Executive Summary

• HM Treasury (“HMT”) and the Financial Conduct Authority (the “FCA”) have published the proposals for a wholesale amendment of the current UK alternative investment fund managers (“AIFMs”) regime and make certain changes to the reporting and remuneration requirements applicable also to UCITS ManCos and MiFID investment firms.¹ The new regime is intended to simplify rules and introduce a more proportionate three-tier regime based on the aggregate net asset value (“NAV”) of the funds under the firms’ management. The proposals remove the existing small registered AIFM pathway, simplify rules and make the compliance burden proportional to the manager’s NAV under management.

New AIFM Thresholds and Tiers

• Current regime. Under the current UK rules, UK small AIFMs which have (i) up to €100 million in assets under management (“AuM”) if they use leverage; or (ii) up to €500 million in AuM if they use no leverage and offer no redemption rights for five years following initial investment, must be authorised by the FCA as a small authorised UK AIFM. Some small UK AIFMs may, subject to certain conditions, seek a regulation-lite registration with the FCA.
• New AIFM regime. The proposals would see the small AIFM registration regime removed (except for AIFMs managing social entrepreneurship or registered venture capital funds), meaning that all AIFMs must seek authorisation with the FCA and the scope of their obligations will depend on the aggregate NAV of portfolios that they manage, with a tiered framework for small AIFMs (<£750 million NAV), medium AIFMs (£750 million – £5 billion NAV) and large AIFMs (>£5 billion aggregate NAV).

New Fund Reporting Framework

• The proposals seek to make reforms to reporting by AIFMs by replacing the current Annex IV reports with a new reporting framework called Fund Reporting for Asset Management Entities (“FRAME”). The proposals would introduce proportionate reporting requirements for smaller firms.

New Remuneration Code for Solo Regulated Firms

• The proposals also seek to replace the current remuneration code for FCA solo regulated AIFMs, UCITS Management Companies and MiFID Investment Firms by introducing a single remuneration code that would apply to all three categories of managers and allow greater discretion in how managers apply the remuneration code.

Timing

• Final rules for the new AIFM regime are expected to be published in 2027 and to take effect in 2028, but the FCA remains open to feedback on timing. Where certain rules are proposed to be removed, the FCA may allow this to take effect earlier than 2028. Final rules for the new remuneration code are expected in Q1 2027, to take effect shortly thereafter. Proposed changes to the new reporting requirements would apply from 2028. There are a number of deadlines for responding to the various proposals – please see below the table under ‘Package of Policy Reforms’ for further details.

Next Steps for Firms

• UK firms should review the proposals to determine how they may affect their licensing status (if they are a small registered AIFM), governance, remuneration arrangements and regulatory reporting obligations and consider responding to the consultations directly or through trade associations.
• NPPR. For non-UK AIFMs, registering to market funds in the UK will still be possible under the UK’s national private placement regime (“NPPR”). The proposed FRAME reporting will be of most interest as non-UK AIFMs that register funds for marketing will be required to undertake streamlined reporting to that required under the existing Annex IV regime as a condition of NPPR registration (and in a new reporting template, with “essential” or “enhanced” reporting required depending on fund NAV size).
• More broadly, while the FCA is seeking to remove unnecessary prescription, it does not intend to provide exhaustive guidance on how each requirement should apply in every case. Firms will therefore need to exercise judgement in determining how the new rules apply to their particular business model and risk profile.

The Package of New Rules

The package of reforms comprises:

• HMT’s draft statutory instrument, the Alternative Investment Fund Managers Regulations 2026 (the “AIFMR 2026”),² laying out the proposals for the new statutory framework that will replace the 2013 Regulations;
• The FCA’s accompanying consultation, “CP26/28 The UK AIFM Regime”, setting out the new proposed Alternative Investment Funds sourcebook (“ALTS”), in which the new firm-facing requirements, currently contained in FUND, will be located;³
• The FCA’s proposed reforms to the fund reporting framework FRAME; and⁴
• The FCA’s proposed changes to the remuneration code for solo regulated AIFMs, UCITS Management Companies and MiFID Investment Firms (“CP26/27: Remuneration: Solo-regulated firms’ rules reform”).⁵

Below we set out a summary of the publications, their areas of focus, together with the date at which each consultation on proposed changes will close.

The AIFMR 2026: Key Provisions

As the statutory instrument setting out the legislative framework, the AIFMR 2026 will replace the existing 2013 Regulations and form the new statutory framework for the regulation of AIFMs in the UK.

