UK AIFMD reforms: further divergence from the EU and a potential relaxation to smaller full scope AIFM requirements

18 March 2024

On 1 March 2024, the FCA published a letter to CEOs of asset managers and alternatives firms, outlining its supervisory and regulatory priorities for the year. As part of its update, the FCA confirmed that it will pursue reforms to the UK’s onshored AIFMD regulations.

The FCA is required to review all onshored EU financial services legislation under the Financial Services and Markets Act 2023, a process that it calls the “Smarter Regulatory Framework”. The Government will revoke the legislation and the FCA must decide whether to scrap or copy the requirements into its rulebooks, possibly amending the rules in the process of doing so. In a speech on 11 October 2023, Ashley Alder, the FCA’s Chair said that it would make changes to the AIFMD.

While the details of the reforms are due to be outlined in a consultation in 2024, the FCA says that it will consider the thresholds that differentiate full-scope AIFMs from sub-threshold AIFMs, with the latter subject to a narrower range of regulatory requirements. The FCA’s concern is that there is a cliff-edge effect, in which full-scope AIFMs over the €500m assets under management threshold for unleveraged AIFs or the €100m limit for leveraged funds, are subject to a more onerous set of requirements. The FCA says that it wants to introduce a more proportionate application of the regulations, implying a scale in the application of the rules to AIFMs rather than a binary regime. The FCA will also look at making it easier for an AIFM to obtain regulatory permissions to undertake MiFID business in the same entity. This is useful for private capital managers who not only manage AIFs but funds of one (i.e. separately managed accounts) or provide investment advice only to investors.

The FCA’s upcoming proposals are a response to its 2023 Discussion Paper on post-Brexit reforms to the UK Asset Management Regime. The consultation received a range of responses. For instance, we at Macfarlanes argued that the UK could adopt a dual regime, like the Channel Islands’ approach to the AIFMD, with an opt-in to the EU AIFMD regime for AIFMs that wish to market their funds in the EU, and a lighter touch regulatory regime for onshore AIFMs. While the trade association, the BVCA proposed an increase in the sub-threshold limit to ensure that fewer relatively small AIFMs are not caught by the more onerous full-scope AIFM regime. 

While we await the FCA’s proposals, we have observed several AIFMs taking a cautious approach to launching new AIFs, in the expectation that they might be affected in a significant way by a change in the sub-threshold limit. We think that there will be a time delay before any reforms take effect in the UK so a wait and see approach may not be compatible with some sub-threshold AIFMs businesses as they need to start raising their successor fund. Many in the market would welcome a clarification from the FCA about the expected timing of the consultation and the possible implementation of the reforms, to enable AIFMs to invest with confidence in the direction of UK regulations.

The FCA’s reforms will place the UK AIFMD in a very different place to the EU’s AIFMD regime, which retains the threshold limits mentioned above. Although divergence is already a reality, with the EU’s AIFMD II legislation due to be published in the EU’s Official Journal soon. The AIFMD II introduces a new loan origination funds passport, and the legislation makes changes to liquidity risk management and portfolio management delegation rules, changes that are not reflected in the UK’s regime.

AIFMs subject to the UK regime will, at some point, need to adjust to a potentially drastically different application of the rules and, in some areas, effectively different AIFMD regimes. But for now, the timeline is unfortunately unclear.

We have observed several AIFMs taking a cautious approach to launching new AIFs, in the expectation that they might be affected in a significant way by a change in the sub-threshold limit.