A regular briefing for the alternative asset management industry.
KEY INSIGHTS
Deregulation on the horizon: Reviews of the regulation of alternative investment fund managers are underway in the UK and the EU, which could deliver some benefits for firms.
Burden reduction is one of the objectives: Although European policymakers say they are targeting growth and competitiveness, and will clearly try to simplify their rulebooks, there are also dangers inherent in any regulatory reform – and some firms will probably see some burdens increase.
Industry's opportunity to influence outcomes: Regulators are asking for stakeholder input, giving the industry a rare chance to influence the supervisory framework that governs them, and the current political climate makes it more likely that industry suggestions will find favour.
When the EU passed the Alternative Investment Fund Managers Directive (AIFMD) in 2011, it heralded a huge step-up in regulation for the sector. Although private fund managers had been regulated in the UK and some other jurisdictions before, the scale and prescription of the new pan-EU regime was a shock. Many practitioners and academics argued that the rules were not needed for an asset class largely directed at institutional investors. They said many of the provisions – for example, significant additional capital requirements and requirement to engage a depositary – would be costly to implement while offering little benefit to investors or wider stakeholders.
In 2020, the European Commission launched a review of the AIFMD, seven years after it became effective. The starting point for that review was a comprehensive and influential report by KPMG – which had given the rulebook a relatively clean bill of health, declaring that most of its provisions were contributing to the regime's policy objectives "effectively, efficiently and coherently".
And – perhaps surprisingly, given the concerns expressed less than a decade earlier – the industry was not clamouring for wholesale reform.
AIFMD 2, eventually passed in 2024, made relatively few changes to the rulebook, and many of the changes it did make were aimed at private credit funds – a sector that had grown hugely since the financial crisis.
Similarly, when the UK left the EU, some had expected that a government focused on securing the benefits of Brexit might have rapidly moved to ease the burdens on UK-regulated firms. In fact, the UK "onshored" the EU's rulebook and made virtually no changes. The UK has not copied the EU's subsequent AIFMD reforms, but nor has it rushed to make substantive changes to the inherited regime.
That might be about to change – in the UK and the EU.
The explicit focus for European policymakers in recent years has been growth and competitiveness. In Britain, the centre-left government led by Sir Keir Starmer has made growth its number one priority (at least it has said it has). And when Ursula von der Leyen was re-appointed to lead the European Commission last year, she pledged to focus on "sustainable prosperity and competitiveness".
These pledges might now lead to some deregulatory changes to the EU and the UK versions of the AIFMD.
In the UK, the government and the regulator launched a joint review last month, asking the industry to suggest changes to the AIFMD and setting out some initial proposals. The government intends to transfer significant rulemaking authority to the regulator, the FCA, consistently with its general approach to regulation post-Brexit.
One central idea is to establish a three-tier regime, so that only the largest firms – those with more than £5 billion of assets under management, measured by net asset value (NAV) – would be subject to the most prescriptive and demanding rules. Firms with NAV under £100 million would be subject to a light-touch "start-up" framework. That would leave a large group of "mid-size" firms with NAV of between £100 million and £5 billion under management with a less burdensome rulebook, facilitating their growth.
Although de-regulatory overall, this change could increase oversight of smaller firms, meaning some will need formal FCA authorisation for the first time, and subjecting many others – those that are currently "sub-threshold" firms – to increased substantive requirements.
"... calls for burden reduction will get a more sympathetic hearing than they have in the recent past."
As for the rules themselves, although they do not set out detailed proposals in every area, the FCA has made it clear that everything is potentially up for grabs. Among other things, the FCA will look at depositary rules (although it says significant changes are not envisaged), capital requirements, leverage, remuneration, and reporting requirements – including the rules specifically applying when a private equity fund acquires control of a portfolio company.
Stakeholders are invited to submit responses by 9 June, with draft legislation and detailed rule changes expected next year. The plan is to fast track changes that will remove unnecessary burdens, although some of the changes that come later might add to compliance costs, especially in areas where risks have increased since 2013.
Meanwhile, the European Commission has also launched a process that could lead to change, with a targeted consultation on integration of EU capital markets. That process, part of the Savings and Investment Union strategy and inspired by the Draghi report, is designed to make the EU "faster and simpler" – including by simplifying regulations and reducing burdens. The EU approach has the advantage of inviting comments on connected legislation at the same time, while the resource-constrained FCA has been approaching these dossiers sequentially.
Among the possible outcomes at EU-level is a change to the thresholds for compliance with the AIFMD. The rules to use the marketing and management passports that come with authorisation as a full scope manager are also under active consideration. Other barriers are also being assessed, including the authorisation and supervisory approval processes, and there is an open question on whether the investor protections are necessary for funds that do not target retail investors. There is a clear sub-text: a push by the Commission for more integrated, perhaps centralised, EU supervision – something several national regulators have firmly resisted in the past.
The private funds industry will grab the opportunity to push the EU to remove a wide range of barriers and annoyances inherent in the existing regime; their wish list may be similar to the one the UK's FCA will receive.
The usual reluctance to ask for changes to regulation that firms have largely learned to live with will be somewhat tempered by the current political mood: calls for burden reduction will get a more sympathetic hearing than they have in the recent past. But the dangers inherent in any regulatory review have not completely receded.
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