Reshaping UK Fund Management Regulation: What the FCA and HMT Proposals Mean for Small and Mid-Sized AIFMs

On 14 July 2026, HM Treasury and the FCA published their long-awaited proposals to update and simplify the UK alternative investment fund manager (AIFM) regime.

The aim of the proposals (set out in the draft Alternative Investment Fund Managers Regulations, an accompanying policy note, and three consultation papers) is to make the regulations more proportionate to a firm's size and activities and to better match the rules to the actual risks posed by a firm. Although the proposals are designed to simplify the regulations, the regulatory obligations for existing small authorised AIFMs will increase slightly, with new rules relating to valuation, risk management and liquidity risk management. However, the FCA would argue that these rules generally reflect good market practice. 

The New Three-Tier Categorisation Framework

The headline change is the FCA’s proposal to replace the current distinction between “full-scope” and “small” AIFMs with a new three-tier categorisation based on net asset value (NAV) rather than assets under management (AuM). Regulatory requirements increase progressively through the tiers.

The aim is that larger firms posing greater risks to market integrity are subject to proportionate standards, whilst smaller managers face a lighter-touch regime. 

Firms will be required to calculate their NAV quarterly. If a firm’s NAV takes it into a higher tier, it need only notify the FCA without requiring a variation of permission application.

The £750 million small-firm threshold represents a marked increase from the £100 million originally proposed in the FCA’s 2025 Call for Input, reflecting substantial industry feedback. This is a good illustration of why it is important for firms to participate in the consultation process either directly or via an industry body.

Removal of (most of) the Small Registered AIFM Regime 

In addition to the new three-tier categorisation, HMT proposes removing the current AIFM registration regime for all AIFMs other than managers of Registered Venture Capital Funds (RVECAs) and Social Entrepreneurship Funds (SEFs).

As a consequence, firms which are currently classified as small registered AIFMs (such as internally managed AIFs and small property fund managers) will need to become authorised. The FCA has indicated that there is not expected to be any grandfathering regime. This is a significant change that will require affected firms to plan for the authorisation process well in advance of implementation.

The Government will consider the regulatory approach to RVECA and SEF managers in due course, as part of a review of venture capital expected in 2028, including whether a registration regime remains appropriate for these fund managers.

New Definition of AIF 

The proposals include an amendment to the definition of an AIF. In particular, HMT intends to clarify that the concept of “raising capital” is not limited to funds actively fundraising at a particular point in time. This could result in some legacy collective investment schemes (CISs) being reclassified as AIFs.

A potentially helpful proposal is that certain small, listed, internally managed closed-ended investment companies would be exempt from the requirement to appoint an authorised AIFM. 

The New ALTS Sourcebook 

The FCA proposes creating a new Alternative Investment Funds sourcebook (ALTS) to consolidate all AIFM rules in a single location. ALTS will replace the existing Investment Funds sourcebook (FUND) and provisions currently spread across multiple sources: primary legislation, retained EU regulations, technical standards, FCA Handbook provisions, and guidance. This fragmentation has long been a source of frustration (and cost), particularly for smaller managers without large in-house legal teams.

The consolidation into ALTS is intended to improve accessibility, reduce duplication, and make the regime easier to navigate.

Key Proposed Regulatory Changes

Valuation 

Valuation rules will now apply consistently across all AIFM sizes, including small AIFMs which currently have no specific valuation requirements. The FCA proposes setting procedural requirements around the basis and standard of valuation rather than prescribing specific methodologies, giving firms flexibility to adopt approaches appropriate to their asset classes and fund structures

Leverage

The proposals represent a significant simplification of the leverage framework, including in relation to how leverage is calculated. The FCA expects firms using high levels of leverage to operate to appropriate standards and to manage the resultant risks effectively.

Risk Management and Liquidity Management

Core risk management requirements will apply to all firms; however, additional requirements will be applied on an activity-specific and tiered basis. Liquidity management requirements are simplified for small AIFMs but broadly maintained for medium and large AIFMs.

