UK AIFM regime explained: what the FCA's three-tier rules change

The Financial Conduct Authority (FCA) has proposed a new three-tier regime for UK alternative investment fund managers. Managers would be classed as small, medium or large using £750 million and £5 billion thresholds based on the aggregate net asset value of the funds they manage.

That sounds like a simpler rulebook for a specialist corner of finance. The market is neither small nor uniform. The FCA says alternative investment fund managers oversee almost £2 trillion in the UK, spanning private equity, real estate, infrastructure, private credit, hedge funds and other strategies with very different liquidity and leverage profiles.

Consultation paper CP26/28 would replace the current divide between small and full-scope managers with a more graduated system. Many firms already subject to the full regime would gain room to design controls around their own funds. Some managers that are currently registered rather than authorised would move in the other direction, into FCA authorisation and a wider set of obligations.

The proposal is therefore not simply deregulation. It redistributes prescription. The largest firms keep the most detailed requirements, medium firms gain a substantial control framework, and small firms receive more discretion without being exempt from valuation, conflicts, risk or liquidity duties.

The three tiers determine how much prescription applies

The thresholds apply to the manager, not to one fund in isolation. A firm would aggregate the relevant alternative investment funds it manages and use a quarterly mean net asset value (NAV) to determine its tier. Open-ended and closed-ended funds would both count, subject to the detailed calculation rules.

A manager could choose to follow the requirements of a higher tier. That may suit a group that wants one control framework across several businesses or expects to cross a threshold soon. A firm moving up a tier would usually have six months to comply with the additional duties and up to 12 months to appoint a depositary where the change creates that requirement.

Small would mean lighter, not exempt

Small managers would have fewer detailed rules telling them exactly how to organise their systems. They would still need credible arrangements for valuation, conflicts of interest, risk management, leverage and liquidity. For an open-ended fund whose investors can redeem, that includes liquidity management and stress testing at least annually under the proposal.

This distinction matters because principles can require just as much judgement as a prescriptive checklist. A small property or private-credit manager may run fewer funds than a global asset manager, but those funds can still hold difficult-to-value assets or offer redemption terms that need careful control. The firm would have more freedom over the design of its process and more responsibility for showing that the process matches the assets and investors.

The sharpest change sits at the edge of authorisation. The Treasury proposes to remove the registration route for most small AIFMs, while retaining it for registered venture-capital and social-enterprise funds and exempting certain small internally managed closed-ended investment companies. Affected registered managers would need authorisation, with no automatic grandfathering. They would have to demonstrate appropriate governance, capital, systems and controls rather than continuing under registration alone.

The depositary boundary creates an operational divide

Medium and large managers would need a depositary for every UK alternative investment fund they manage. The depositary provides cash-flow monitoring, safekeeping or record-keeping for assets and oversight of matters such as subscriptions, redemptions and valuation procedures.

Small managers would generally not have to appoint one, although they could choose the higher standard and exceptions would remain for some fund and marketing arrangements. The FCA is also considering a split model that could let different providers perform custody and oversight functions, with a clear record of who is responsible for each task.

For a manager crossing from small to medium, this is more than a Handbook classification. It can require provider selection, contract negotiation, data exchange, asset records and a revised operating model. The proposed 12-month allowance recognises that appointing a depositary takes longer than updating a policy.

ALTS would bring the rules into one sourcebook

The FCA plans a new Alternative Investment Funds sourcebook (ALTS) for alternative investment fund managers. Current requirements are spread across retained European Union rules, domestic provisions, guidance and different manager categories. The new sourcebook would organise the regime more directly around the business and its funds.

A common sourcebook would not make a hedge fund, infrastructure fund and private-equity fund the same compliance case. The details would still respond to leverage, dealing frequency, redemption terms, valuation methods, delegation and the type of assets held. The proposed tier determines the depth of prescription; the fund's structure determines how the controls have to work in practice.

This is particularly relevant to climate and sustainable finance because alternative funds finance renewable infrastructure, buildings, land, private companies and transition projects that public-market fund lists may not capture. The new regime would govern the manager, not certify the environmental quality of those assets. A fund could meet every operational requirement and still have a weak sustainability claim or unsuitable financial risks.