Detailed rules will be housed in the new ALTS sourcebook, which will apply to all authorised UK AIFMs regardless of size (small, medium or large). ALTS will replace the FUND sourcebook. Certain ALTS sourcebook provisions will also apply to residual collective investment scheme (“CIS”) operators.

Thresholds Reforms

The key reform replaces the current binary framework - under which UK AIFMs are classified by reference to the total assets under management (“AUM”) in respect of alternative investment funds (“AIFs”) they manage and use of leverage, as either:

• Full-scope UK AIFMs, which are required to seek authorisation from the FCA if they do not meet the thresholds to be a small UK AIFM (see below). Full-scope UK AIFMs are required to comply with the entire UK AIFM regime and the FCA Handbook; or
• Small UK AIFMs that could either seek authorisation from the FCA and comply with a sub-set of requirements under the UK AIFM regime and the FCA Handbook, or, subject to certain conditions, seek registration as a small registered UK AIFM whereby they would have limited obligations to the FCA, namely to notify the FCA if they ceased to meet the applicable small registered AIFM threshold. The current thresholds for a small UK AIFM are: (i) up to €100 million of assets under management if firm uses leverage; or (ii) up to €500 million if the firm uses no leverage and offers no redemption rights for five years following initial investment.

The proposed new categories, based on aggregate NAV of managed AIFs, are:

Key Features of the New Tiered Classification System

• NAV: The NAV calculation is measured on an aggregate basis across all AIFs and residual Collective Investment Schemes (“CISs”) (see below for further details) managed by the firm. Consistent with determining AUM under the current framework, the proposals would require that where a firm manages both UK and non-UK AIFs, the aggregate NAV of all portfolios should be included to determine the appropriate NAV tier.
• Voluntary opt-up: Firms may elect to comply with higher-tier requirements, enabling those anticipating growth to prepare in advance, or because doing so may be commercially advantageous, for example to satisfy the expectations of investors.
• FCA discretion: The FCA retains discretion to require a firm to comply with higher-tier requirements where the nature or risk profile of the firm warrants it, regardless of NAV.
• Transitional periods reduce “cliff-edge” effects: Where a firm passes beyond a size threshold, it has six months from notification to comply with new category obligations; 12 months where a depositary is required for the first time (with the Client Assets Sourcebook 6 custody rules applying in the interim).
• Notification, not re-authorisation: Firms crossing a threshold need only notify the FCA via a SUP15 material change notification whereas currently a variation of permission is required if transitioning from a small authorised AIFM to a full-scope AIFM. Small and medium firms may voluntarily elect to be subject to higher-tier supervision. The FCA is not proposing grandfathering for registered AIFMs that will need to become authorised under the new regime.

One reclassification per year: Firms may change size classification only once per calendar year, including voluntary elections to move to a lower classification. Where a firm increases classification more than once in a calendar year due to asset changes, the 6-month (general compliance) and 12-month (depositary appointment) periods begin at the start of the next calendar year.The thresholds represent a significant departure from the existing full-scope and small AIFM thresholds. They will be particularly welcomed by managers that use leverage, including hedge fund managers that were required to comply with the full regime if their assets under management exceeded €100 million, whereas the new £750 million threshold for the lowest tier affords greater flexibility for hedge fund managers in their journey to scale up their NAV under management.

Removal of Small Registered AIFMs

The current small AIFM registration regime will be removed. All current small registered AIFMs must obtain full Part 4A authorisation, save for (i) Managers of Registered Venture Capital Funds (“RVECAs”) and Social Entrepreneurship Funds (“SEFs”) for whom registration is retained pending HMT’s wider review of venture capital; and (ii) small internally managed investment companies (which are removed from the registration regime and AIFMD framework completely).

HMT has indicated that it expects to allow reasonable time for firms affected by these changes to take the necessary steps under transitional arrangements, though the specific transitional period has not yet been finalised.

Once authorised, formerly small registered firms managing below £750 million aggregate NAV will be classified as Small AIFMs, with proportionate requirements. For small registered AIFMs that do not fall within the exemptions, the new regime would represent a material increase in regulatory obligations and compliance costs as presently most are not required to comply with the UK AIFM regime in any substantive sense and as they are not authorised firms they are not subject to the FCA Handbook.  

