Legal briefing | 02 Oct 2026 |

UK AIFMD Review – the FCA misses its shot

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KEY INSIGHTS

Reform in name only: The FCA's proposals recycle large portions of EU-derived rules into new British ones. For larger managers, the regulatory burden will feel much the same.

Small managers, bigger burden: The firms the reforms claim to help — smaller managers and new market entrants — may face more rules, as they will fall within a detailed regulatory framework for the first time.

A missed strategic opportunity: Brexit was a chance to design a competitive, ground-up framework for asset management to attract international businesses to the UK, but the FCA has failed to seize it.

A regular briefing for the alternative asset management industry

At Brexit, the UK assimilated applicable European Union financial services measures into UK law. The then Conservative UK government decided that these need to be transitioned out of UK law and into the Financial Conduct Authority Handbook, so that the regulator could amend them over time. The current Labour government has continued this policy. The FCA is now reviewing each legacy EU Financial services measure and adapting it. Although it is now 10 years since the Brexit vote, the UK remains in the early stages of this process. The FCA's new proposals for alternative investment funds form part of this review.

In July, the UK's Financial Conduct Authority published its proposals to adapt the legacy Alternative Investment Fund Managers Directive (AIFMD) for the UK. The reforms arrive at a moment when Britain is hungry for growth and keen to attract global private capital. The FCA had a chance to be bold. It missed the opportunity.

The chief benefit of AIFMD was a cross-border marketing "passport", allowing a GP in one EU Member State to market its funds to institutional investors across the EU. UK managers lost the passport in 2020: the UK government tried and failed to preserve passporting in its post-Brexit settlement with the EU, but nevertheless retained the full regulatory burden of AIFMD. Anticipating this, many global alternative managers migrated their European management activities to (principally) Luxembourg and Ireland before 2020.

This deprived the UK of much of the economic upside from the industry's stellar growth in recent years.

UK and EU GPs have long called for a lighter regime, arguing that it is institutional investors who ultimately bear the compliance cost. The stated aim of the UK's new proposals is to deliver a framework that encourages new market entrants, reduces administration and maintains market integrity.

The FCA's central innovation is a three-tier categorisation system — UK managers will be small, medium or large depending on their total net AUM. The EU only distinguishes between small and large. The FCA's proposed thresholds are considerably more generous than the EU's: a manager with net AUM below £750m would be "small"; one below £5bn would be "medium". By comparison, EU rules classify managers as large once gross assets exceed €500m, or less where a fund uses leverage. This means UK managers could grow larger before the full weight of regulation falls on them.

That is welcome. But it is where the innovation ends.

For medium and large managers — the firms that dominate the industry — the proposals recycle substantial portions of existing EU-derived requirements. Bluntly, the FCA has, in large parts, copied the current rules, tweaked the wording, and called them British.

For smaller managers, the picture is paradoxically worse. Today, most UK GPs below the AIFMD thresholds escape AIFMD almost entirely and benefit from older UK domestic rules imposing a low burden of regulation commensurate with their institutional client base.

Under the new proposals, these managers would face more requirements, not fewer. This is an odd outcome given the aim of supporting new market entrants and especially so because Luxembourg, the UK's main competitor, only requires small managers to notify the regulator that they are carrying on business.

"It's a classic case of a so-called deregulatory exercise adding requirements even as it claims to remove them."

The proposals also introduce a new approach to investor disclosure: a mix of mandatory requirements and suggested information, subject to an overarching principle that investors should receive whatever information they reasonably need. It's this principle that is unsettling because the manager's reasonable efforts may still be insufficient and because it may interfere with well-understood mechanics for negotiating the provision of additional information in investor side letters. The disclosure rules apply — with some variation — to both professional and retail investors and also extend to non-UK managers marketing funds into the UK.

The FCA has also used the opportunity provided by these reforms to introduce new rules in areas that have been on its mind in recent years: liquidity management in open-ended funds, valuations and conflicts of interest. It's a classic case of a so-called deregulatory exercise adding requirements even as it claims to remove them.

The divergence between UK and EU rules will create real costs for managers active in both markets. Sometimes firms can muddle through by following the stricter of the two standards. But for regulatory reporting and investor disclosures, new system costs are unavoidable. The FCA cannot be blamed entirely for this: some divergence was always a stated ambition of Brexit. The question for policymakers is whether the UK will use divergence to enhance its attractiveness, and the current proposals fall short in the benefits they offer.

The deeper disappointment is what the proposals say about the UK's ambitions. Brexit gave Britain the opportunity to cut back many of the AIFMD requirements, free from the compromises that shaped EU law, to become competitive with other leading jurisdictions.

That is not what is proposed – this is just a mildly modified version of the old rules, and it is unlikely that the changes are enough for international firms to choose London over Luxembourg or Dublin. There is no discussion in the FCA's publications of the UK's future competitive position compared with its rivals – the consultation simply notes that the UK is the second largest asset management jurisdiction, after the US. This is disappointing given that the UK government's competitiveness strategy for financial services indicated that Luxembourg's industry advantage is approximately four times that of the UK. Other sources (such as the European Fund and Asset Management Association's latest Quarterly Statistical Release) put the UK behind Luxembourg, Ireland, France and Germany in terms of net AUM across UCITSs and AIFs.

Fundamentally, the FCA lacks political cover from the UK government to be more radical. Any significant change to these rules is probably only possible if there is serious political pressure and, even with sustained industry lobbying, this seems unlikely.

The UK's pro-growth agenda calls for regulators to think boldly about how to sustain the country's position as a key asset management hub. The FCA has played it safe. Those hoping for something more ambitious will have to wait.

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