Proposed changes to the UK AIFM Regulations: What fund managers need to know

In July 2026, HM Treasury and the Financial Conduct Authority (FCA) published the long awaited proposed changes to the UK alternative investment fund managers (AIFM) regulatory framework (UK AIFM Rules).

These changes form part of the UK Government’s overall growth and competition strategy and are designed to create a more proportionate, streamlined and simplified AIFM regime, which reflects the size, nature, scale, and risk profile of the AIFM and the alternative investment funds (AIF) that they manage.

State of play

The proposed changes are set out in HM Treasury’s draft The Alternative Investment Fund Managers Regulations 2026 (AIFM Regulations 2026) and the accompanying Policy Note; two FCA consultation papers: CP26/28: The UK AIFM Regime (UK AIFM Rules CP) and CP26/26: Fund Reporting for Asset Management Entities (FRAME CP); and the FCA’s proposed new reporting templates.

The FCA also published a separate consultation paper on proposed changes to the remuneration rules for solo regulated firms (including AIFMs) in CP26/27. This will be covered in a separate client briefing.

Changes at a glance

The proposed changes are summarized as follows:

• AIFMs will be classified as either small, medium, or large based on the net asset value (NAV) of the funds that they manage. The application of the UK AIFM Rules will depend on such classification, with a lighter touch regime for small AIFMs but a more prescriptive regime for larger AIFMs that broadly reflect the status quo.
• HM Treasury has sought to clarify the meaning of the AIF definition, including that the term “raising capital” is intended to capture historic, current, and future fund raising, and that the term “defined investment policy” can be implicit.
• Most of the prescriptive rules will be transferred across to the FCA Handbook rather that outlined in legislation, which is designed to make it easier for the FCA to make changes to the regime in the future to keep pace with market developments.
• There will be some relaxation of existing rules in relation to delegation requirements (e.g., a move to a post notification approach) and external valuers (including the removal of strict liability).
• Investor disclosure and annual reporting requirements will be simplified for AIFMs with NAV below £500 million.
• AIFMs will be given flexibility on the approach they can take to calculating leverage subject to appropriate investor disclosure.
• Annex IV reporting will be significantly simplified, especially for AIFMs managing funds with NAV under £500 million. The regime will also be calibrated to reflect the investment strategy of the different types of AIF (e.g., hedge fund, private equity, and loan origination).
• The UK national private placement regime (the NPPR) will remain in place subject to a few minor tweaks and amendments, on the basis that the existing regime is viewed as working as anticipated.
• Less helpfully, there will be a new liquidity management rule that will require certain UK AIFMs that manage open-ended AIFs that invest in other open-ended AIFs to look through to the liquidity of the underlying assets rather than relying on redemption terms.
• The asset stripping and private equity notification rules have largely been retained. This may come as a disappointment to some firms.

The FCA intends to publish further consultation papers covering such matters as AIF depositaries and prime brokers and AIFM prudential rules, and they are considering whether the existing AIFM business restriction (i.e., the restriction of other activities that can be undertaken by UK AIFMs) should be removed or amended. The FCA has given an initial indication on the potential direction of travel on these topics in UK AIFM Rules CP, but market participants have an opportunity to put forward alternative solutions and approaches.

Commentary

While there has been a genuine attempt to simply and streamline the existing UK AIFM Rules, especially for smaller AIFMs, and the flexibility permitted in relation to the calculation and reporting on leverage will be welcome, there will be some disappointment that the reforms have not gone far enough in calibrating the application of the rules to the different types of AIF strategies (beyond reporting), and the overall impact of the changes on medium and large AIFMs is likely to fairly limited in practice.

There is clearly significant thinking still to be done with respect to the role of depositaries and the calibration of the regulatory capital rules for UK AIFMs, including those with Markets in Financial Instruments Directive (MIFID) top-up permissions.

The retention of the existing NPPR will come as a relief to third-country AIFMs and AIFs who will continue to be able to market to professional investors in the UK under the marketing notification procedure, which the HM Treasury and the FCA have acknowledged is working well.

