Recent announcements from the FCA and Treasury on reforms to the rules surrounding alternative investment funds (AIFs) have been welcomed by industry experts after years of debate.
Earlier today (14 July) the FCA released its consultation paper on the current UK Alternative Investment Fund Managers (AIFM) regime, following years of industry backlash over the complicated and unclear regulations.
In its report, the FCA noted many of the rules surrounding AIFs are derived from the EU’s Alternative Investment Fund Managers Directive (AIFMD), which itself was set up following the global financial crisis. This was then implemented into the UK through the Alternative Investment Fund Managers Regulations 2013 (AIFMR).
“Requirements have become dated – for instance, firm size thresholds have not reflected inflation or growth in the market,” the FCA noted. Or they fail to distinguish between funds frequently trading financial instruments or those holding illiquid investments over a longer time frame, the report added.
Guy Rainbird, public affair director at the Association of Investment Companies (AIC), added: “Much of the AIFM rulebook duplicates the legal and governance standards that already apply to investment companies.
“These regulations were imposed by Europe without proper recognition of how listed investment companies differ from other funds.”
Experts have been pushing for changes to these rules for years. In 2024, 114 signatories wrote to the national press to stress that the investment trust sector had spiralled into a crisis because of EU regulation that did not apply to UK investment trusts remaining on the statute book.
See also: Cost disclosure campaign steps up calls for trusts to be removed from AIFMD
That same year, Baroness Bowles called the FCA’s interpretation of the regulation around investment trusts “illegal, irrational and inconsistent,” with Baroness Altman pushing for the removal of investment trusts from the AIFMD.
The FCA’s updated proposals aim to make the rules more proportionate and better match firms’ size and risks. The regulator suggested a new three-tier structure with more gradual application of the rules, with firms divided into small, medium and large tiers.
The AIC explained that under these new rules a firm with net assets of £750m would be considered a small AIFM, compared with the current limit of £100m. In addition, Rainbird praised the additional provisions for AIFM’s with assets between £750m and £5bn as making the rules “more proportionate” and reducing unnecessary compliance burdens.
The FCA will also create an Alternative Investment Fund Sourcebook (ALTS) to bring all the rules together in one place and make navigating the rules easier for businesses.
The AIC’s Rainbird said: “The FCA’s proposals are wide-ranging and complex, but there is a lot to be positive about.
“Reducing regulation where it serves no useful purpose will help the UK’s asset management sector focus on what is most important, securing better returns for investors and providing capital to support economic growth.”
Alongside this, the Treasury has published a draft version of the proposed legislation on AIFM’s designed to allow for “technical checks” and to identify any errors or oversights that would prevent the regulation from achieving its goals.
In the Treasury’s draft legislation, it said: “Although the AIFMR is generally well-regarded by industry participants, there are areas which can be brought up to date and streamlined, while maintaining financial stability and consumer protection.”
On top of allowing the FCA to create more proportionate rules, the draft legislation will offer exemptions to small internally managed investment companies.
To qualify for this exemption, the fund must trade on a recognised UK investment exchange (in practice this means the London Stock Exchange Main Market or Specialist Funds Segment, the Alternative Investment Market, or the Aquis Stock Exchange).
The government is accepting comments on the draft until 14 October 2026.
See also: ‘This doesn’t mean the job is done’: Experts react to the FCA’s proposed listing reforms
