When the EU passed the Alternative Investment Fund Managers Directive (AIFMD) in 2011, it heralded a huge step-up in regulation for the sector. Although private fund managers had been regulated in the UK and some other jurisdictions before, the scale and prescription of the new pan-EU regime was a shock. Many practitioners and academics argued that the rules were not needed for an asset class largely directed at institutional investors. They said many of the provisions – for example, significant additional capital requirements and requirement to engage a depositary – would be costly to implement while offering little benefit to investors or wider stakeholders.
In 2020, the European Commission launched a review of the AIFMD, seven years after it became effective. The starting point for that review was a comprehensive and influential report by KPMG – which had given the rulebook a relatively clean bill of health, declaring that most of its provisions were contributing to the regime's policy objectives "effectively, efficiently and coherently".
And – perhaps surprisingly, given the concerns expressed less than a decade earlier – the industry was not clamouring for wholesale reform.
AIFMD 2, eventually passed in 2024, made relatively few changes to the rulebook, and many of the changes it did make were aimed at private credit funds – a sector that had grown hugely since the financial crisis.
Similarly, when the UK left the EU, some had expected that a government focused on securing the benefits of Brexit might have rapidly moved to ease the burdens on UK-regulated firms. In fact, the UK "onshored" the EU's rulebook and made virtually no changes. The UK has not copied the EU's subsequent AIFMD reforms, but nor has it rushed to make substantive changes to the inherited regime.
That might be about to change – in the UK and the EU.
The explicit focus for European policymakers in recent years has been growth and competitiveness. In Britain, the centre-left government led by Sir Keir Starmer has made growth its number one priority (at least it has said it has). And when Ursula von der Leyen was re-appointed to lead the European Commission last year, she pledged to focus on "sustainable prosperity and competitiveness".
These pledges might now lead to some deregulatory changes to the EU and the UK versions of the AIFMD.
In the UK, the government and the regulator launched a joint review last month, asking the industry to suggest changes to the AIFMD and setting out some initial proposals. The government intends to transfer significant rulemaking authority to the regulator, the FCA, consistently with its general approach to regulation post-Brexit.
One central idea is to establish a three-tier regime, so that only the largest firms – those with more than £5 billion of assets under management, measured by net asset value (NAV) – would be subject to the most prescriptive and demanding rules. Firms with NAV under £100 million would be subject to a light-touch "start-up" framework. That would leave a large group of "mid-size" firms with NAV of between £100 million and £5 billion under management with a less burdensome rulebook, facilitating their growth.
Although de-regulatory overall, this change could increase oversight of smaller firms, meaning some will need formal FCA authorisation for the first time, and subjecting many others – those that are currently "sub-threshold" firms – to increased substantive requirements.
"… calls for burden reduction will get a more sympathetic hearing than they have in the recent past."