AIFMs and other market participants should: (a) engage with the consultation process, including through industry bodies; (b) determine whether and how they will be classified under the proposed new regime; (c) undertake a gap analysis against the proposed new rules; (d) determine the changes that will be required to be made to governance, policies, procedures and controls as well as any FCA notifications or approvals; and (e) ensure that senior management is actively engaged and informed throughout the entire consultation and implementation process.

In addition to the proposed changes to UK AIFM regime, AIFMs should expect ongoing supervisory engagement from the FCA in the next six to 18 months, and further changes are expected in relation to conflicts of interest, client categorization, fund digitization, and Artificial Intelligence (AI).

The new regime

AIF definition and scoping

HM Treasury is consulting on amendments to the definition of an AIF, which could result in some collective investment schemes (CIS) being reclassified as AIFs. These include clarifications that the term “defined investment policy” may be implicit and the term “raising capital” is intended to capture historic, present, and intended future capital raising activities. The FCA has indicated that it expects these proposed clarifications to result in some current CISs being reclassified as AIFs.

The impact of such a reclassification may be material as it could require the operator to seek authorization from the FCA to become an AIFM (assuming the operator does not currently have this permission), as well as active dialogue and consultation with investors who may have to incur additional costs as a consequence of the operator’s new regulatory designation.

The FCA notes that the CISs that are expected to remain outside the AIF regulatory perimeter (referred to as “residual CISs”) are lower-risk structures, such as carried interest vehicles limited to private capital investments, single-investor structures, joint venture arrangements, and vehicles established to hold specific assets – especially if there is no real management of such vehicles.

However, due to concerns about the lack of visibility over these CISs, the FCA is considering whether to make changes to the rules applicable to residual CIS operators, including in respect to regulatory reporting and enhanced investment disclosure. They do not intend to apply a one-size-fits-all approach. For example, the proposed enhanced reporting proposals are not expected to apply to employee participation schemes, carried interest vehicles, joint ventures, and single-investor vehicles that do not pose material risks. It will be important for market participants to weigh in on this aspect to ensure that any changes proposed by the FCA are proportionate and reflect actual risks.

AIFM classification

The new UK AIFM Rules will remove the distinction between full-scope and below-threshold AIFMs, thereby abolishing the small registered AIFM regime, with the exception of registered venture capital funds, social entrepreneurship funds, and below thresholds internally managed investment companies.

Instead, AIFMs will be required to classify themselves as small, medium, or large based on the NAV of the AIFs and CISs they manage (rather than the current asset under management (AUM) test), as follows:

• Small AIFM: these are AIFMs with NAV of less than £750 million.
• Medium AIFM: these are AIFMs with NAV of £750 million to £5 billion.
• Large AIFM: these are AIFMs with NAV above £5 billion.

The rules applicable to AIFMs will be set out in a new Alternative Investment Funds Sourcebook in the FCA Handbook, which will replace the existing Investment Funds Sourcebook in the handbook. The rules will apply on a proportionate basis depending on the classification of the AIFM, with the more prescriptive and onerous rules applying to larger AIFMs.

This will, of course, require AIFMs to have procedures in place to calculate their NAV and determine their classification, and to recalculate the NAV where there is a change. For open-ended funds, the rules require the calculation to be undertaken by the AIFM on at least a monthly basis.

Helpfully, any change in the AIFM’s classification will only need to be notified to the FCA rather than requiring approval of a variation of permission. In addition, AIFMs will have up to six months to comply with the rules applicable to their new classification.

Risk management

All UK AIFMs will be subject to a baseline requirement to undertake due diligence on the underlying assets that their AIFs invest in and to ensure that they have sufficient knowledge and expertise to understand the risks associated with each investment made.

