The reforms to the UK Alternative Investment Fund Managers (AIFM) Regulations proposed by His Majesty’s Treasury (HMT) and the Financial Conduct Authority (FCA) create a unique opportunity to increase the UK’s attractiveness as an asset management hub.  

UK reforms seek to reduce regulatory burden 

On 7 April 2025, HMT and the FCA published an open consultation and a Call for Input (CfI) respectively regarding proposed reforms to the regulatory regime currently applicable to AIFMs in the UK. With the AIFMD having come into force in the UK in July 2013, it’s now been over 12 years since its original adoption, and so HMT and the FCA agreed that material reform is needed.   

The goal of the proposals is to streamline the regulation of AIFMs and establish an approach that is proportionate to an AIFM’s size and activities. The hope here is that, by making it simpler and cheaper for asset managers to conduct business in the UK, while maintaining high regulatory standards, the reforms will increase the UK’s attractiveness as an asset management hub. This strongly aligns with both the UK Government’s economic growth agenda and the FCA’s five-year strategy for 2025-2030, as well as the regulator’s secondary international competitiveness and growth objectives. 

The FCA’s CfI and HMT’s consultation paper both closed for comments on 9 June 2025. After considering the responses, the Government intends to publish a draft statutory instrument for feedback, following which the FCA will consult on detailed rules in the first half of 2026.

The big question now is what specific regime changes could make a real difference to the attractiveness of the UK as a centre for asset management. 

Raising the thresholds   

One of the key proposals contained in HMT’s consultation and the FCA’s CfI is to revoke the legislative thresholds and instead establish new regulatory classifications for UK AIFMs. It’s worth noting that the thresholds for the proposed new tiers would be based on an AIFM’s net asset value (NAV), rather than leveraged assets under management (AUM). This change benefits hedge funds, which often employ leverage to enhance returns, compared to private equity funds which are typically unleveraged at the fund level (although leverage is employed at the portfolio company level). It’s also proposed that UK AIFMs would no longer need to apply for a variation of permission as they change size category. 

Under the current rules, AIFMs with AUM of more than €100 million – or €500 million for funds that are unleveraged and have no redemption rights for the first five years – are subject to the full-scope UK AIFM regime. In contrast, an AIFM below these AUM thresholds is categorised as either a small, registered UK AIFM or a small authorised UK AIFM and is accordingly subject to fewer requirements. 

However, as HMT notes in its consultation, these AUM thresholds have not been amended since the introduction of the AIFMD and have, therefore, not accounted for inflation or market movements. Furthermore, this regulatory framework has created a “cliff-edge effect”, which can disincentivise growth. This refers to the sudden increase in capital and other more onerous regulatory compliance requirements that sub-threshold AIFMs face when the value of their AUM crosses the full-scope threshold, which could occur passively due to market movements.  

FCA proposes three AUM tiers  

The proposed three-tiered approach to the regulation of AIFMs is summarised below:            

Large AIFMs (NAV of £5 billion or more): This category of firm would be subject to rules similar to those currently applicable to full-scope UK AIFMs. As the FCA notes, much of the leveraged exposure is concentrated in the firms with the largest NAV, and setting the threshold at this level would therefore capture most leveraged assets within the most stringent regime. At present, this cut-off would capture 64 AIFMs, amounting to 78% of the total leveraged AUM or 74% of the total NAV of the UK asset management sector.¹  These large firms would continue to be subject to a regime similar to the current rules for full-scope UK AIFMs but with unnecessarily burdensome rules disapplied, and with certain rules applied only to firms doing specific activities.

Mid-sized AIFMs (NAV of £100 million to £5 billion): These firms would be subject to a comprehensive regulatory regime that is consistent with the rules applicable to the largest firms, albeit with fewer procedural requirements to allow for greater flexibility and proportionality. The regulator expects that a significant number of currently full-scope firms would be reclassified as mid-sized as it increases the thresholds, which could reduce their costs as well as subjecting them to a simpler, more flexible and less onerous regime with fewer prescriptive rules to follow.

Small AIFMs (NAV of below £100 million): These firms would be subject to rules setting “baseline standards essential for maintaining appropriate levels of consumer protection and market integrity” proportionate to their size and activities. 

FCA depositary requirements

The FCA sees no immediate need to change asset safekeeping and fund oversight requirements for large and mid-sized AIFMs. For hedge funds, current rules require AIFMs to appoint a depositary once assets under management exceed €100 million. This threshold remains broadly the same under the proposed tier system at £100 million. Hedge fund managers classified as mid-sized AIFMs (£100 million to £5 billion NAV) will therefore continue to require a depositary as they enter this tier.

However, the FCA may adopt a less prescriptive approach to depositary obligations, such as cashflow monitoring and operational oversight, for certain mid-sized AIFMs based on their risk profile and structure.

Hedge funds investing in hard-to-value assets  

The AIFMD regulations allow AIFMs to appoint external valuers to carry out valuations of assets held by the AIF. However, they also set out that the external valuer is liable to the AIFM for any losses caused by the valuer being negligent or intentionally failing to perform its tasks. Industry feedback to HMT suggest that this liability makes valuers cautious about taking on business and makes it challenging for them to obtain professional indemnity insurance.  

HMT is proposing to remove this legal liability from legislation to encourage greater market participation, and notes that these external valuers would still have contractual liability to AIFMs. This links to the FCA’s publication of its multi-firm review of private market valuation practices earlier this year. 

These proposed changes could benefit hedge fund strategies that invest in hard-to-value assets such as distressed debt and special situations funds holding assets such as defaulted bonds, and bank loans or direct lending funds lending directly to companies that can’t access traditional financing holding assets such as Illiquid loans, mezzanine debt and asset-backed securities.

Further deregulation needed to make a real difference  

Although some changes proposed in the CfI will be helpful in reducing the regulatory burden for AIFMs, it’s difficult to go much beyond a worthwhile fine-tuning of the regime given the scope of the reforms. 

However, the three-tiered approach to categorising AIFMs may turn out to be a more significant first step in allowing the FCA to take a bolder approach to other key issues that they’re planning to address in separate reforms. One example is the proposed reform of regulatory reporting. The reporting regime brought in by AIFMD has not been reviewed since its introduction. The FCA has committed to consider how best to establish a more effective reporting regime that is proportionate in its demands on firms. Its aim is to collect information in a way that is future-proof, helps it understand the market and monitor the collective and individual risks posed by firms.

All UK AIFMs are required to provide reports to the FCA known as Annex IV reports.  The tiering approach would give the FCA an option to remove the Annex IV reporting requirements for mid-sized and small AIFMs, reducing the regulatory burden of completing and submitting the returns for over 500 firms, representing just over 22% of leveraged AUM. The FCA would still ensure it’s provided with key information to meet its financial stability objective, because around 78% of leveraged AUM, and most of the leverage risk, is concentrated in the 64 large firms that would continue to report. 

A similar approach of using the three-tiered UK AIFM classifications may also allow the FCA to take a bolder approach to its proposed reforms of AIFM capital requirements and remuneration. 

In summary, the HMT consultation and FCA CfI are a clear signal of intent to reduce the regulatory burden facing hedge fund managers, marking the first step in a deregulation drive aiming to make it easier for hedge funds to grow, innovate and enter the market. Along with current geopolitical tailwinds, the UK may be on the verge of a “golden age” for its world-leading asset management sector if the government and regulator can work effectively with the sector to seize the opportunity whilst protecting investors and ensuring firms manage risks responsibly.

1.  According to AIFMD reporting data as at 31 December 2024.