Delegation

Prior FCA approval for delegation will no longer be required; firms will instead notify the FCA after implementation. A new, narrower category of “additional core AIFM functions” (third-party valuation, compliance monitoring, AIF marketing) will be easier to delegate. However, AIFM liability continues to be unaffected by delegation, and written agreements remain required.

Annual Reporting and Investor Disclosures

Disclosure requirements will become more principles-based, and small AIFMs will be required to provide a short annual summary rather than a full annual report, significantly reducing the reporting burden.

Disclosures will be split more clearly between professional and retail investors, reflecting different information needs and regulatory policy objectives. Medium and large AIFMs will retain broadly equivalent obligations to those currently in force, albeit in a more streamlined form.

Depositaries

Depositary requirements are likely to remain for medium and large AIFMs. Small AIFMs will not need to appoint a depositary (although they may do so if they wish) but will need to comply with the FCA's CASS 6 custody rules. The FCA is also considering permitting AIFMs to appoint more than one firm to carry out depositary functions.

Remuneration

The FCA has proposed a new consolidated remuneration code. The proposals move away from prescriptive rules towards a more outcomes-focused approach, creating a simpler, clearer, and more proportionate framework. This is likely to be welcomed by smaller firms for which the existing remuneration code has often been disproportionate to their scale and complexity.

Reporting (FRAME)

The current Annex IV reporting framework will be replaced by FRAME (Fund Reporting for Asset Management Entities). The FCA expects this to reduce regulatory reporting by approximately 75%—a substantial reduction in compliance costs and operational burden across the industry.

Prudential Changes

The prudential rules for AIFMs will be brought into the new COREPRU framework. The FCA is still consulting on this, but the prudential obligations for small firms are likely to be higher than the existing obligations for sub-threshold firms.

What is the Likely Impact on Small and Mid-Sized AIFMs?

The reforms are particularly consequential for small and mid-sized fund managers. We highlight the following key implications:

Opportunities

• The significantly higher thresholds (£750 million NAV for “small” managers)mean that many more firms will fall into the small category with lighter-touch regulation.
• Simplified reporting (FRAME), principles-based disclosures, and streamlined delegation requirements should reduce compliance costs.
• The shift from AuM to NAV may benefit leveraged strategies, as gross exposure will no longer automatically push firms into higher regulatory tiers.

Challenges and Action Points

• Small registered AIFMs must become authorised and this will require early planning, including preparation of regulatory business plans, compliance arrangements, and capital adequacy assessments. No grandfathering is expected, meaning affected firms must complete the authorisation process before the new regime takes effect.
• Current small authorised AIFMs will face new baseline requirements including stress testing, maintaining delegation documentation, producing annual investor summaries, and ensuring at least two experienced directors are in place.
• The amended definition of an AIF may bring some CIS operators withinscope for the first time.

The proposals should not be mistaken for a wholesale relaxation of regulatory expectations. Effective governance, robust risk management, and accountability remain central themes throughout the FCA’s consultation. The lighter-touch regime for smaller firms still demands adherence to core regulatory standards.

UK-EU Divergence

The proposals will mark a significant point of divergence from the EU approach to AIFM regulation. Firms with cross-border operations should carefully assess how the two regimes will interact and consider whether operational structures may need to be adapted. In particular, delegation arrangements, reporting obligations, and liquidity risk management practices may need to satisfy both sets of requirements concurrently.

Timeline and Next Steps

The key dates for the consultation and implementation process are as follows:

We strongly encourage affected firms to engage with the consultation process. The proposals, while generally welcomed by industry, contain details that will benefit from constructive challenge and practical input.

How We Can Help

Our Funds and Financial Services Regulation teams are actively advising clients on the implications of these proposals. We can assist with:

• Assessing which tier your firm will fall into under the new framework and what that means for your regulatory obligations;
• Assisting with authorisation applications for currently registered firms;
• Reviewing and updating delegation arrangements, compliance monitoring frameworks, and governance structures;
• Drafting consultation responses to HMT and the FCA; and
• Conducting gap analyses to identify areas where current arrangements may need to be enhanced ahead of implementation.

We would be pleased to discuss any aspect of these proposals with you.