Additional requirements will apply to AIFMs that manage open-ended funds or other AIFs with a greater risk profile (e.g., those that permit leverage, experience liquidity mismatch, or have a wider market footprint) such as maintaining an independent risk management function that can identify, measure, monitor, and manage material risks (subject to a degree of proportionality for small AIFMs).

Medium-sized UK AIFMs will be required to maintain a documented risk management policy, ensure formal independence between the risk management and portfolio management functions, implement and comply with certain risk limits, implement robust conflict of interests procedures, and undertake periodic reviews of their risk management policy, procedures and controls. The FCA clarifies that the risk management policy would need to explain how the UK AIFM identifies and monitors risks to each AIF, complies with the rules, safeguards the independence of the risk management function, and when and how that function will act to manage risks.

Large UK AIFMs will remain subject to the most prescriptive governance requirements that requires the risk management function to monitor compliance with risk limits, address risks outside those limits, and report regularly to senior management and the governing body on those risks (including on the overall effectiveness of the UK AIFM’s risk management policies, procedures, and controls). The FCA proposes compliance with more detailed conditions for achieving functional and hierarchical segregation of the risk management function within large UK AIFMs by including restrictions on supervision, and safeguards to manage conflicts of interest. In addition, such UK AIFMs will be required to ensure that (a) decisions are made on the basis of reliable data, (b) the risk function is subject to independent review, and (c) the risk function has sufficient authority and seniority. Conflicting duties will also have to be properly segregated and the current rules on internal audit or external review and on the operation of risk committees will be retained for large UK AIFMs.

The UK AIFM Rules CP also highlights the importance of UK AIFM’s risk management controls, factoring in key risks to market integrity and financial stability, including excessive leverage, concentrated market positions, and the use of models or automated trading strategies. In this regard, the FCA highlights that the use of AI could amplify such risks, if not properly understood and appropriately monitored and/or controlled.

Liquidity management

The application of the liquidity management rules will be based on proportionality principles that will take account of the nature and risk profile of the AIF that the UK AIFM manages.

Unleveraged closed-ended AIFs will remain outside scope as the FCA notes that they are not exposed to redemption pressures or significant liquidity demands from leverage. Although compliance with general risk management requirements and FCA principles will continue to apply, UK AIFMs of such AIFs will be expected to consider factors such as the lifecycle of the fund and any commitments made to investors when designing and managing the fund.

Small UK AIFMs managing open-ended AIFs will be required to comply with certain baseline requirements including ensuring that the AIF’s redemption policy is aligned with its investment strategy and liquidity profile (both at launch and on an ongoing basis), and maintaining appropriate liquidity risk tools. In addition, small UK AIFMs will be required to maintain appropriate systems, controls, and processes, and to conduct liquidity stress testing at least annually.

Medium and large UK AIFMs will be subject to the baseline requirements plus more prescriptive rules including undertaking enhanced stress-testing, periodic reviews of their liquidity risk management procedures and controls, and, if investing in open-ended funds (other than exchange traded funds), applying a “look-through” assessment of the liquidity of the assets of those funds rather than relying on the redemption terms. This will add an additional layer of compliance and ongoing diligence and monitoring to the process.

Valuation

All UK AIFMs will be required to ensure that valuations are conducted in good faith, impartially, and with due, skill, care, and diligence, in accordance with appropriate governance, oversight, and conflict management procedures. UK AIFMs will be required to maintain records of valuation decisions and undertake ad hoc valuations, including in light of external events where they have evidence that the current valuation does not represent fair value. Much of this was foreshadowed in the private market valuations practices document published by the FCA in 2025.

Helpfully, the FCA recognizes that it is challenging for small and medium sized UK AIFMs to maintain a valuation function that is functionally independent from the portfolio management function and thus are proposing to only require small and medium sized UK AIFMs to take appropriate steps to manage conflicts.

External valuers should only be appointed where they have appropriate resource, knowledge, and expertise to value the assets. The Draft AIFM Regulation removes legal liability of an external valuer for its negligence or intentional failure to perform its tasks. Instead, an external valuer’s liability would be governed by the contract between the external valuer and the UK AIFM.

