FCA: The structure of the asset management regulatory regime

Expanding on our previous overview of the Financial Conduct Authority’s (“FCA”) consultation paper titled “Updating and Enhancing the UK Asset Management Regime” (DP23/2), which focused on improving the way the asset management regime works, we have produced a subsequent summary that emphasises the structure of the asset management regulatory regime.

The asset management regulatory regime in the UK is primarily governed by several EU directives, including the Undertakings for Collective Investment in Transferable Securities (“UCITS”) Directive, Alternative Investment Fund Managers Directive (“AIFMD”), and Markets in Financial Instruments Directive, which have all been retained as UK law. To enhance the current structure of this regulatory framework, the FCA has put forth proposals. These include:


The overall structure of the regime:

The FCA has recognised that there are differences in regulation for fund managers and portfolio managers, which may lead to complexity. For example, there are no specific regulations governing investment due diligence or liquidity management for portfolio managers. The FCA acknowledges that without regulatory standards, there could be uncertainty about the minimum standard that a portfolio manager is expected to adhere to in certain areas. Consolidation of the rules could significantly simplify the regulatory framework by applying the same rules to both fund managers and portfolio managers, while also making any necessary modifications as required.

The regime for retail funds (UCITS funds and NURS):

The regime for retail funds which includes UCITS and Non UCITS Retail Schemes (“NURS”) can be complex for retail investors; this is due to the differences between the two regimes. The FCA has proposed various measures to address this issue, including changing the boundary between the UCITS and NURS regimes to allow for all authorised funds to be widely distributed to retail investors who will have a single set of rules. Additionally, the FCA suggests rebranding the NURS regime as “UCITS Plus” with mainstream products falling under the UCITS banner and more complex products falling under the UCITS Plus banner. Furthermore, the FCA proposes the creation of a new category of “basic funds” which would limit investors to specific types of investments, thus creating a clear boundary between basic funds and retail funds.

The regime for managers of professional funds:

The rules in relation to authorised funds are derived from the AIFMD. Whether the fund manager falls within the scope of the UK AIFMs or not depends on the assets under management of the fund they manage. Firms below the size threshold usually are subject to less prescriptive requirements. The FCA is proposing to change this regime, by changing the size threshold at which firms apply the full scope of the UK AIFM regime. Alternatively, they are considering introducing an option that would allow firms to meet the criteria other than size, thereby allowing them to utilise the small, authorised UK AIFM exemption, whilst ensuring that such exemption is appropriately applied. Regardless of whether the threshold is changed, the FCA is considering making the expectations of small AIFMs much clearer. The FCA proposes to introduce a comprehensive set of high-level rules, setting minimum standards on core fund areas such as valuation, liquidity management and investor disclosure.

Look out for two more of the proposals in the FCA’s discussion paper that we’ll be covering over the coming weeks.

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