AIF Definition

Regulation 3 of the AIFMR 2026 amends the definition of an AIF, to “a collective investment undertaking, including a sub-fund of such an undertaking, which (a) raises, has raised or intends to raise capital from a number of investors, with a view to investing it in accordance with a policy as to how the capital is to generate a return or investment outcome for the benefit of these investors, and (b) is not a UK UCITS”.

HMT has explained that this revision clarifies that raising capital can happen in the past, present or future (rather than being confined to fundraising only in the present), and that an investment policy can be implicit as well as explicit.  

Residual CIS Operators

Although many CISs are also AIFs, the existing framework recognises that some CISs fall outside the AIFM regime (“residual CIS”). As noted above, HMT is consulting on amending the AIF definition to clarify this overlap.⁶ The changes may bring some current CISs within the revised AIF definition, which would require recategorisation of the vehicles as AIFs and require residual CIS operators to vary their permissions to be able to manage AIFs. Further, existing AIFMs may need to notify the FCA of new AIFs under management as a result of the recategorisation.

Certain CISs will remain residual CISs, for example, certain carried interest vehicles, joint venture arrangements, single investor vehicles, and other comparable vehicles. The FCA proposes proportionate rules for operators of residual CISs, including limited reporting and disclosure requirements, with exemptions for carried interest vehicles, joint venture vehicles and single-investor vehicles.

Tiered Framework and Application of Key Requirements

Requirements are cumulative. Medium AIFMs are subject to the Small AIFM requirements plus the Medium AIFM requirements set out below, and Large AIFMs are subject to the requirements across all three tiers. The application of certain requirements will vary depending on whether an AIF is open-ended, closed-ended, and/or leveraged.

Below we have outlined some of the key requirements and the incremental obligations that apply for firms from small to large AIFMs. 

Valuation

HMT proposes to remove the statutory liability regime attaching to external valuers, under which an external valuer is liable to the AIFM for losses arising from its negligence or intentional failure to perform its tasks.

Under the revised framework, AIFMs would retain the ability to engage independent third-party valuers, provided that any such valuer satisfies specified eligibility criteria, including possessing the requisite knowledge, skills and technical resources to perform valuations independently. The removal of the external valuer statutory liability regime addresses a persistent challenge for PE/VC managers, for whom engaging external valuers has often been challenging due to the strict liability standard imposed on such valuers for losses arising from negligence.

Leverage

The FCA proposes to remove mandatory gross and commitment method leverage calculations. Managers would disclose leverage to investors using methods best suited to their fund and investment strategy, provided disclosure is clear, fair and not misleading.

The disclosure must explain: (a) types of leverage used; (b) sources of leverage; (c) maximum leverage that may be employed; and (d) current leverage level, using appropriate metrics.

Acceptable metrics include net-to-gross ratio, value-at-risk, gross notional exposure, regulatory leverage ratio, or any other metric that the AIFM reasonably considers provides a meaningful representation of the AIF’s leverage risk.

The removal of mandatory gross and commitment method calculations means subscription lines and NAV lending can be disclosed using metrics appropriate to closed-ended funds, such as loan-to-value ratios or other measures that provide meaningful representation of leverage risk to investors.

For risk and liquidity management purposes, an AIF is classed as “unleveraged” if it uses derivatives only for hedging (and does not otherwise employ leverage), benefiting from an exemption from specific leveraged-fund risk management and liquidity requirements. The FCA has acknowledged industry concerns by allowing firms greater flexibility to use a methodology appropriate to the relevant strategy, provided that the resulting disclosure is fair, clear and not misleading.

Delegation

On delegation, the FCA appeared to signal continuity rather than a policy shift. It proposes to retain current delegation rules, including the requirement for a written agreement setting out rights and obligations of the AIFM and the delegate.

HMT proposes to remove the requirement for the FCA’s prior approval when a UK AIFM delegates risk or portfolio management to an entity not authorised or registered for asset management. Instead, the AIFM must notify the FCA as soon as practicable after delegation becomes effective and confirm the arrangements through periodic regulatory reporting.

The AIFM remains responsible for compliance and must retain sufficient expertise and substance to avoid becoming a mere “letter-box entity”.

Regulation 6 of the AIFMR 2026 preserves the principle that an AIFM is responsible for proper performance of delegated functions and may not use delegation to avoid regulatory obligations, consistent with current framework.

Depositaries

The FCA’s discussion chapter on depositary requirements envisages a tiered approach that aligns with the new AIFM size classifications.

