler annual summary.
- Investor disclosure requirements would become more flexible and principles-based when marketing to professional investors.
- Sensible delegation rules applying to all AIFMs, with pre notification requirements removed
- Annex IV reporting would be replaced with a simplified reporting framework.
- Single Remuneration Code being explored to reduce regulatory burden.
Understanding the Proposed Changes
Under the current regime, firms are categorised as either "small" or "full-scope" AIFMs based largely on assets under management, including any exposure created through leverage. This can create an artificial inflation of a firm's regulatory classification, particularly for managers using leverage within their investment strategies.
The FCA is proposing a simpler structure based solely on Net Asset Value (NAV), excluding leverage from the calculation altogether, but including residual Collective Investment Schemes (CIS) the firm is also operating. Firms would be divided into three categories:
AIFMs:
NAV below £750m
AIFMs:
NAV between £750 million and £5 billion
AIFMs:
NAV above £5 billion
This change could significantly reduce regulatory burdens for many firms, particularly those currently caught within the full-scope regime due to leverage calculations rather than the actual scale of their business.
Another welcome development is the proposed approach to firms moving between categories. Rather than applying for a formal variation of permission, firms would simply notify the FCA and would have six months to comply with the requirements of their new classification.
Areas Where Firms May See Increased Requirements
Although much of the consultation focuses on reducing unnecessary regulatory burdens, firms should not assume that the new "small" category means lighter supervision across the board.
For example, firms currently categorised as small under the current regime will need to enhance their governance arrangements and compliance framework to meet requirements of Small AIFMs under the proposals. This ranges from ensuring that the firm is run by at least 2 reputable and experienced people to having proportionate formal arrangements in place for meeting risk management, valuation, liquidity and revised disclosure requirements.
Small registered UK property AIFMs and certain internally-managed closed ended investment companies will no longer be exempt from authorisation and will need to seek permission as a Small AIFM which will be a significant change for those firms.
Residual CIS Operators will also need to review the proposals to assess impact on the business. In a worse case some CIS may fall within the new AIF definition meaning a variation of permission for ‘Managing an AIF’ will need to be submitted to the FCA. As a minimum Residual CIS Operators will face new reporting and disclosure requirements.
What This Means for Firms
For many alternative investment managers, particularly private equity firms managing closed-ended and unleveraged funds or smaller current Full Scope AIFMs, the proposals represent a clear move towards a more proportionate and business-friendly regulatory framework.
Firms with aggregate NAV below £750 million could benefit from:
Reduced reporting obligations
Removal of depositary requirements
More flexible leverage reporting
Lower compliance costs overall
Simpler risk, liquidity management and valuation expectations with more proportionate independence requirements
Medium and large firms are also likely to see some simplification compared with the current full-scope framework, although they will continue to face more comprehensive requirements.
Another example where firms may benefit from CP26/28 proposals reside where firms have structured their alternative investment fund management activities outside the UK but have a substantive UK investment management capability. The direction of travel is towards a more proportionate, tiered UK AIFM regime, reducing complexity and administrative burden while making the UK more competitive as a fund management jurisdiction.
A key commercial question is:
Can the firm bring AIFM activity back to the UK, which could reduce cost and complexity, but without damaging distribution?
That said, firms should avoid making any immediate operational changes. The proposals remain at consultation stage, with feedback due by October 2026 and final rules expected during 2027 before implementation in 2028.
The most sensible next step is to assess where your firm would sit under the proposed three-tier structure, identify which regulatory obligations may change, and consider whether there are any aspects of the consultation that warrant a formal response.
Which category do we fall into? Would your aggregate NAV place you in the Small, Medium or Large AIFM category?
Are we currently classified as Full-Scope primarily because of leverage? If so, the proposals may significantly reduce regulatory requirements
Do we currently rely on an overseas AIFM structure? The proposed framework may change the economics of maintaining UK vs overseas structures
Are any currently exempt activities likely to become regulated? Internally managed investment companies should assess the proposals carefully
Could our governance framework withstand more scrutiny? Even under a more proportionate regime, firms remain responsible for risk management, valuation oversight and investor protection
How ONE Can Help
Our teams across the UK, EU and US can assist with impact assessments, governance reviews, operating model analysis and implementation planning. We help firms:
Identify the category they are likely to fall into.
Understand which regulatory obligations may change.
Assess opportunities to simplify governance and operating models while maintaining robust oversight.
ONE could provide comprehensive gap analysis support, review existing frameworks, assist with consultation responses, and help firms prepare early for the transition to the FCA's new AIFM framework. Taking time now to understand the direction of travel will allow firms to plan effectively and make the most of what appears to be a significant and largely positive evolution of UK alternative investment fund regulation.
Get in touch:
If you are assessing the potential impact of CP26/28 on your governance framework, operating model, or delegation arrangements, we would be pleased to discuss a proportionate approach.
