The future of UK Alternative Investment Fund Regulation: FCA proposals could reshape the AIFM landscape
The FCA has published CP26/28: The UK AIFM Regime, setting out proposals for the most significant reform of the UK Alternative Investment Fund Managers ("AIFM") framework since the Alternative Investment Fund Managers Directive (“AIFMD”) was first implemented in 2013. Published alongside HM Treasury's draft Alternative Investment Fund Managers Regulations 2026 and related consultations on fund reporting and remuneration , the proposals form part of the Government's wider programme of post-Brexit financial services reform.
The direction of travel is clear: create a more proportionate, flexible and UK-specific regulatory framework while retaining appropriate standards of investor protection, market integrity and risk management. For many firms, particularly smaller and mid-sized managers, the proposals have the potential to reduce compliance complexity and better align regulatory obligations with the scale of their business. However, the reforms should not be viewed as a simple deregulatory exercise. Rather, they represent a fundamental redesign of how the UK regulates alternative fund managers.
What is the FCA proposing?
The consultation is extensive, but the core proposals can be distilled into a number of key reforms.
A new three-tier categorisation of AIFMs
The FCA proposes replacing the current distinction between "full-scope" and "small" AIFMs with a new three-tier structure based on net asset value ("NAV"):
Small AIFMs - less than £750 million NAV
Medium AIFMs - between £750 million and £5 billion NAV
Large AIFMs - more than £5 billion NAV
The FCA proposes that regulatory requirements should increase progressively as firms move through these categories, with the most extensive obligations applying to the largest firms.
Given the shift from the current AuM-based thresholds to a NAV-based categorisation model, firms will need to assess carefully how they would be classified under the proposed framework. Firms would be required to aggregate the NAV of the AIFs they manage when determining their categorisation and to monitor their classification on an ongoing basis. Importantly, a change in category would not require a firm to seek a variation of permission or a change to its authorisation status, although firms moving into a higher category would be given a transitional period to comply with any additional requirements.
A new Alternative Investment Funds Sourcebook (ALTS)
The FCA intends to consolidate much of the UK AIFM framework within a new sourcebook known as ALTS. This would bring together requirements currently spread across legislation, retained EU materials and the FCA Handbook, creating a single source of rules for AIFMs.
The creation of ALTS is more than a handbook restructuring exercise. It reflects the FCA's intention to become the principal architect of the UK AIFM regime and should make future regulatory evolution considerably easier.
Reforms to key operational requirements
The consultation proposes amendments across a number of core areas, including:
Risk management
Liquidity risk management
Valuation
Leverage
Delegation
Annual reporting
Investor disclosures
Importantly, the FCA proposes that many of these requirements should apply differently depending on whether a firm is categorised as small, medium or large.
Changes to the depositary framework
HM Treasury proposes removing much of the detailed depositary framework from legislation and enabling the FCA to replace it with tailored rules. Certain core concepts would remain, including depositary liability and requirements relating to the appointment of entities to perform depositary functions.
Reform of the registration regime
HM Treasury proposes removing the current AIFM registration regime for all AIFMs other than managers of Registered Venture Capital Funds and Social Enterprise Funds. The proposals would also require certain currently unauthorised firms, including some property fund managers, to become authorised under the new framework.
More fundamentally, the reforms would reshape the treatment of internally managed investment vehicles. Certain internally managed closed-ended investment companies that currently fall below the relevant thresholds would be excluded from the AIFM regime altogether, whilst above-threshold and externally managed closed-ended investment funds would be required to have an authorised AIFM. This represents a significant change to the current registration framework and could alter the regulatory position of a number of investment structures.
Clarification of the AIF perimeter
The draft legislation would clarify aspects of the definition of an AIF, including that a "defined investment policy" may be implicit and that the concept of "raising capital" is not limited to funds actively fundraising at a particular point in time.
Simplification of certain private equity disclosure obligations
HM Treasury proposes removing certain periodic notification obligations relating to portfolio company voting rights on the basis that the information is no longer considered necessary for supervisory purposes.
A new reporting framework
The FCA's separate consultation on Fund Reporting for Asset Management Entities (FRAME) would replace the existing AIF001 and AIF002 reports with a new reporting framework built around "essential" and "enhanced" reporting obligations.