• The new rules will retain the requirement that UK AIFMs marketing non-UK AIFs in the UK must appoint one or more entities to carry out the depositary functions.
• Small UK AIFMs would be exempt from the mandatory depositary appointment requirement in respect of UK AIFs that they manage, though they must still comply with CASS 6 client asset rules.
• Medium and Large UK AIFMs would be required to appoint a depositary for each UK AIF that they manage.
• Where a firm moves into a tier requiring depositary appointment for the first time, it will have 12 months from the date of notification to appoint a depositary, with CASS 6 rules applying in the interim.

Prudential Requirements

The AIFMR 2026 does not introduce a new prudential regime for AIFMs but indicates the potential changes to the prudential framework in the future. AIFMs would remain subject to the Interim Prudential sourcebook for Investment Businesses (“IPRU-INV”) and Collective Portfolio Management Investment firms subject to both IPRU-INV and the Prudential sourcebook for MiFID Investment Firms (“MIFIDPRU”) regime for the time being.

The FCA indicates that it is considering whether AIFMs should be brought within the scope of the reformed prudential regime for solo-regulated investment firms (“COREPRU”) in due course. Such changes would be subject to separate consultation.

Third-Country Managers and NPPR

The new rules propose to retain the National Private Placement Regime (“NPPR”) for marketing AIFs to UK professional investors.

NPPR under the new Regulation 49 of the AIFMR 2026 (formerly Regulation 59 of the 2013 Regulations, i.e., Article 42 of the AIFMD) will be retained. This means non-UK AIFMs may continue to market to professional UK investors, subject to notifying the FCA and complying with the initial and ongoing requirements, including making the relevant investor disclosures and submitting regulatory reports to the FCA (as reflected in the replacement of the existing Annex IV reporting template with the new FRAME template).¹⁰

In parallel, the current requirement for UK AIFMs to seek the FCA’s pre-approval (which the FCA must provide within 20 working days of receiving a complete notification) to market a UK AIF is proposed to be removed. Under the new regime, marketing of the UK AIF could commence once a notification containing all required information has been submitted by the UK AIFM to the FCA.

Hedge Funds

• Leverage reporting: Removal of mandatory gross/commitment calculations is a significant operational simplification for strategies that employ derivatives.
• Liquidity risk management: Medium and Large AIFMs managing open-ended hedge funds must conduct liquidity stress testing (quarterly for Large, semi-annually for Medium), formalising existing market practice.

Private Equity

PE and private credit managers benefit from several targeted provisions:

• Closed-ended carve-out: Unleveraged closed-ended funds (the typical PE fund structure) are exempt from detailed liquidity risk management requirements in ALTS 7, recognising their limited need for liquidity as they offer no redemption rights to investors.
• Leverage: The removal of mandatory gross and commitment method calculations means, for instance, NAV lending can be disclosed using metrics appropriate to closed-ended funds, such as loan-to-value ratios or other measures that provide meaningful representation of leverage risk to investors.
• Portfolio company provisions: The existing provisions requiring notification of major holdings in unlisted UK companies will be retained under the new rules, as will the asset stripping provisions. Helpfully, the new rules propose to remove the requirement for AIFMs to notify the FCA of their control of voting rights in a UK portfolio company at notifiable thresholds, which will be welcomed by private equity fund managers.

Fund Reporting Reform - FRAME (CP26/26)

FRAME introduces a fund-reporting framework to replace the current AIF001 and AIF002 reports (known as Annex IV reporting). The FCA has signaled that the proposed FRAME reporting regime is intended to materially reduce reporting burdens while improving supervisory data.

Summary of Key Proposals

• Reporting obligations are calibrated at the NAV level of individual AIFs rather than by reference to the AIFM’s aggregate assets under management or NAV.
• All funds would be subject to a set of so-called “essential” reporting. In addition, larger funds (with a NAV of £500 million or more) would report more data – what the FCA terms as “enhanced” reporting.
• The frequency of reporting and lag time is set to vary according to the fund’s categorisation. UK AIFMs managing “hedge funds” (a new FCA definition)¹¹ will need to report quarterly, with a 45-day lag, whereas other non-hedge fund vehicles will be required to report annually, with a 120-day lag for unauthorised funds.
• The FCA has proposed a new event-based reporting requirement for hedge funds where fund NAV falls 10% or more over 10 consecutive business days. A prescribed form must be sent to the FCA within 72 hours of such an event.
• The proposed new rules include annual returns for UK MiFID portfolio managers and investment advisers (including CPMI firms) that act for AIFMs and other institutional investors.