FRAME is a parallel change, not the same reform

The FCA is consulting on several asset-management reforms at once. CP26/28 sets the proposed rule tiers and operating duties for UK AIFMs. The separate FRAME fund-reporting proposal changes the data that managers and funds submit to the regulator. A third consultation addresses remuneration.

The thresholds are also different. CP26/28 uses aggregate manager NAV of £750 million and £5 billion to determine the AIFM tier. FRAME proposes a £500 million fund-level threshold for essential and enhanced reporting. A large manager can operate a fund below the FRAME threshold, while a smaller manager may have a fund whose reporting still needs careful classification.

Firms will need one inventory that connects the reforms rather than treating each consultation as a separate spreadsheet. That inventory should identify the legal manager, every fund and sub-fund, domicile, fund type, open or closed-ended status, NAV, leverage, redemption terms, depositary, marketing route and reporting schedule.

The cost claim depends on where a firm starts

The FCA estimates that 638 full-scope AIFMs could benefit from greater flexibility. In its model, an average annual saving of about £24,000 per firm across this group would offset roughly £15.1 million of annual net direct costs. That is a break-even calculation within the consultation model, not a promise that each manager will save that amount.

The position is different for the 69 small registered AIFMs expected to seek authorisation. The FCA estimates average one-off costs of about £71,000 and annual costs of about £105,000 for each affected firm. These estimates depend on assumptions about governance, staffing, systems and professional support, and firms with stronger existing controls may have a different starting point.

The reform can therefore reduce burden for one part of the market while increasing it for another. Investors may eventually bear some costs through fund charges, but the consultation does not establish how much would be passed on. Anyone comparing a fund still needs to inspect current fees, liquidity and risk rather than infer value from the manager's proposed tier.

What investors can and cannot infer

Authorisation gives the FCA a stronger route to supervise a manager, examine its controls and intervene when standards are not met. A depositary adds independent oversight and asset-verification functions. Those protections can improve the operating framework around a fund, especially where assets are illiquid or valuations depend on judgement.

They do not answer whether a fund is suitable, fairly priced or likely to perform. The proposed tiers are based mainly on the manager's aggregate scale, not a score for each portfolio. A large manager is not automatically safer than a small one, and a medium-tier fund is not a medium-risk investment. Strategy, leverage, redemption terms, concentration and valuation uncertainty still differ from fund to fund.

Sustainability claims remain a separate evidence question. An infrastructure or natural-capital fund may finance environmental assets, but its AIFM tier does not confirm impact, additionality or climate alignment. Investors still need the fund objective, holdings, methodology, fees and reporting. Where the claim rests on engagement with portfolio companies, the active ownership guide sets out the voting and escalation evidence to look for.

What managers can map before the rules are final

1. Calculate the provisional tier. Aggregate the NAV of relevant funds using the proposed quarterly method and test how close the result is to each threshold.
2. Separate manager and fund obligations. Record which requirements follow the AIFM tier and which depend on the structure, domicile or marketing route of a particular fund.
3. Check the authorisation route. Registered managers should identify the governance, capital and systems evidence that authorisation could require.
4. Map the depositary position. Identify funds that already have a depositary, those that may need one and the data and contracts that an appointment would involve.
5. Connect the reporting work. Reconcile the same fund inventory with the separate FRAME proposals so NAV, classifications and identifiers do not diverge between projects.
6. Keep proposals separate from current duties. Existing rules continue to apply until legislation and final FCA rules take effect.

For readers assessing public fund evidence rather than a manager's regulatory project, the sustainable funds guide and fund factsheet checklist provide a document-by-document route. Manager authorisation can strengthen supervision, but it does not replace scrutiny of holdings, fees, liquidity, stewardship and sustainability claims.

The timetable remains provisional

The thresholds, transition periods and detailed duties may change. Work on the underlying fund inventory remains valuable under several outcomes: knowing which funds a manager is responsible for, how their NAV is calculated, where liquidity and valuation decisions sit, and whether the evidence supporting those controls is consistent.

Official sources

• Financial Conduct Authority: CP26/28 UK AIFM regime consultation page
• Financial Conduct Authority: CP26/28 full consultation paper
• HM Treasury: Alternative Investment Fund Managers Regulation draft statutory instrument and policy note
• Feature image: Canary Wharf skyline by David Iliff, CC BY-SA 3.0, via Wikimedia Commons