This is the second article in our future UK AIFM regime series, and the first of two focusing on the FCA's Consultation Paper 26/28: The UK AIFM Regime (CP26/28). Here, we look at where firm size is the primary driver behind the FCA's obligations.

The UK AIFM Regime (CP26/28) rebuilds the alternative investment fund manager (AIFM) framework around a single core principle: that obligations should scale with the size and consequent market impact of the firm. At the heart of the proposals is a new three-tier threshold structure, which drives requirements across valuation, risk management, liquidity, annual reporting, and depositaries.

The new three-tier threshold structure

HM Treasury (HMT) intends to remove the current legislative size thresholds and hand rule-making power for AIFM categorisation to the FCA. The Call for Input, released April 2025, had originally floated a small/medium boundary of £100m net asset value (NAV), which respondents considered too low, given it represented a substantial reduction from the current €500m threshold for managers of closed-ended, unleveraged AIFs.

The FCA has revised this significantly upward and the proposed tiers are:

• Small AIFMs: Aggregate NAV up to £750m across all AIFs and non-AIF collective investment schemes (CIS) managed.

• Medium AIFMs: Aggregate NAV above £750m and up to £5bn.

• Large AIFMs: Aggregate NAV above £5bn.

Two structural changes are particularly important to note:

First, the FCA is moving from a ‘leverage-adjusted assets under management calculation’ to a simpler NAV-based test. This will be calculated using the average NAV over the most recent quarter and will be aggregated across collective investment scheme (CIS) AIFs, non-CIS AIFs, and any residual non-AIF, non-UCITS CIF.

Second, the FCA is softening the "cliff-edge" effect long criticised in the current regime. Firms that grow past a threshold will have six months from notification to comply with new general obligations, and twelve months to appoint a depositary where one becomes required. Firms may also elect to voluntarily enter a stricter tier via a SUP15 notification, once per calendar year, without a formal change in permissions. This may occur if a firm’s AUM is increasing and it wants to get an early understanding of the elevated reporting requirements.

What this means for firms

The proposed thresholds are not simply a classification exercise. A firm's category will increasingly determine the regulatory obligations that apply to it. The key areas of impact are:

Valuation requirements

One of the clearest examples of the FCA's proportionality agenda is its proposed approach to valuation.

Currently, smaller AIFMs are not subject to the same detailed valuation requirements as full-scope firms. Under the new regime, all firms would be subject to a baseline valuation framework, although the degree of prescription would vary depending on size.

• Small AIFMs would be required to maintain documented valuation policies and procedures, with an emphasis on ensuring that valuations are performed consistently and appropriately reviewed.

• Medium-sized AIFMs would be subject to more detailed requirements, although these would remain less prescriptive than those currently applicable under the full-scope regime.

• Large AIFMs would continue to operate broadly within a framework equivalent to the existing Level 2 Regulation requirements, including detailed requirements around governance, oversight, and independence.

The proposals also align with the Treasury's intention to remove the statutory external valuer regime. In its place, the FCA is proposing a conduct-based approach, requiring firms to demonstrate that any independent valuer possesses the appropriate competence, resources, and independence to perform its role effectively.

Risk management

Risk management is another area where regulatory expectations would increasingly scale according to firm size.

The FCA distinguishes between managers of:

• Closed-ended unleveraged AIFs

• Closed-ended leveraged AIFs

• Open-ended AIFs

All firms would be subject to a baseline requirement to undertake appropriate due diligence and maintain effective risk oversight. However, additional requirements would apply depending on both the type of fund managed and the size of the firm.

For managers of closed-ended unleveraged AIFs, the baseline requirements would constitute the entirety of the risk management framework.

For firms managing leveraged or open-ended structures, the FCA proposes more extensive obligations.

Medium AIFMs would be expected to establish a dedicated risk management function, maintain formal risk management policies, define risk limits, and undertake regular reviews. Appropriate separation between risk management and portfolio management would also be required.

Large AIFMs would remain subject to a more comprehensive framework, broadly reflecting existing requirements. This would include enhanced governance arrangements, independent challenge, conflict management controls, and more formal oversight mechanisms.

Liquidity risk management

The FCA is proposing a similar approach for liquidity risk management.

Small AIFMs would be subject to a streamlined framework reflecting the nature and scale of their activities, while medium and large firms would remain subject to requirements broadly consistent with the current regime.

The FCA considered whether certain listed closed-ended funds using only limited leverage should benefit from a tailored exemption. However, it concluded that introducing further distinctions could add unnecessary complexity to the framework.

Instead, the regulator has sought to embed flexibility within the existing approach while maintaining a consistent set of expectations for firms operating similar fund structures.

Annual reporting to investors

The proposed annual reporting regime provides one of the most tangible examples of proportionality in practice.

Many smaller firms are not subject to equivalent annual reporting obligations. Under the FCA's proposals, small AIFMs would be required to prepare a new annual summary containing a core set of information for investors. This summary would be significantly less burdensome than the reporting requirements applicable to larger firms and would not require audited financial statements.

Medium and large AIFMs, however, would continue to produce a full annual report for each AIF, including audited financial statements, broadly consistent with existing requirements.

The FCA also proposes to simplify certain content requirements within the annual reporting framework, moving towards a more principles-based approach and removing some of the detailed disclosure obligations that currently apply.

Depositary requirements

Another area where the proposed framework differentiates between firm sizes is within depositary arrangements.

The FCA is proposing that medium and large AIFMs appoint an independent depositary for every unauthorised UK AIF they manage. Small AIFMs would not be subject to this requirement and would instead continue to rely on the existing client assets framework under CASS 6.

Importantly, small firms will retain the option of appointing a depositary voluntarily if this aligns with investor expectations or commercial objectives.

However, it is important to note that this remains a discussion chapter rather than a formal consultation proposal. The FCA has published its direction of travel but has not yet proposed detailed rules, meaning the final approach remains subject to further feedback and development.

Looking ahead

The proposed tiering framework sits at the centre of CP26/28 and will be a key factor in determining how regulatory obligations are applied under the future UK AIFM regime.

While the FCA's proposals are intended to deliver a more proportionate framework, they will require many firms to reassess their governance arrangements, operating models, and compliance obligations. Understanding the categorisation under the proposed thresholds is therefore an important starting point for any firm seeking to evaluate the impact of the reforms.

In part 2, we examine the areas of CP26/28 where firm size is not the primary determinant of regulatory obligations, including delegation, investor disclosures, and the FCA's proposed approach to certain structural exemptions. We also explore the areas where the regulator has yet to reach a final position and is continuing to seek industry feedback. You can read this article here.

How we can help

The proposals in this paper have the potential to reshape the UK's AIFM framework significantly over the coming years. While many aspects of the future regime are becoming clearer, key areas remain under consultation, creating both challenges and opportunities for firms as they plan ahead.

Our Prudential Reporting and Advisory team is closely monitoring regulatory developments and will continue to provide practical guidance, technical insight, and analysis as the reforms progress. Whether you are assessing your position under the proposed tiering framework, considering the implications for governance and reporting, or preparing a consultation response, we are here to help you navigate the evolving regulatory landscape.

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.