This is the third article in our future UK AIFM regime series, and the second of two focusing on the FCA's Consultation Paper 26/28 (CP26/28). Having previously explored where obligations vary by firm size under the FCA's proposed three-tier framework, we now turn to where proportionality is driven by other factors – such as fund structure or business activity – and consider the areas where the FCA has yet to reach a final position.

Proportionality is undoubtedly the defining theme of CP26/28. However, in a closer examination of the consultation it is clear that the FCA does not believe firm size should determine every regulatory outcome.

In several key areas, the FCA has concluded that factors such as the type of investor, the nature of the fund structure, or the activities undertaken by the manager are more relevant than the scale of the firm itself. In some cases, the proposals even introduce new obligations for smaller firms that currently benefit from lighter-touch treatment.

Alongside these changes, several significant areas remain subject to further discussion, with the FCA seeking industry feedback before proposing detailed rules. As a result, firms should not view CP26/28 as a finished regulatory blueprint, but as an important indication of the FCA's direction of travel.

Where firm size is not the deciding factor

While much of the consultation focuses on the proposed small, medium, and large AIFM categories, several important topics discussed below take a different approach.

Leverage calculations and disclosure

The classification that matters here is the ‘type’ of AIF – closed-ended unleveraged, closed-ended leveraged, or open-ended – not its size. The FCA proposes removing both mandatory leverage calculations that currently apply to all leveraged AIFMs regardless of size, i.e.:

• The commitment method, used to determine the "substantially leveraged" reporting threshold.

• The gross method, used for investor disclosure.

In their place, firms of any size would disclose leverage to investors using whichever calculation method best suits their strategy, provided the explanation is clear, fair, and not misleading.

The rationale is that leverage can arise in fundamentally different ways across different asset classes and investment strategies. A single standardised measure is therefore unlikely to provide meaningful comparisons between, for example, a hedge fund making extensive use of derivatives and a private equity fund employing acquisition financing.

Delegation

Delegation remains central to many operating models across the asset management industry, and the FCA is not proposing to differentiate requirements according to firm size. Instead, the proposed framework would apply broadly consistent standards to all authorised UK AIFMs.

One consequence is that some smaller firms could face additional requirements compared with today. Under the proposals, firms would need to demonstrate objective reasons for delegating certain functions, including investment management activities and core operational responsibilities such as valuation, compliance monitoring, and marketing activities.

The FCA's focus remains on ensuring that firms retain sufficient oversight, expertise, and accountability, regardless of the extent to which activities are delegated to third parties.

Investor disclosures

Investor disclosure requirements provide another example of where the FCA believes proportionality should operate differently. Rather than linking disclosure requirements to the size of the manager, the FCA has focused on the characteristics of the investor receiving the information.

• For professional investors, the proposals move towards a more principles-based approach, providing greater flexibility in how relevant information is communicated.

• For retail investors, the disclosure framework is expected to remain more prescriptive, reflecting the FCA's long-standing focus on consumer protection and the differing levels of investor knowledge, experience, and bargaining power.

Changes to SYSC and COBS

One of the more surprising aspects of the consultation is that several existing exemptions currently available to smaller firms may disappear altogether.

The FCA proposes extending several systems, controls, and conduct requirements across all authorised UK AIFMs, regardless of size. These include certain expectations relating to senior management experience, governance arrangements, and shareholder engagement.

The FCA's view is that these requirements already apply to firms undertaking comparable activities under other regulatory regimes and therefore represent an appropriate baseline standard for all authorised AIFMs.

Closed-ended investment companies and internally managed structures

In this area, the key considerations are corporate structure and listing status rather than NAV thresholds.

The Treasury's proposals include an exemption for certain small, internally managed, investment companies whose shares are admitted to trading on a recognised UK exchange. These firms would be assessed against separate thresholds that sit outside the proposed AIFM tiering framework.

For larger investment companies that remain within scope, the FCA is proposing to remove some duplication by disapplying certain AIFM reporting and disclosure requirements where equivalent information is already provided under UK listing rules.

This reflects a broader objective of reducing unnecessary regulatory overlap while maintaining appropriate investor protections.

Residual collective investment scheme operators

CP26/28 also addresses the treatment of residual collective investment scheme (CIS) operators.