Retention of the National Private Placement Regime
The Government proposes retaining the UK's National Private Placement Regime for overseas AIFMs and AIFs, albeit with potential amendments to reporting and disclosure requirements.
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Why these reforms matter
While the headline changes concern categorisation thresholds and reporting requirements, the significance of the reforms lies in something much broader.
Since 2013, the UK regime has largely reflected the architecture of the EU Alternative Investment Fund Managers Directive. As part of the post-FSMA framework reform programme, HM Treasury is seeking to move firm-facing requirements out of legislation and into FCA rules wherever possible. The objective is to create a regime that is easier to adapt over time and better aligned with the UK's domestic market.
The FCA notes that aspects of the current framework no longer adequately distinguish between firms with very different business models and risk profiles. Some thresholds have remained unchanged despite significant growth in the alternative investment sector, whilst certain requirements do not always reflect the characteristics of different investment strategies.
The consultation therefore signals a broader regulatory shift away from rigid categorisation towards a more graduated and risk-based approach. More fundamentally, the proposals continue the post-FSMA trend of transferring detailed firm-facing requirements from legislation into FCA rules. In practice, this represents a significant reallocation of regulatory responsibility from Parliament to the regulator. While that should make the regime more agile and responsive to market developments, it will also mean that future changes to the AIFM framework may be implemented more quickly and with less reliance on legislative reform.
The proposal to increase the threshold for the smallest category of AIFMs to £750 million NAV is likely to be one of the most consequential changes for many firms.
The FCA's objective is to ensure that regulatory obligations are better aligned with a firm's scale and activities. Rather than a binary distinction between full-scope and sub-threshold managers, requirements would increase in stages as firms grow.
For emerging managers, private equity sponsors, venture capital firms and alternative asset managers, this could significantly reduce compliance complexity whilst preserving core regulatory safeguards.
That said, firms should avoid equating "small" with "lightly regulated". The FCA is clear that governance, conflicts management, systems and controls and appropriate risk management remain fundamental expectations regardless of firm size.
Many firms currently find the AIFM framework difficult to navigate because obligations are spread across multiple legislative and regulatory sources.
The proposed ALTS sourcebook aims to address this issue by creating a single, dedicated source of AIFM rules.
While this may appear largely administrative, it could have significant practical benefits. Compliance teams will be able to map obligations more easily, whilst future FCA amendments should become more straightforward as fewer changes will require legislative intervention.
The creation of ALTS also reinforces the FCA's role as the primary architect of the UK AIFM regime going forward.
Some of the most important proposals may ultimately be those receiving the least publicity. The clarification of the AIF definition serves as a reminder that questions around whether a structure constitutes an AIF, and who is managing it, remain fundamental regulatory analyses.
Similarly, the proposed abolition of most of the registration regime could have material consequences for certain firms that currently operate without full FCA authorisation. The proposals indicate that some firms may need to become authorised under the new framework, potentially affecting governance arrangements, regulatory capital requirements and compliance infrastructure.
Firms that may be affected should begin considering those implications sooner rather than waiting for final rules.
The consultation also highlights the FCA's focus on so-called "residual" collective investment schemes that do not fall within the AIF definition. The FCA expects some existing structures to be reclassified as AIFs if HM Treasury proceeds with its proposed changes to the perimeter. However, it also recognises that certain arrangements, including carried interest vehicles, joint venture vehicles and single-investor vehicles, may warrant a more proportionate approach where they do not present the same risks as traditional pooled investment funds. Firms operating such structures should nevertheless assess whether any proposed changes to the AIF definition could affect their regulatory categorisation.
The reforms extend well beyond categorisation thresholds. The FCA is reviewing requirements relating to risk management, liquidity management, valuation, leverage, delegation, annual reporting and investor disclosures.
In parallel, HM Treasury proposes changes to the legislative framework governing depositaries and external valuers. For example, the draft legislation would remove the current requirement imposing unlimited liability on external valuers for losses arising from negligence or intentional failure to perform their duties.
For many firms, the practical work associated with these reforms may ultimately prove more significant than the headline threshold changes.
CP26/28 sits alongside two related FCA consultations that will be highly relevant for AIFMs.
First, the proposed FRAME regime would replace AIF001 and AIF002 reporting returns with a new reporting framework calibrated according to fund characteristics and regulatory risk.
Secondly, CP26/27 proposes replacing the existing remuneration rules applicable to various categories of solo-regulated firms with a single consolidated remuneration code.
