The UK government is set to unveil sweeping changes to its regulatory framework for hedge funds and private equity firms, proposing a new lighter-touch regime for managers with less than £5bn in assets under management rather than the £100m threshold currently, according to a report by the Financial Times.
The proposed reforms, to be announced by the Treasury and open to industry consultation in partnership with the Financial Conduct Authority (FCA), are designed to reduce the compliance burden on smaller firms and enhance the UK’s appeal as Europe’s leading hub for alternative asset management.
The overhaul could have major implications for the UK’s £355bn hedge fund industry and the wider private capital market, which accounted for more than half of Europe’s €1.15tn in private equity AUM last year, according to data from Arthur D Little.
Under the new plans, fund managers below the £5bn threshold would be subject to a more proportionate regime, tailored to their size and operational complexity. The government argues the shift will unlock capital, reduce regulatory friction, and promote innovation across the alternatives sector.
“Eliminating costly and duplicative requirements will help increase capital flows, strengthen public and private capital markets, and foster innovation,” said Rob Hailey of the Managed Funds Association, whose members include some of the world’s largest hedge funds.
The FCA also signalled its support for a tiered model, with Simon Walls, Interim Executive Director of Markets, noting: “We want rules better tailored to UK investment managers. These could allow them to operate more efficiently, further supporting competition, competitiveness, and economic growth.”
While the industry broadly welcomes the proposals, concerns remain about the potential for regulatory divergence from the EU. The UK’s intention to repeal and replace the Alternative Investment Fund Managers Directive (AIFMD) — inherited from the EU — may stoke tensions with Brussels, particularly around delegation rules that allow EU funds to outsource functions to UK-based managers.
“The UK must tread carefully,” said one London-based private equity executive. “Overreaching on deregulation could provoke the EU into tightening delegation rights — that would be a serious blow to cross-border business.”
Indeed, Brussels’ most recent update to AIFMD maintained delegation allowances but imposed stricter controls and disclosures — a sign that further divergence by the UK could invite retaliation.
Politically, the proposed changes may also pose challenges for the Labour government, which has committed to prioritising economic growth but faces criticism over perceived giveaways to the financial elite. Some Labour MPs are expected to oppose any move seen as “deregulation for financiers” — especially in the context of recent welfare cuts.
City Minister Emma Reynolds defended the plans, saying the goal was to “tear down unnecessary barriers to investment, such as costly regulation that prevents asset management firms from growing and providing capital to businesses across the country.”
The consultation will explore not only threshold changes but also reductions in reporting obligations and the elimination of overlapping requirements. The Treasury has pledged to cut the overall cost of red tape for UK businesses by 25% in an effort to revitalise a stagnant economy.
Michael Moore, Chief Executive of the British Private Equity and Venture Capital Association, called the proposals “an important step in securing the UK’s status as one of the world’s leading private capital hubs.”