If future legislative changes expand the scope of regulation, some arrangements that are currently unregulated may become subject to enhanced disclosure and reporting obligations.

At the same time, the FCA proposes excluding various structures that do not exhibit the characteristics typically associated with collective investment vehicles, including certain carried interest arrangements, joint ventures, and single-investor vehicles.

Importantly, these distinctions are based on the nature and purpose of the arrangement rather than the size of the manager.

Where is the FCA still seeking feedback?

Despite the breadth of CP26/28, several important aspects of the future regime remain unresolved.

In these areas, the FCA has published discussion chapters rather than formal rule proposals, with further consultation expected before final rules are introduced.

Depositaries

As discussed in the first insight in this series, the FCA's initial thinking is that medium and large firms should continue to appoint independent depositaries, while smaller firms would remain outside this requirement.

However, important questions remain open. The FCA is explicitly seeking views on:

• Whether the single depositary model should be preserved, or whether a split model that is already permitted for non-UK AIFs marketed under the National Private Placement Regime should be extended more widely

• Whether the depositary requirement is proportionate, particularly for structures such as investment trusts or private equity funds with limited investor transactions

Prime brokers

The regulator has deliberately postponed reform proposals for prime broker arrangements until its thinking on depositaries are developed further.

This reflects the close relationship between the two frameworks and the importance of ensuring that any future changes operate coherently.

The AIFM business restriction

The FCA has outlined four potential approaches, ranging from retaining the current AIFMD business restriction for all authorised AIFMs to removing the restriction entirely.

The FCA's stated preference is to remove the restriction for all firm sizes, paired with switching off transaction reporting for AIFMs entirely rather than extending it but this remains a discussion topic, not a proposal.

Prudential requirements

Perhaps the most significant area of future reform relates to prudential regulation.

The FCA is considering migrating AIFMs, UCITS management companies, and residual CIS operators onto its Core Prudential Sourcebook (COREPRU), addressing significant inconsistencies in the current framework

A separate Call for Input on the wider Investment Firm Prudential Regime (IFPR) is expected later this year, with a dedicated consultation on prudential rules for fund managers to follow.

Regulatory reporting

CP26/28 does not contain the reporting field detail itself. That sits in the parallel CP26/26: Fund Reporting for Asset Management Entities (FRAME), which will replace the current Annex IV regime and bring residual CIS operators into reporting scope for the first time. Any assessment of a firm's future reporting burden will need to take into consideration CP26/26 alongside CP26/28.

What should firms be doing now?

Although final rules are not expected until 2027, firms should not wait to begin assessing the impact of the proposals.

Practical steps to consider include:

• Determining likely categorisation under the proposed NAV-based thresholds.

• Assessing whether existing governance, risk and oversight arrangements would meet future expectations.

• Reviewing delegation models and documenting the rationale for key outsourced functions.

• Identifying any current reliance on small-firm exemptions that may be removed under the new framework.

• Considering the interaction between CP26/28 and the FCA's separate reporting consultation, CP26/26 (FRAME).

• Responding to the consultation before the relevant deadlines.

Looking ahead

Taken together, the proposals demonstrate that while proportionality sits at the centre of the FCA's reform agenda, firm size is only one part of the picture. Investor type, fund structure, business activities, and governance arrangements will all continue to influence regulatory expectations under the future regime.

Equally, several of the most consequential aspects of the framework remain under consideration. Firms should therefore view the current consultation as both an indication of future regulatory direction and an opportunity to influence the final outcome.

With further consultations expected and implementation scheduled for 2028, there remains time for firms to assess the implications carefully and prepare for change. Nevertheless, those that begin planning early are likely to be best placed to adapt efficiently when the final rules are published.

How we can help

As the consultation evolves, understanding not only what is changing, but also what remains uncertain, will be critical for firms seeking to make informed strategic and operational decisions.

Our Prudential Reporting and Advisory team continue to monitor developments closely and will provide further insights, analysis, and practical guidance as the FCA's proposals progress. Whether you are considering the potential impact on your business, reviewing governance, and operating models, or preparing a consultation response, we can help you navigate the evolving regulatory landscape and prepare for the next stage of reform.

To explore the other articles in our future UK AIFM regime series and keep up to date with the FCA’s proposed reforms, visit our series hub, where you will find detailed analysis of the latest consultation papers and what they could mean for your firm.