Key Takeaways
- • The FCA's consultation CP26/28 proposes a new three-tier AIFM regime based on aggregate net asset value, with firms of up to £750m classed as small AIFMs, up from the current £100m threshold.
- • HM Treasury's parallel draft Alternative Investment Fund Managers regulations would remove the legislative size thresholds and grant the FCA rule-making power to replace existing rules with its own handbook, with implementation currently envisaged for 2028.
- • The FCA proposes removing the gross and commitment leverage calculations and adding a hedging exemption that classifies funds using derivatives solely for hedging as unleveraged for risk and liquidity purposes.
- • A narrowed AIF definition would bring some current collective investment schemes within AIF scope, while carried interest vehicles, single-investor vehicles and joint ventures would be exempt from enhanced disclosure requirements.
- • Related consultations CP26/26 (FRAME reporting) and CP26/27 (remuneration) apply beyond AIFMs to investment firms, UCITS management companies and their groups.
Summary
The Financial Conduct Authority has launched consultation CP26/28 proposing a substantial overhaul of the UK regulatory framework for alternative investment fund managers (AIFMs), according to a note by Linklaters authors Premlata Fagan, Raza Naeem, Elliot Jack, Emily Harmsworth and Clare Wiles. The central change is a new three-tier structure of small, medium and large AIFMs, measured by aggregate net asset value (NAV) of the AIFs and residual collective investment schemes (CIS) a firm manages, replacing the current leverage-based metric. Firms with net assets of up to £750m would be considered small AIFMs and subject to fewer obligations, a substantial increase from the current £100m threshold; the lower threshold was raised from the £100m proposed in the earlier Call for Input following industry feedback.
HM Treasury's parallel consultation on draft Alternative Investment Fund Managers regulations would remove the legislative size thresholds and transfer powers to the FCA to set them within its own rules. The Treasury draft would also grant the FCA rule-making power and allow it to replace existing regulations with FCA handbook rules. The implementation date currently envisaged is 2028. Firms crossing a threshold upwards would have six months to comply with new obligations and twelve months to appoint a depositary where required. Linklaters flags ambiguity in the undefined term "significant change in the value of assets being managed", which could lead to inconsistent practice and regulatory risk, particularly for open-ended funds.
The draft statutory instrument also introduces a revised definition of an AIF that would explicitly exclude occupational pension schemes, holding companies, employee participation schemes and securitisation special purpose entities. Some current CIS would fall within the revised definition and be re-categorised as AIFs, subject to enhanced disclosure and reporting. The FCA expects carried interest vehicles, single-investor vehicles, joint ventures and certain pre-determined asset holding arrangements to remain residual CIS, and enhanced disclosure requirements would not apply to carried interest vehicles, joint ventures or single-investor vehicles. Residual CIS operators would, however, provide limited regulatory data, including the number of vehicles, gross notional value and purpose.
On leverage, the FCA proposes removing both the gross and commitment methods, which respondents described as complicated and burdensome, and requiring firms to disclose leverage using methods suited to their strategy. Linklaters notes this adds flexibility but weakens comparability across funds. A hedging exemption would classify funds using derivatives only for hedging as unleveraged for risk and liquidity management purposes. Valuation proposals are broadly similar to existing AIFMD rules but extend valuation requirements to current small authorised AIFMs for the first time, and would allow small and medium AIFMs to rely on conflict-mitigation steps rather than a fully independent valuation function.
Liquidity rules would no longer apply to unleveraged closed-ended AIFs, while small open-ended AIFMs would need to align redemption policy with investment strategy and conduct annual stress tests. Medium and large firms investing in other open-ended funds would face a new look-through requirement. Annual reporting would apply only to medium and large AIFMs, with small AIFMs and in-scope residual CIS operators preparing a concise annual summary. The package also includes CP26/26 on Fund Reporting for Asset Management Entities (FRAME) and CP26/27 on simplified remuneration rules, which extend beyond AIFMs.
HM Treasury's parallel consultation on draft Alternative Investment Fund Managers regulations would remove the legislative size thresholds and transfer powers to the FCA to set them within its own rules. The Treasury draft would also grant the FCA rule-making power and allow it to replace existing regulations with FCA handbook rules. The implementation date currently envisaged is 2028. Firms crossing a threshold upwards would have six months to comply with new obligations and twelve months to appoint a depositary where required. Linklaters flags ambiguity in the undefined term "significant change in the value of assets being managed", which could lead to inconsistent practice and regulatory risk, particularly for open-ended funds.
The draft statutory instrument also introduces a revised definition of an AIF that would explicitly exclude occupational pension schemes, holding companies, employee participation schemes and securitisation special purpose entities. Some current CIS would fall within the revised definition and be re-categorised as AIFs, subject to enhanced disclosure and reporting. The FCA expects carried interest vehicles, single-investor vehicles, joint ventures and certain pre-determined asset holding arrangements to remain residual CIS, and enhanced disclosure requirements would not apply to carried interest vehicles, joint ventures or single-investor vehicles. Residual CIS operators would, however, provide limited regulatory data, including the number of vehicles, gross notional value and purpose.
On leverage, the FCA proposes removing both the gross and commitment methods, which respondents described as complicated and burdensome, and requiring firms to disclose leverage using methods suited to their strategy. Linklaters notes this adds flexibility but weakens comparability across funds. A hedging exemption would classify funds using derivatives only for hedging as unleveraged for risk and liquidity management purposes. Valuation proposals are broadly similar to existing AIFMD rules but extend valuation requirements to current small authorised AIFMs for the first time, and would allow small and medium AIFMs to rely on conflict-mitigation steps rather than a fully independent valuation function.
Liquidity rules would no longer apply to unleveraged closed-ended AIFs, while small open-ended AIFMs would need to align redemption policy with investment strategy and conduct annual stress tests. Medium and large firms investing in other open-ended funds would face a new look-through requirement. Annual reporting would apply only to medium and large AIFMs, with small AIFMs and in-scope residual CIS operators preparing a concise annual summary. The package also includes CP26/26 on Fund Reporting for Asset Management Entities (FRAME) and CP26/27 on simplified remuneration rules, which extend beyond AIFMs.
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