Michael LewisHM Treasury is consulting on proposed changes to the laws affecting AIFMs and the FCA has published a call for input seeking views on its own proposals.
The Treasury consultation focuses on the areas of the UK legislation that originally implemented the AIFMD and, since Brexit, has passed into assimilated law which are not necessarily proportionate to the risks of the sector or various firms within it. It looks predominantly at the AIFM and depository regulatory perimeter and seeks views on:
- the current distinctions between full scope, “small” and “registered” AIFMs: specifically, firms have raised concerns about the cliff-edge risks between the largest “small” AIFMs and the smallest full-scope ones, with significantly increased requirements applying once the “small” threshold is exceeded, and the halo effect for small registered firms, when consumers will often believe these firms are regulated when in fact they are minimally supervised. Treasury proposes to remove the legislative thresholds for small regimes and leave it to the FCA to decide what rules are appropriate for which types and sizes of AIFM.
- the consequences of the threshold removal for registered firms. For the time being, social entrepreneurship funds and registered venture capital funds are outside the scope of the consultation because they are currently subject to different regimes. But managers of unauthorised property CIS will need to apply for authorisation since the registration regime will no longer be available. Similarly, internally managed companies that currently qualify for the small registered regime will need to seek authorisation;
- keeping listed closed-ended investment companies within the scope of the AIFM regime (including bringing the relatively few internally managed ones within it) – but on the basis that the FCA would remove any requirements that duplicate between its rules and the requirements the entities must comply with as a result of being listed);
- moving all relevant definitions into the RAO;
- broadly keeping the NPPR;
- removing the requirement for AIFMs to give 20 days advance notice of marketing of new UK or Gibraltar AIFs to professional investors;
- seeking view on whether to keep the requirement to notify acquisition of controlling holdings by funds in its current form; and
- whether to remove the current liability an external valuer has to AIFMs for failings in its valuations.
The FCA call for input builds on this. Its two main proposals are:
- to repeal all the AIFMD firm-facing legislative requirements and replace it, as appropriate, with rules; and
- to make changes to its existing rules for AIFMs.
The initiative is part of the 50 measures the FCA has outlined to support growth, remove unnecessary regulation and ensure that the regulatory regime is proportionate and competitive.
The FCA sees a strong case for retaining the existing framework in principle, but substantially improving it.
Taking forward the Treasury’s proposals, the FCA comments that:
- it is aware that some small AIFMs deliberately stay under the full-scope threshold so they do not have to meet the requirements to hold additional capital, appoint a depository and generally meet stricter expectations, nor to have to comply with the ban on not carrying out any other activities. But it does not want to stifle growth;
- it is also aware that the UK has several “boutique” full scope firms that do not pose anything near the same levels of risk as other more general full scope firms – under its thinking, there will be some full scope firms that will in future be treated as “mid-sized” if the FCA changes the current thresholds, and so be able to benefit from more flexible regulation;
- its proposals are not intended to materially increase requirements or raise standards for small AIFMs;
- it wants to take the opportunity to restructure the way in which expectations are set out, so that firms can clearly see the rules relating to each of
- structure and governance
- the pre-investment phase
- during investment
- change
The FCA proposes to change the thresholds such that the lower threshold going forwards will be £5bn net asset value to distinguish larger firms, while £100m will be the threshold for the small firm regime. Any firms in between the two will be subject to the new mid-sized firm regime.
It also seeks views on:
- how it should make its expectations of risk management by highly-leveraged firms clearer;
- whether to create bespoke regimes to reflect the different activities carried on by different types of manager;
- whether in particular a separate regime for venture capital and growth capital funds would be a good idea;
- whether, if listed investment trusts come within scope, as the Treasury has proposed, the FCA should create a bespoke regime for them, particularly in relation to transparency requirements, leverage and delegation; and
- whether any change is needed to depositary requirements (the FCA thinks not).
The call for input gives some examples of how the FCA might approach rewriting the rules.
The FCA also plans various other fund-related initiatives separate to this exercise, covering, for example, remuneration, prudential requirements, the business restriction and regulatory reporting.
Comments on both papers are due by 9 June. The FCA then plans to consult on detailed rules in 2026.