In today’s ever-changing financial industry, becoming an authorised Alternative Investment Fund Manager (“AIFM”) is a significant achievement that can open new opportunities and is crucial for both operational success and regulatory compliance. The Financial Conduct Authority (“FCA”) offers a clear pathway for firms looking to obtain this status and provides various AIFM licenses designed to suit the size and scope of a firm’s activities. Understanding which license is the best fit for your firm’s requirements is the first step towards establishing a strong and compliant business model. Here is what you need to know to successfully navigate the FCA application process.
The FCA categorises AIFMs into two main types: Full-Scope UK AIFMs and Small UK AIFMs.
Full Scope UK AIFMs: The Comprehensive Regulators
Full Scope UK AIFMs are the heavyweights in the regulatory ring. They are subject to the full breadth of the Alternative Investment Fund Managers Directive (“AIFMD”) regulations. These entities manage Alternative Investment Funds (“AIFs”) that exceed the threshold of Assets Under Management (“AUM”), which places them under a more rigorous regulatory framework. Full Scope AIFMs must comply with extensive reporting requirements, maintain higher capital, and adhere to strict risk management protocols.
Small UK AIFMs: The Agile Contenders
On the flip side, Small UK AIFMs operate under a lighter regulatory regime. They manage AIFs below the AUM threshold and are exempt from some of the stringent requirements that Full Scope AIFMs face. This allows for greater flexibility and potentially lower operational costs. However, they are limited in the scale and scope of their activities.
Identifying your Firm’s Category
The following factors should be taken into consideration when deciding whether you fall under a Full Scope AIFM or a Small UK AIFM:
- Assets Under Management (“AUM”) and the nature of the funds managed: As per Article 3 of the Alternative Investment Fund Managers Directive, firms managing Alternative Investment Funds (“AIFs”) whose AuM exceeds:
- €500 million in total for portfolios of AIFs that are unleveraged and have no redemption rights exercisable during a period of five years following the date of initial investment of each AIF; or
- €100 million in total for other cases, including any assets acquired through the use of leverage
The above threshold conditions must apply to be authorised as a Full-Scope UK AIFM.
- Business Scope: Full Scope AIFMs are subject to a comprehensive set of regulatory requirements, while Small UK AIFMs have a more streamlined set of obligations.
- Understand Regulatory Requirements: Familiarise yourself with the full regulatory requirements for AIFMs, including reporting obligations and conduct rules.
Strategic Implications for Fund Managers
The choice between becoming a Full Scope or a Small UK AIFM should align with a fund manager’s business model, growth aspirations and risk appetite. Full Scope AIFMs can attract larger institutional investors seeking the security of a fully regulated entity whilst Small UK AIFMs may appeal to niche markets or investors who are looking for innovative investment strategies and can tolerate a higher risk profile.
The Application Essentials
To apply for authorisation, firms must use the FCA’s online system, Connect. The application must include:
- Regulatory Business Plan: A comprehensive plan outlining the firm’s strategy, operations and compliance with the FCA’s expectations
- Three-Year Financial Forecast: A projection demonstrating the firm’s financial stability and resource adequacy
- Permissions: Identification of the specific permissions required, such as ‘managing an unauthorised or authorised AIF’
Prudential Requirements
Full Scope AIFMs are subject to Collective Portfolio Management (“CPM”) or Collective Portfolio Management Investment (“CPMI”) firms’ prudential requirements. Small UK AIFMs have different requirements based on whether they hold MiFID permissions such as:
- Capital Requirements: Small UK AIFMs typically have a base capital requirement of £50,000. However, if they also perform additional MiFID activities, the capital requirements may be higher
- Risk Management: They must implement appropriate risk management systems to identify, manage, and monitor the risks associated with their activities
- Regulatory Reporting: Submit regular reports to the FCA, including information on the main instruments in which they are trading and on the principal exposures and concentrations of the AIFs they manage
- Own Funds: They must maintain Own Funds which are higher of the initial capital requirement and the sum of funds needed for covering operational risks
Conclusion: Embrace the Journey
Applying to become an authorised AIFM is a journey that requires careful planning and attention to detail. Choosing the most suitable UK AIFM license is a strategic decision that aligns with your firm’s long-term objectives. By carefully assessing your firm’s needs against the FCA’s criteria, you can ensure a smooth application process and a solid foundation for future growth.
How Can Complyport Help?
The authorisation process can be challenging and time-consuming. At Complyport, our experienced team navigates regulatory requirements to offer the best advice and guidance throughout your application.
We offer a flexible approach to suit your needs, providing a fully project-managed service to review and provide feedback on draft applications prior to submission.
If your firm is seeking to acquire additional licensing to expand its business scope, we can also support you with other regulatory applications such as variations of permissions (VoP), change in control, and legal status. Please click here to learn how we can assist you.
Our fully project-managed authorisation service includes:
Pre-Application Consultancy
- Our team works with you to understand your goals and activities.
- We listen to your ideas for the future and ensure the correct regulatory permissions are applied for.
- We identify and resolve potentially contentious issues before submission.
Construction of the FCA Application Pack
- We provide support with drafting or reviewing your regulatory business plan and provide assistance with the preparation of relevant forms.
- We lend our expertise in supporting the creation of financial projections and key assumptions including our templates.
- Take advantage of our Template Compliance Monitoring Programme appropriately tailored to your business in the submission of your firm’s application to the FCA.
Post Submission Queries
- We will assist with post-submission issues or queries raised by the FCA.
- We will advise on the best approach to take when dealing with the FCA.
Provision of Appropriate Compliance Documentation
- We provide compliance documentation after your application is submitted to the FCA in order to ensure you are ready to meet your regulatory and compliance obligations.
- The documentation includes compliance manuals, a tailored Compliance Monitoring Programme, registers and policies.
Ongoing Support
Many of the firms we help to get authorised go on to take up our ongoing support services to ensure they continue to meet their regulatory requirements, for more information please click here.
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