Thirteen years after its adoption, HM Treasury and the FCA have set the ball rolling on reforming the Alternative Investment Fund Managers Directive (“AIFMD”).
AIFMD was originally a response to the 2008 financial crisis and a perception that the activities of ‘alternative funds’ might spread or amplify risks through the financial system. The EU-wide framework was onshored into the UK post-Brexit.
The proposed reforms are in-line with a wider UK government initiative aimed at improving regulatory frameworks to support the UK’s growth and international competitiveness (“Growth Objective”). The reforms advocate for proportionate regulation based on firms’ size and activities, while also eliminating unnecessary regulations and reducing administrative burdens for alternative fund managers.
In contrast, the EU’s reform of AIFMD, which takes effect in 2026, focuses on investor protection and financial stability. While the EU’s reform introduces additional requirements, the UK’s reform aims to ‘fine-tune’ the existing framework. The destination (‘meeting certain regulatory outcomes’) remains unchanged, but the route (‘measures required to meet these outcomes’) is altered.
Below we present our ‘top 10 takeaways’ on the plans for reform:
1. Devil of the detail will follow
The proposals are set out in an FCA ‘Call for input’ paper and an HM Treasury consultation, and are described at a high-level. Additional detail will follow; the FCA will publish a Consultation Paper in the first half of 2026 which will likely be followed by the publication and then adoption of the new rules.
This process may take some time; the FCA states that it will give firms time to adapt to the new regime. However, the regulatory also asserts that certain unnecessary rules will be removed relatively quickly, thereby indicating a ‘phased’ approach to implementation.
2. AIFMD is here to stay!
An obvious point, perhaps, but under the proposals, the AIFMD framework will remain. From an asset manager’s perspective there will therefore continue to be a delineation between AIFMD and the regimes for ‘managed accounts’ (MiFID) and ‘retail funds’ (UCITS).
Differences between the AIFMD and MiFID regimes in particular have let to certain inconsistencies and a sometimes illogical approach most felt by firms subject to both of these frameworks. However, the FCA plans implementing certain other initiatives that will eradicate some of these inconsistencies. We’ll return to these initiatives later on.
3. Empowering the FCA
Following Brexit, the UK aims to create a competitive financial framework by revoking EU law related to financial services and replacing it with legislation tailored to UK markets. In addition, where appropriate, legislation is replaced with rules set by regulators including the FCA.
The government is reviewing the regulations for UK alternative investment fund managers (“AIFMs”), removing elements of the legislative framework and empowering the FCA to establish a more graduated and proportionate approach to regulation.
Compared to the legislative updating process, FCA rules can be updated more quickly and efficiency in response to changes in financial markets, emerging risks and replacing inefficient requirements. This should facilitate alignment of AIFMD reform and the Growth Objective.
4. Proportionality: Size
Currently there are – broadly – two regulatory categorisations for AIFMs – above-threshold (or full-scope) AIFMs and below-threshold (or small authorised or small registered AIFMs). The regulatory requirements for the latter are significantly less voluminous compared to the former.
The thresholds are based on ‘gross’ AUM figures established in 2011 (€100m, or €500m for unleveraged AIFs with a 5+ year lock-in period). A change of regulatory status from below-threshold to above-threshold (or vice versa) requires a variation of permission application to the FCA.
It is proposed that three categories of AIFM will be created. This will facilitate the application of a more ‘proportionate’ approach:
- Large: AUM of £5bn or more: Subject to a regime similar to the current regime for full-scope AIFMs but with unnecessarily burdensome rules disapplied. There are currently 64 firms in this category currently, representing 74% of AUM
- Mid-sized: AUM of £100m to £5bn: Subject to all major aspects of the regime, but not more detailed procedural requirements
- Small: Aum of under £100m. Rules set baseline standards essential for maintaining appropriate levels of consumer protection and market integrity
The thresholds are based on ‘net’ AUM figures. Moving categories would require a notification to the FCA, not a variation of permission.
5. Proportionality: Type
It is recognised that AIFMD has a ‘bias’ towards ‘hedge fund’ strategies. As such, some rules are unsuitable for other strategies such as private equity, venture capital, real estate and infrastructure.
The FCA therefore intends creating rule diversions to reflect these differences, for example, regarding risk management.
More bespoke regimes might also be put in place, for example, for managers of venture capital/growth capital funds and investment trust managers.
6. Clarifications and Simplifications
The HM Treasury and FCA papers provide some proposals on clarifications and simplifications to AIFMD. However, these are not exhaustive and further detail will follow in subsequent publications.
- Marketing: Currently, full-scope UK AIFMs are required to notify the FCA of their intention to market AIFs in the UK, and the FCA has 20 working days to grant of refuse approval. HM Treasury proposes revising the legislation so that marketing can commence at the point of notification.
- Leverage: Since most of the leverage exposure lies with firms in the ‘large’ category, the FCA alludes to a proportionate approach regarding leverage. The regulator also states that they are considering if they need to be clearer about their expectations of risk management by highly leveraged firms.
- Private equity notifications: Full-scope UK AIFMs are currently subject to notification requirements where they acquire control of non-listed companies and issuers. HM Treasury is considering whether to remove this requirement.
- Business restrictions: Currently, a full-scope UK AIFM is limited in the range of other regulated activities it can perform, primarily restricted to certain ‘buy-side’ related activities. This was initially implemented to prevent conflicts of interest. However, the concept of addressing the conflicts with a blanket restriction is now viewed as conceptually flawed, leading to an intention to remove this ‘business restriction’.