Taken together, these reforms could require firms to revisit internal reporting arrangements, management information, remuneration governance and broader compliance frameworks.
A more distinct UK regime
The proposals form part of the UK's broader effort to replace retained EU legislation with a domestic framework better suited to UK markets. HM Treasury's draft regulations would repeal and replace significant elements of the existing legislative architecture and give the FCA greater flexibility to develop its own rules.
For firms operating internationally, the practical challenge will be managing compliance across multiple jurisdictions as regulatory frameworks evolve independently.
The National Private Placement Regime survives - and that may be one of the most important outcomes
For many overseas managers, one of the most significant aspects of the reform package is what is not changing.
HM Treasury proposes retaining the UK’s National Private Placement Regime, which currently enables non-UK AIFMs to market to UK professional investors without the need for a full UK authorisation regime. HM Treasury’s policy paper makes clear that it intends to preserve this framework while providing the FCA with greater flexibility to reform associated reporting requirements.
For many international private equity sponsors, venture capital managers, real estate funds and hedge fund managers, this will be a welcome outcome. The retention of the NPPR provides continuity for firms that currently rely on the regime when accessing UK institutional capital.
That said, firms should not assume that nothing will change. The FCA’s wider proposals, including FRAME reporting reforms, indicate that reporting and disclosure requirements may evolve over time. The key point, however, is that the UK appears committed to maintaining a pragmatic approach to international fund distribution whilst modernising the broader AIFM framework.
Asset stripping reforms may be particularly significant for private equity
While much of the consultation focuses on the regulation of AIFMs themselves, private equity sponsors should pay close attention to the proposed reforms to the portfolio company disclosure and asset stripping regime.
HM Treasury proposes retaining the existing framework, which applies where an AIF acquires control of certain companies and is designed to prevent value extraction that could prejudice the long-term viability of portfolio businesses. The regime currently restricts a range of transactions during the first two years following the acquisition of control, including certain distributions, capital reductions, share redemptions and share buybacks.
However, HM Treasury also proposes modernising one of the regime's most important exemptions. Rather than using the existing AIFMD definition of a small and medium-sized enterprise ("SME"), the exemption would be aligned with the SME thresholds contained in the Companies Act 2006.
The practical effect is likely to be that a significantly greater number of portfolio companies will fall outside the scope of the disclosure and asset stripping provisions altogether, potentially reducing the number of private equity transactions subject to the two-year post-acquisition restrictions.
For transaction lawyers and fund managers, determining whether a target qualifies as an SME is therefore likely to become an increasingly important part of early-stage deal analysis. For many transactions, the availability of the SME exemption may ultimately have a greater practical impact than some of the changes to the AIFM categorisation framework itself.
What should AIFMs be doing now?
Although implementation is currently anticipated in 2028, firms should begin assessing the proposals now.
In particular, AIFMs should consider:
Where they are likely to fall under the proposed NAV thresholds
Whether their authorisation or registration status could be affected
Whether existing governance and compliance arrangements remain fit for purpose
Whether any existing or proposed portfolio company acquisitions could benefit from the revised SME exemption and associated changes to the asset stripping and disclosure regime
The impact of the proposed FRAME reporting regime
Possible remuneration implications
The effect of reforms on delegation, valuation and depositary arrangements
Whether they wish to engage with the FCA or HM Treasury during the consultation process
Final thoughts
The FCA's consultation is far more than a technical update to the existing rulebook. It represents a significant rethinking of how alternative investment fund managers should be regulated in the UK.
The proposed three-tier categorisation framework, creation of ALTS, reforms to reporting and remuneration, changes to the registration regime and clarification of the perimeter all point towards a more tailored and proportionate regulatory model.
For many firms, particularly smaller and medium-sized managers, the reforms may create opportunities to reduce complexity and streamline compliance arrangements. However, the proposals should not be mistaken for a relaxation of regulatory expectations. Effective governance, robust risk management and accountability remain central themes throughout the consultation.
For AIFMs, the next two years provide an opportunity not only to prepare for a new regulatory framework, but also to reassess governance, reporting and operating models in anticipation of a more flexible and distinctly UK approach to alternative investment fund regulation.
If your business may be impacted by the proposed reforms and you would like to discuss, please contact Sushil Kuner, Partner and Head of our Financial Services Regulatory team.
The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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