Leverage

The FCA considers that all firms using leverage should understand and manage the associated risks involved, but acknowledges that the existing rules are unnecessarily complex.

While the FCA proposes to retain the current definition of leverage, it will remove the requirement to report leverage on a gross and commitment basis and will instead allow AIFMs to calculate leverage using an approach that it considers appropriate based on the investment strategy of the AIF, provided that this is clearly disclosed to investors.

Closed-ended AIFs that only use derivatives for hedging purposes will be considered unleveraged.

The FCA also proposes to replace the current “substantially leveraged” threshold with a simplified and streamlined reporting regime that will apply to all leveraged UK AIFMs. The FCA considers that this approach will enable them to more effectively monitor market-wide and systemic leverage risks.

Delegation

The existing rules on delegation will remain broadly intact, with some simplification proposed for the delegation of ancillary services and a few enhancements for delegation of investment management functions.

This means all authorized UK AIFMs will be required to ensure delegates have adequate knowledge, expertise, resources, and governance arrangements in place, and UK AIFMs will be required to conduct ongoing monitoring and reviews of their delegation arrangements.

The FCA proposes enhanced controls for the delegation of investment management functions and “additional core AIFM functions”, such as valuations, regulatory compliance monitoring, and fund marketing, which must be justified with objective reasons (e.g., utilizing specialist expertise or obtaining operational efficiency).

UK AIFMs will remain responsible for the performance of the investment management function, and the rules that guard against UK AIFMs becoming “letterbox” entities remain intact in an ongoing effort to support effective oversight and supervision by the FCA.

UK AIFMs must ensure that written agreements clearly allocate responsibilities, allow the AIFM to oversee the performance of delegates, issue instructions, and terminate arrangements, if and where necessary. The FCA confirms that delegation to unauthorized entities is permitted where the delegate is not required to be authorized in its home state. This should be checked as part of the initial due diligence process.

The requirement to pre-notify the FCA of delegation arrangements will be replaced with a post-notification regime, which will be subsequently confirmed by the UK AIFM through compliance with the regulatory reporting requirements.

Investor disclosures and reporting

The FCA is proposing to simply the pre-contractual disclosure rules for AIFs marketed to professional investors, with disclosure based on the principle that AIFMs should only provide information that investors reasonably need in order to assess the risks, merits, and costs of investing in the AIF. This will be supplemented by a limited set of mandatory disclosures covering valuations and liquidity risk management. Whilst this flexibility may be welcomed by AIFMs, it does introduce a degree of uncertainty to a disclosure regime that is well understood by most AIFMs and not viewed as particularly onerous, as most of the requirements are included in the main private placement memorandum (PPM) as a matter of course.

Medium and large UK AIFMs will be required to prepare an annual report and audited financial statements. The current prescriptive detailed rules on the contents of such reports will be replaced with some baselines rules derived from international accounting standards, and a requirement for the use of consistent terminology and methodology across such reports over time. The AIF Report will continue to be required to include details of aggregate remuneration paid to material risk-takers.

Small AIFMs will be required to provide a simplified unaudited annual summary, providing core financial information and details of material changes to the fund.

Where an investor makes a reasonable request for further pre-contractual or post-contractual information about the activities of the AIF, the AIFM will be required to provide the information to them and make it available to other investors.

Non-UK AIFMs marketing under the NPPR will be required to comply with these pre-contractual investor and regulatory reporting requirements, as applicable to the size of their NAV.

The discussion chapters

The FCA intends to separately consult on changes to rules relating to depositaries and prime brokers, AIFM regulatory capital rules, and the existing AIFM business restriction.

