By Mike Booth, Managing Partner, Suntera UK
The reforms affect all categories of AIFM. While the extent of change will vary depending on a firm's size and fund structure, every manager should assess how the new framework applies to its business and identify any actions required.
The reforms are not expected to come into force until 2028, providing firms with a valuable opportunity to undertake impact assessments, develop implementation plans and make any necessary operational or governance changes.
The proposed definition of an Alternative Investment Fund has been broadened and may capture certain schemes currently classified as Collective Investment Schemes (CIS) that are not presently treated as AIFs. Firms should assess existing structures carefully and seek legal advice where classification is unclear.
The current Gross Asset Value methodology will be replaced by a Net Asset Value (NAV) approach. In addition, AIFs and CIS assets will be aggregated when calculating thresholds, potentially resulting in different outcomes for some firms.
Firms will be required to determine whether they fall within the Small, Medium or Large AIFM category and notify the FCA accordingly. The proposed thresholds are based on aggregate NAV:
Some internally managed UK investment trusts may fall outside the FCA authorisation perimeter where specific conditions are satisfied. Conversely, the removal of the small registered AIFM exemption may bring certain UK property scheme managers within the regime. Existing exemptions for SEF and RVECA managers remain, although FCA supervisory powers will be enhanced.
The introduction of the new FCA sourcebook (ALTS), alongside consequential handbook amendments, including SYSC. Firms will need to review policies, procedures, governance frameworks and compliance documentation to ensure continued alignment with regulatory requirements.
Large AIFMs are unlikely to experience significant operational disruption. However, firms falling within the Small and Medium categories may benefit from a less prescriptive framework for areas such as valuation, liquidity management and risk oversight. For many existing sub-threshold AIFMs, the focus may be on formalising existing arrangements rather than introducing entirely new processes.
Firms moving from sub-threshold status into the new regime may need to strengthen governance arrangements, oversight frameworks and documented controls, even where operational practices are already robust.
Firms qualifying as Small or Medium AIFMs will have the option to elect into the Large AIFM regime. This decision should be considered carefully, taking into account investor expectations, distribution considerations and wider commercial objectives.
Changes to FCA reporting will apply across the board. Firms should review the proposed reporting framework, data requirements and submission obligations to understand the operational impact and implementation effort involved.
Remuneration requirements will be scaled according to firm size. Large AIFMs will remain subject to the most comprehensive requirements, while Small and Medium AIFMs will benefit from a more proportionate approach. Firms should assess the impact on remuneration policies and governance arrangements.
Only Medium and Large AIFMs will be required to ensure that their funds are audited under the proposed regime. This may reduce costs and administrative burdens for some smaller managers.
New disclosure obligations will apply across the regime. The framework is largely principles-based, although additional protections and requirements will apply where retail investors are involved.
The FCA intends to consult separately on regulatory capital requirements. While the final position remains uncertain, some firms transitioning into the Small AIFM category may face higher capital expectations than under the current regime.
Only Medium and Large AIFMs will be required to appoint a depositary. Firms moving into the Small category should assess whether retaining existing depositary arrangements remains commercially and operationally appropriate.
Historically, FCA fund-level conduct rules have had limited application to CIS operators. Under the proposals, CIS operators will become subject to defined disclosure and reporting requirements unless a specific exemption applies. Certain vehicle types, including carried interest vehicles, joint ventures vehicles, single-investor vehicles and employee participation schemes, may remain outside scope.
The FCA is not proposing to restrict delegation arrangements. However, firms will need to demonstrate robust oversight, governance and challenge processes. The notification framework will also expand to include certain "core" functions in addition to existing investment management functions.
Valuation, risk management and liquidity oversight will become central regulatory considerations for all AIFMs. While Small AIFMs and managers of certain unleveraged closed-ended AIFs (e.g. property, venture capital, private equity) will benefit from a less prescriptive framework, firms should review whether their existing frameworks are sufficiently documented, evidenced and governed.
Although implementation remains some way off, the work required is significant. Classification exercises, legal analysis, governance reviews, policy updates, investor disclosures, reporting changes and strategic decisions are likely to require significant lead time. Early preparation will place firms in the strongest position to manage the transition efficiently.
While many details remain subject to consultation and further FCA guidance, the direction of travel is clear: a more proportionate, risk-based framework that applies across the alternative investment fund sector. Firms that begin assessing the implications now will be better positioned to navigate the transition and take advantage of the implementation period before the new regime comes into effect.
If you would like to learn more about how these reforms may impact you and your business, please get in touch with us via the form below.
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