UK AIFM Regime Overhaul—FCA and HMT Propose Major Reforms

On July 14, 2026, the Financial Conduct Authority (FCA) and His Majesty’s Treasury (HMT) published their proposals for a broad review of the UK asset management regulatory framework with the aim of creating a more proportionate, efficient and domestically tailored regime. The reforms are intended to simplify existing requirements, reduce unnecessary compliance burden and improve the quality of regulatory data available to supervisors.

 

HMT’s Draft Statutory Instrument and Policy Note

HMT published the draft statutory instrument of The Alternative Investment Fund Managers Regulations 2026 alongside its policy note, which set out the proposed changes to primary legislation to reform the regulatory framework for alternative investment fund managers (AIFMs).

HMT’s proposals are intended to replace many aspects of the current regime inherited from EU legislation with a more flexible UK-specific framework that supports growth while maintaining investor protection and market integrity. 

The key HMT proposals include:

• The transfer of more rulemaking powers to the FCA, allowing it to determine the detailed requirements applicable to different categories of AIFMs and to make future updates to the regime more quickly 
• Removing the existing thresholds based on assets under management (AUMs) for the categorization of AIFMs, leaving it to the FCA to determine new thresholds
• As a result of these points, the small registered AIFM regime is to be removed for all AIFMs, causing firms falling under this category to require authorization by the FCA, except for:
  • Managers of social enterprise funds and registered venture capital funds, ahead of wider venture capital reforms
  • Small, internally managed investment companies meeting certain criteria under a dedicated exemption
• Streamlining certain National Private Placement Regime (NPPR) and marketing requirements and introducing a public register of alternative investment funds (AIFs) notified under NPPR
• Removing regulatory reporting requirements under the AIFM regime, enabling the FCA to establish the new Fund Reporting for Asset Management Entities (FRAME) framework
• Simplifying certain mandatory disclosures relating to private portfolio companies
• Removing the unlimited liability regime for external valuers

 

FCA CP26/28: The UK AIFM Regime

In CP26/28, the FCA proposes to create a new Alternative Investment Funds Sourcebook (ALTS) for managers of unauthorized alternative investment funds (AIFs). The key proposals in the FCA’s consultation include:

