The UK government has been pursuing a pro-growth agenda as one of its core missions, which has resulted in consultations on lighter-touch regimes to encourage investment, and the regulations which govern alternative investment fund managers (AIFMs) are next on its list.
In short, the government has announced proposals today to update the existing regime for AIFMs, which derives from EU legislation, to reflect a lighter-touch, UK-bespoke regime which is more growth-led and proportionate. This is consistent with the government’s aim to promote flexibility and reduce administrative burdens for firms which operate internationally, while retaining crucial consumer and market protections. This will impact venture capital funds, investment companies, real estate funds, private equity, and hedge funds in the United Kingdom.
Overview of the Amendments
Substantive amendments have been suggested to enable the Financial Conduct Authority (FCA) to determine proportionate rules for AIFMs of various sizes, investment activities, risks and specific investor bases, and remove the “cliff-edge” risks which the current regime creates for above-threshold firms.
Noting these shortcomings, the consultation is accompanied by a Call for Input published simultaneously by the FCA, which has proposed amendments to align with the government’s revisions. This includes a novel, three-tiered approach which will be delineated in accordance with a revised upper threshold for AIFMs, subjecting firms to different regulations as follows:
- Largest firms: £5 billion, or above, net asset value; full-scope regime similar to the current regime, but with the potential to remove some of the current, onerous details to ensure the strictest risk management for firms with the broadest reach
- Mid-tier firms: Between £5 billion and £100 million; comprehensive regulatory framework covering all major aspects of fund management under the existing rules, but without many of the prescriptive detailed requirements, to promote flexibility
- Small firms: Firms with £100 million net asset value; lightest-touch regime with basic core requirements proportionate to their size and activity to assist with their growth
The government also proposes to (1) retain listed closed-ended investment companies in scope of the AIFM regulations for financial stability and consistent consumer protection, (2) broadly restate the marketing regime for overseas AIFMs in the final legislation, and (3) remove the need for UK AIFMs to notify the FCA 20 working days prior to marketing new funds
Practical Considerations
As with any legislative amendment, there are key practical considerations to be aware of, including:
- Reclassification of firms: This is likely to result in greater flexibility and a significant reduction in regulatory costs and prescriptive requirements for many existing firms in relation to the new three-tiered approach
- Proportionality: The streamlining of the requirements for venture capital and listed closed-ended investment companies may create a proportionate regime which reflects their unique characteristics
- Increased up-front costs: This is particularly in the case of sub-threshold firms which may be required to seek FCA authorisation
- Reduced marketing delays: The UK may become a more attractive marketing platform if the requirement to notify the FCA 20 days prior to marketing is removed
Timing
AIFMs and other interested parties will have until 9 June 2025 to submit their comments on the consultation on the proposed changes. Following this, the government will publish a draft statutory instrument on the regulatory framework for AIFMs.
Further, the FCA intends to consult on the detailed rules in the first half of 2026, subject to the Treasury’s feedback, and intends to provide firms with a transitional period in which to adapt to the new regime.
We are closely monitoring developments in this area and aim to shortly provide a LawFlash considering this development in more detail.