Remuneration Code Reforms (CP26/27)

CP26/27 proposes replacing the three existing remuneration codes (i) the AIFM Remuneration Code; (ii) MIFIDPRU Remuneration Code; and (iii) the UCITS Remuneration Code, with a single, outcomes-focused remuneration code for FCA solo-regulated firms.

The proposed new remuneration code is not intended to apply to small and non-connected (“SNI”) MiFIDPRU investment firms or small AIFMs.

The FCA notes that a firm currently compliant with the existing solo-regulated codes should generally remain compliant under the new proposals.

Summary of Key Proposals

• Outcomes-focused approach: The new code shifts from prescriptive rules to an outcomes-focused framework, relying on firm governance and management body judgement.
• Application to individuals: The code applies at two levels: (i) general remuneration requirements applying to all staff; and (ii) additional principles applying to material risk takers (“MRTs”).
• MRT definition: The definition of MRT is narrowed to include only staff whose activities or remuneration incentives have a material impact on the firm, investors or regulatory compliance.
• Deferral of variable remuneration: The FCA proposes moving away from prescriptive, banking-derived deferral requirements for solo regulated firms. Two options are consulted on: (i) a principles-based approach under which management bodies determine whether and how to apply deferral, without prescribed minimum periods or fixed structures; and (ii) a threshold-based approach under which mandatory deferral applies only to firms above specified thresholds.
• Performance adjustment mechanisms: Firms must consider whether to implement performance adjustment mechanisms (e.g., malus and clawback mechanisms), however these would not be mandatory.
• Governance simplification: Mandatory remuneration committees and formal annual remuneration reviews would no longer be required.
• MiFIDPRU Reporting: For MiFIDPRU firms, the remuneration reporting and disclosure requirements would be revoked. Instead, firms are expected to maintain appropriate internal records.  

^{1 The current UK rules are principally contained in the Alternative Investment Fund Managers Regulations 2013 (SI 2013/1773) (the “2013 Regulations”) and the FCA’s investment funds (“FUND”) sourcebook with reference to the EU secondary legislation and guidance, where applicable.}

^{2 See, https://assets.publishing.service.gov.uk/media/6a50d4a7a4890e65cce64cc6/The_AIFMR_Consultation_Draft_SI.pdf.}

^{3 See, https://www.fca.org.uk/publications/consultation-papers/cp26-28-uk-aifm-regime.}

^{4 See, https://www.fca.org.uk/publications/consultation-papers/cp26-26-fund-reporting-asset-management-entities-frame.}

^{5 See, https://www.fca.org.uk/publications/consultation-papers/cp26-27-remuneration-reform-solo-regulated-firms.}

^{6 See, https://www.gov.uk/government/publications/alternative-investment-fund-managers-regulation-draft-si-and-policy-note; and https://assets.publishing.service.gov.uk/media/6a50d4a7a4890e65cce64cc6/The_AIFMR_Consultation_Draft_SI.pdf.}

^{7 All AIFs must (i) identify material risks to the AIF’s assets and liabilities; (ii) monitor and manage those risks on a continuous basis; (iii) apply risk management proportionate to risks taken, including risks to market integrity; and (iv) carry out appropriate due diligence on all proposed investments. Additional rules for firms managing AIFs other than closed-ended, unleveraged AIFs.}

^{8 Liquidity risk management rules do not apply to unleveraged closed-ended AIFs, including those using derivatives solely for hedging purposes. However, baseline risk management rules and FCA principles, including the Consumer Duty where applicable, will apply.}

^{9 Apart from where the units in the open-ended fund in which the AIF invests are actively traded on an investment exchange, e.g., ETFs.}

^{10 The FCA published three reporting templates illustrating the data they propose to collect. Please see (i) the FRAME reporting template (here); (ii) the Collective Investment Schemes reporting template (here); and (iii) the Segregated portfolio manager and adviser reporting template (here).}

^{11 A “hedge fund” is defined as an unauthorised AIF which is an open-ended AIF in relation to which both (a) and (b) are satisfied: (a) a person involved in the management of the AIF or the selection of investments (whether delegated or otherwise) is entitled to be paid a performance fee or allocation calculated wholly or partly by reference to unrealised gains even if such a fee or allocation is not payable for a particular period; and (b) it is possible for the exposure of the AIF to be increased by either borrowing cash or securities in an amount in excess of half of the AIF’s NAV or embedding leverage in derivative positions in excess of twice the AIF’s NAV.}