• AIFM thresholds: The FCA proposes replacing the current two-tier AIFM regime based on AUMs with a three-tier framework based on fund net asset value (NAV). Under the proposed rules, AIFMs will be classified as: 
  • small AIFMs (NAV up to £750 million)
  • medium AIFMs (NAV £750 million to £5 billion) 
  • large AIFMs (NAV over £5 billion)
• Small AIFM firms will be subject to a simplified rule set, with obligations increasing as they move up in category. It should be noted that, under these proposals, existing firms that currently qualify as small, authorized AIFMs will see their baseline requirements, particularly around valuation, risk management and liquidity risk management, increase. However, these baseline requirements are generally aligned with good market practice and existing FCA expectations. Firms will be required to calculate their NAV quarterly and simply notify the FCA if they move between tiers, removing the need for a variation of permission application to the FCA. 
• Residual collective investment scheme (CIS) operators: The FCA and HMT proposals will further clarify the boundaries between the definitions of AIFs and the residual categories of collective investment schemes (CISs). As a result, it is expected that some CISs may be reclassified as AIFs, requiring operators to notify the FCA and investors and, in some cases, obtain the necessary permissions to manage AIFs. The FCA proposes a new regulatory framework for “residual CIS operators,” introducing proportionate governance, reporting and conduct requirements for these firms.
• Valuations: The FCA is proposing a proportionate valuation framework that would apply to all AIFMs, including existing small, authorized AIFMs that are currently outside the scope of specific valuation requirements. The proposals reinforce the principle that valuations must be conducted fairly, independently and with appropriate management of conflicts of interest, while allowing firms the flexibility to apply controls proportionate to their size and complexity. The new rules reflect lessons from the FCA’s recent private markets valuation review and international valuation standards, including a stronger focus on fair value assessments, documented valuation processes and the need to conduct ad hoc valuations when market- or asset-specific events affect valuations. The proposals also support greater use of independent valuers because of the removal of the current strict liability framework under HMT’s proposals, with the reinforcement of suitability criteria based on expertise, resources and independence. Although larger firms would remain subject to requirements broadly similar to the current regime, small and medium AIFMs would benefit from a more proportionate approach. 
• Leverage: The FCA proposes to retain the current definition of leverage but intends to remove the requirement for firms to calculate leverage using the “commitment” and the “gross” leverage calculation methods. Firms will still need to include leverage calculations in investor disclosures but will be able to choose the method most appropriate to the underlying investment strategy. The FCA will also remove the “substantially leveraged” threshold, and the reporting of leverage data will be streamlined under the FRAME proposals.
• Risk Management: The proposals introduce a more proportionate and tiered regime based on fund type and firm size. All AIFMs will be required to carry out appropriate due diligence on proposed investments and identify material risks. Only baseline requirements will be applied to managers of closed-ended unleveraged AIFs, while managers of open-ended and leveraged AIFs will be subject to more stringent requirements. Prescriptive additional requirements will also apply; medium AIFMs and large AIFMs will be subject to incremental governance, monitoring and independence requirements similar to those applicable to existing full-scope AIFMs. 
• Liquidity risk management: The FCA proposes a liquidity management framework that varies according to a fund’s structure and risk profile. Closed-ended funds without leverage would be exempt from specific liquidity requirements, though they would still need to meet broader risk management standards. Open-ended funds managed by smaller firms would be required to ensure redemption terms remain consistent with the fund’s liquidity characteristics and are supported by appropriate controls, liquidity tools and regular stress testing. Larger firms would face additional obligations, including more robust stress-testing, periodic reviews of liquidity arrangements and deeper assessments of the liquidity risks within underlying investments.
• Delegation: The FCA proposes to retain the current delegation framework, recognizing delegation as an important and legitimate operating model for asset managers. Although they maintain flexibility, the proposals reinforce that AIFMs remain fully responsible for delegated activities and must ensure effective oversight, governance and control. Proposed changes include replacing certain FCA approval requirements with a notification process and introducing enhanced controls for the delegation of key functions such as portfolio management, valuations, compliance monitoring and marketing. 
• Annual reporting to investors: The FCA proposes to simplify and streamline annual reporting requirements for AIFs while maintaining core transparency standards. Medium and large AIFMs would continue to produce annual reports, including audited financial statements, with greater flexibility on content and a principles-based approach aligned with international accounting standards. Reporting obligations for remuneration would be significantly reduced, while firms would be expected to provide additional information to investors on request and disclose certain matters such as special arrangements relating to illiquid assets. Small AIFMs and residual CIS operators will instead be required to provide a simpler annual summary containing key financial and fund information. 
• Investor disclosures: The FCA proposes a simpler and more proportionate investor disclosure framework that applies to all AIFMs, with a clearer distinction between professional and retail investor requirements. For professional investors, the regime would move to a more principles-based approach focused on providing information necessary to assess a fund’s risks, costs and investment merits, supported by investor rights to request additional information. Ongoing disclosure requirements would be streamlined, with liquidity and leverage information generally provided up-front and updated only when material changes occur. For retail investors, the FCA would retain a more prescriptive disclosure regime, though with some simplification. Retail disclosures will continue to cover key fund features, risks, liquidity arrangements, leverage, valuation approaches, conflicts of interest and investor protections, alongside additional information required under consumer-focused rules.
• Closed-ended investment funds trading on UK markets and internally managed investment companies: The FCA proposes a more proportionate regulatory framework for closed-ended investment companies (CEICs), recognizing that many are already subject to extensive regulation under listing, disclosure and company law requirements. As indicated previously in this report, HMT is proposing to exempt certain small, internally managed listed investment companies from the AIFM regime altogether, reducing regulatory burden for firms below specified size thresholds. For CEICs that remain within scope, risk management requirements would be tailored according to their use of leverage, with liquidity rules applying primarily where leverage creates additional risks. The FCA also proposes to remove duplicative AIFM investor disclosure and annual reporting requirements for many listed CEICs, relying instead on existing listing-related disclosure obligations.
• NPPR and cross-border marketing: The FCA proposes to introduce guidance in ALTS, clarifying the conditions that apply to AIFMs wishing to market funds in the UK.
• Consequential changes: The FCA is also consulting on some consequential changes relating to certain operational requirements in Senior Management Arrangements, Systems and Controls (SYSC) and the Conduct of Business Sourcebook (COBS).

In addition to the previously mentioned proposals, the CP26/28 also includes discussion chapters on:

• Depositaries: Under the new UK AIFM Regime, small AIFMs will not be required to appoint a depositary. The FCA is also seeking views on introducing greater flexibility in how depositary responsibilities are allocated, allowing different providers to perform separate functions rather than concentrating all duties within a single entity and on the simplification of cash reconciliation rules.
• Prime brokers: The FCA has signaled its continued support for requirements obliging AIFMs to conduct appropriate due diligence on prime brokers and to ensure that robust contractual arrangements are in place. However, it considers the current level of regulatory prescription in this area to be unnecessary and is therefore seeking feedback on whether existing requirements should be streamlined.
• Business restrictions: The FCA is seeking feedback on various options for reviewing the application of AIFM business restrictions that prevent full-scope AIFMs from performing certain regulated activities. The current restrictions affect the activities that AIFMs can carry out in the UK, resulting in regulatory complexity and forcing asset management groups to set up affiliates requiring separate FCA authorization, so this review will be welcomed by the industry.