7. What’s not changing
Under the proposals, certain elements will remain unchanged. These include the overall framework of the ‘UK national private placement regime’, the continued inclusion of investment trusts (which, as listed companies, are also subject to other regimes) within the AIFMD, and the concept of the ‘external valuer’— a third party responsible for tasks such as asset valuation, albeit with adjustments to their legal liability.
Certain aspects cannot be unilaterally amended by UK bodies, particularly the international marketing and distribution framework for alternative investment funds. From the EU’s perspective, there is currently no indication that ‘marketing passports’ will be made available to UK AIFMs, meaning these firms would continue to be subject to the placement regime of each individual EU jurisdiction.
8. Some potential ‘cost’ considerations
‘Cost’ has several meanings – monetary cost, time and ‘opportunity cost’ (for example, the cost to compliance departments of dealing with inefficient rules, thereby losing sight of achieving meaningful outcomes). For many firms, certain aspects of AIFMD have particular cost implications. Whilst either not mentioned in the HM Treasury or FCA papers, or with brief reference made, these aspects include:
(i) Depositary
Depositary requirements, which currently apply to full-scope AIFMs, impose additional costs due to the depositaries’ legal liabilities and the obligation for depositaries to perform ‘fiduciary responsibilities’ in addition to asset safekeeping duties.
The FCA has indicated that it sees no immediate need to make radical changes to the depositary framework, albeit it does allude to some relaxations where the fund contains no retail investors. Notwithstanding this, the regulator welcomes input on whether they should explore proportional alternatives that meet global regulatory standards.
In addition, the FCA states that it does not expect to extend the depositary requirements beyond the current scope i.e., small authorised AIFMs and full-scope AIFMs that manage non-UK domiciled AIFs that are not marketed in the UK will continue to be out-of-scope.
(ii) Prudential
At present the prudential regime for AIFMs is a ‘hotch-potch’ of different frameworks dependent upon the firm’s status. Some smaller AIFMs with a venture capital strategy have a regulatory capital requirement of £5,000 whereas conversely full-scope UK AIFMs that also perform so-called ‘MiFID top-up activity’ are subject to two parallel prudential regimes: AIFMD and MIFIDPRU.
One option for reform would be to put in place a more proportionate set of rules for mid-sized firms. Some suggestions, albeit these are by no means exhaustive include:
- Reducing the minimum capital requirement from €125,000 to £75,000, to align with a typical asset manager operating under MiFID
- Revisit and potentially remove the ‘additional own funds’ concept, designed to address professional indemnity insurance risk
- Eradicate unnecessary complications caused by the juxtaposition of the AIFMD and MIFIDPRU prudential regimes, based on the notion that most mid-sized asset managers subject to both regimes have a single operation and not one divided into ‘AIFMD business’ and ‘MiFID business’
(iii) Reporting
Currently, all UK AIFMs are required to provide reports to the FCA known as ‘Annex IV’ reports. Full-scope UK AIFMs with UK funds or UK investors are also required to provide information to investors, for example prior to investment taking place or in the fund’s annual report.
Relaxing the Annex IV reporting requirements would likely be advantageous to many firms while continuing to ensure that the regulator is provided with key information. Over 70% of NAV, and most of the leverage risk, is concentrated in circa 64 firms. It is possible that the FCA will consider the value of information provided by over 1,000 firms representing under 30% of NAV, in the context of the burden of completing and submitting the returns.
Regarding information to investors, one option would be relaxing the requirements for professional investors.
9. The Bigger Picture
AIFMD is one element of the overall regulatory framework for AIFMs. For example, the Senior Managers and Certification Regime (“SMCR”) and the Consumer Duty are separate concepts. Certain AIFMs are also subject to MiFID-derived requirements.
It would therefore be erroneous to state that AIFMD reform in itself would likely have a very material impact on the overall modus operandi of an AIFM’s compliance obligations. However, AIFMD reform should be considered in light of other FCA initiatives that are commensurate with the Growth Objective.
Actual or proposed initiatives include:
- Reviewing the FCA handbook to remove any unnecessary rule deviations, including between AIFMD and MiFID, for example regarding conflicts of interest
- Reviewing regulatory reporting requirements i.e., RegData filings
- An upcoming review of SMCR
- Updating certain requirements related to financial promotions
- Extending rules introduced in 2024 adding a new ‘joint payment’ method for paying for research and execution services to UK AIFMs and UCITS managers
- Removing outdated rules and guidance
AIFMs should therefore consider AIFMD reform in the context of the ‘bigger picture’.
10. Stakeholder engagement
HM Treasury and the FCA welcome feedback to their papers up until 9 June 2025. There will be additional means to provide feedback going forward, for example, when responding to FCA consultation papers.
The government’s Growth Objective’ ambitions facilitate the fostering of an environment of collaboration between politicians and regulators on one hand, and AIFMs and other stakeholders on the other.
This is in stark contrast to the original AIFMD when ambitions were not necessarily so aligned. To a degree, there was a political motivation to take action to regulate ‘hedge funds’ post-financial crisis and this often did not line up with the views of the asset management sector.
Hence, AIFMD reform presents a wonderful opportunity for AIFMs and other stakeholders to participate in the process.