The FCA’s initial thoughts on these topics are set out in various “discussion chapters” in the UK AIFMD Rules CP and can be summarized as follows:

• Depositaries: The FCA appears minded to retain the requirement for large and medium sized AIFMs to appoint a single depositary for each AIF that they manage, with an opt-in right for small AIFMs. That said, they are open to feedback on whether the depositary requirement is disproportionate for certain types of AIFs (e.g., private equity funds and investment trusts). The FCA also discusses the possibility of a split depositary model, with more than one entity carrying on certain aspects of the overall depositary function.
• Regulatory Capital: The FCA acknowledges the complexity of the current regulatory capital regime for AIFMs, including those with MIFID top-up permissions, and is minded to improve consistency by bringing AIFMs within scope of its Core Prudential Sourcebook (COREPRU), subject to certain amendments. Industry views are requested on, if, and how certain aspects of the COREPRU regime could be applied to AIFMs.
• AIFM Business Restriction: The FCA is proposing to remove the business restriction rule for all UK AIFMs, in favor of a case-by-case assessment undertaken by the FCA at the authorization application stage for each individual applicant. If implemented this will allow firms to house more regulated activity in a single legal entity, thereby improving efficiency subject to the proper management of conflicts of interest.

Third-country marketing under the UK NPPR

HM Treasury proposes to retain the UK National Private Placement Regime (NPPR) for the marketing of AIFs to UK professional investors following the submission of a notification to the FCA, with very limited changes.

The NPPR marketing rules will continue to require compliance with FCA marketing notifications, pre-contractual disclosures, Annex IV regulatory reporting (as amended by FRAME), AIF annual reports the payment of annual fees, and compliance with supervisory cooperation and anti-financial crime/tax rules.

HM Treasury will give the FCA new powers to maintain public registers of all AIFs notified under the NPPR and of AIFs that have had their marketing rights suspended or revoked.

Regulatory reporting – FRAME

The FCA acknowledges that the current Annex IV reporting regime for AIFMs is overly cumbersome and has proposed replacing it with a simplified reporting framework that is calibrated to the size, type, and activity of the AIF. The FCA notes that this will reduce the burden of regulatory reporting by 75% for AIFMs while improving the overall quality of the data reported FCA, to better support more effective supervision of the sector.

AIFMs with NAV below £500 million would be required to report certain essential information consisting of the fund profile and strategy, investor base and distribution, performance and flows, liquidity profile, and, for some funds, Value at Risk data and counterparty exposure.

AIFMs with NAV of £500 million or more will be required to report enhanced information in addition to the essential information referenced above. Small AIFMs will be permitted to opt up if they wish to report according to a single consistent set of requirements.

Reporting will be calibrated for fund types (e.g., hedge funds, private equity, and loan origination), which will require AIFMs to classify each AIF that they manage. The frequency of reporting will depend on fund type with quarterly reporting (within 45 days) required for hedge funds, and annual reporting for most other fund types.

There will be some limited changes to the leverage information to be reported and in respect to feeder funds.

The current Annex IV reporting templates (i.e., Form AIF001 and Form AIF002) will be replaced with a new reporting template.

Equivalent reporting requirements will apply for AIFs marketing under the NPPR.

Timings and next steps

This is the first significant overhaul of the UK AIFM framework since the UK’s departure from the single market, and AIFMs are actively encouraged to engage HM Treasury and the FCA on the various topics covered in the draft legislation and consultation papers to ensure that a sensible outcome is reached.

Firms have until 22 September 2026 to provide comments to the FCA on the FRAME CP and until 14 October 2026 to provide comments to a) HM Treasury, on the AIFM Regulations 2026 (although we note that HM Treasury is asking for technical comments only, which indicates that the policy position is principally settled); and (b) the FCA, on the UK AIFM Rules CP, including the prudential discussion chapter.

Feedback to the FCA on the other discussion chapters, including on depositaries, prime brokers, and AIFM business restrictions must be provided by 18 September 2026.

The new regime is expected to be finalized during the course of 2027, with full implementation required by mid-2028 – although the FCA notes in the UK AIFMD Rules CP that, if AIFMs are ready, it may introduce some parts of the new regime earlier.

If you have any comments or questions, please reach out to your regular McDermott Will & Schulte contact.