 

FCA CP26/26: FRAME

The FCA’s proposed FRAME regime outlined in CP26/26 will replace existing fund reporting requirements with a single, more proportionate framework based on a fund’s size, type and activity. The aim is to simplify reporting, reduce duplication and improve the FCA’s ability to monitor market risks and industry trends.

Under the proposals, funds with a NAV below £500 mn would generally be subject to a streamlined set of essential reporting requirements, covering areas such as fund strategy, investor base, performance, flows and liquidity. Funds with a NAV above £500 million would be required to submit enhanced reporting, including more detailed information on portfolio exposures, liquidity, fees, investor rights and financing arrangements.

Reporting frequency would become more risk based. Most unauthorized AIFs would report annually, while hedge funds would report quarterly due to their greater use of leverage and more active trading strategies. As indicated earlier in this report, the FCA also proposes the removal of the existing requirement to calculate and report leverage metrics, instead collecting more detailed information on exposures, sources of leverage and fund resilience.

Additional reporting requirements would apply to larger private market funds, including private equity and loan origination funds. Large hedge funds would also become subject to an event-driven reporting regime, requiring notification to the FCA following material losses.

The proposals would replace the current AIF001 and AIF002 returns, introduce simplified annual reporting for certain firms and further digitize fund reporting and notification processes through the FCA Gateway. Overall, FRAME represents a substantial modernization of the UK fund reporting framework.

 

FCA CP26/27: Remuneration for Solo-Regulated Firms

The FCA’s remuneration proposals set out in CP26/27 represent a major shift from the detailed, post–financial crisis remuneration rules toward a more flexible, principles-based framework for solo-regulated firms. The reforms support the FCA’s objectives of reducing regulatory burden, increasing proportionality and enhancing the UK’s competitiveness, particularly for nonsystemic asset managers and investment firms.

Key proposed changes include:

• Greater flexibility in remuneration design: Mandatory requirements for deferral, malus and clawback would be replaced by a stronger reliance on firms’ judgment and governance, allowing remuneration structures to be tailored to individual business models and investment horizons. 
• A single remuneration code: The FCA plans to consolidate the AIFM, UCITS and MIFIDPRU remuneration regimes into a new SYSC 19AA, reducing complexity and addressing duplication for firms subject to multiple frameworks.
• Application to individuals: The proposed new code will have general remuneration requirements applicable to all staff. The FCA is also proposing a narrower definition of material risk takers, focusing on individuals who have a significant impact on firm outcomes, which will be subject to additional remuneration principles.
• Remuneration committees and annual reviews: The FCA is proposing to remove requirements that mandate certain firms to maintain a remuneration committee and the requirement to perform a formal annual remuneration review.
• MIFIDPRU reporting and disclosures: The FCA is proposing to remove MIF008 remuneration report and the MIFIDPRU remuneration disclosure requirements.
• Reduced scope: Small, non-interconnected MIFIDPRU firms and, subject to the outcome of the UK AIFM reforms, small AIFMs would be excluded from the regime. 

 

Next Steps

Stakeholders can provide feedback to the previously discussed publications within the following timelines:

• CP26/28 (UK AIFM Regime) by September 18, 2026, for the discussion chapters and by October 14, 2026, for the proposed new rules. The FCA will publish another consultation paper following up on the discussion chapters and setting out its proposed reforms for the authorized AIFs regime.
• CP26/26 (FRAME) by September 22, 2026
• CP26/27 (Remuneration) by September 16, 2026

The FCA will publish its policy statement and final FCA Handbook rules in line with HMT’s Statutory Instrument in 2027.

The overall rule package will come into effect in 2028, although the FCA has signalled its intention to lift certain requirements on firms, where possible, when the final legislation and policy statement are published.

 

Kroll’s Initial Views

The proposals represent a fundamental shift in the UK’s approach to the regulation of alternative asset management firms and a significant departure from the inherited pre-Brexit EU regime. The FCA and HMT aim to create a more proportionate and risk-based framework, reducing complexity and unnecessary costs for the industry while maintaining robust standards for investor protection and financial stability.

Although the final rules are expected to come into force in 2028, firms should start considering the impact that the proposed reforms will have on their business and compliance arrangements to ensure they are fully prepared.

We stand ready to support our clients with their impact assessments, gap analysis exercises and regulatory change projects. 

Please do reach out to our experts below or to your usual Kroll contacts if you would like to discuss the FCA and HMT proposals in more detail.