London, UK – The United Kingdom’s investment fund sector is a cornerstone of its financial services industry, boasting a vast array of assets under management and a significant contribution to the nation’s economic output. As of May 2025, the regulatory landscape governing these funds is in a state of dynamic evolution, shaped by post-Brexit independence, a heightened focus on consumer protection, technological advancements, and ongoing efforts to foster growth and competitiveness. Fund managers, distributors, and investors alike must navigate this complex environment, understanding the key regulatory shifts and what they signify for the future.
Post-Brexit Divergence: Shaping a “Smarter Regulatory Framework”
The UK’s departure from the European Union has provided the Financial Conduct Authority (FCA) and HM Treasury with the opportunity to reshape financial regulation to better suit the unique characteristics and priorities of the UK market. This drive towards a “smarter regulatory framework” is a central theme in the current regulatory agenda.
A key area of reform lies in the regulation of Alternative Investment Fund Managers (AIFMs). Historically, the UK largely implemented the EU’s Alternative Investment Fund Managers Directive (AIFMD). However, HM Treasury and the FCA have been actively consulting on proposals to move away from these “overly prescriptive” rules in favour of a more flexible, tailored UK regime. As of April 2025, HM Treasury has published a consultation paper outlining plans to streamline the regulatory framework for AIFMs, with a focus on proportionality based on firm size and activities. This could lead to a significant reduction in detailed requirements for smaller AIFMs and a more graduated approach for mid-sized firms, while still ensuring robust oversight for the largest players. These changes are expected to foster greater agility and competitiveness within the UK’s alternative asset management industry.
Similarly, changes to the UK’s retail fund regime are anticipated. The FCA aims to simplify requirements on asset managers, which could involve re-evaluating rules for non-UCITS retail funds to make them more consistent and proportionate. The goal is to reduce regulatory burdens where appropriate, fostering innovation and reducing barriers to entry for firms, ultimately supporting growth in the sector.
Consumer Duty: Embedding a Culture of Good Outcomes
A defining feature of the UK’s regulatory approach is the Consumer Duty, which came into full force for new and existing products in July 2023, with a further deadline for closed book products in July 2024. As of May 2025, the ripple effects of this fundamental shift are profoundly impacting how investment funds are designed, distributed, and managed.
The Consumer Duty mandates that firms act to deliver good outcomes for retail customers. This goes beyond mere compliance and requires a tangible, measurable improvement in customer experiences. For investment funds, this translates into several key expectations:
- Understandable Communications: Fund managers must ensure that all communications, from marketing materials to ongoing statements, are clear, fair, and not misleading, allowing customers to make informed decisions.
- Products and Services Meeting Needs: Funds must be designed to meet the needs of an identified target market, considering various customer segments, including vulnerable customers. This involves robust product governance and oversight throughout the product lifecycle.
- Fair Value: Firms must assess and demonstrate that the price paid for a fund’s services represents fair value to the customer. This requires scrutinising all charges and fees, including those within the fund’s operating cost and any distribution charges.
- Effective Customer Support: Customers must receive timely and appropriate support throughout their journey, from pre-sale information to post-sale queries and complaints handling.
The FCA has made it clear that it expects the Consumer Duty to be embedded into firms’ organisational culture, governance structures, and day-to-day operations. Reviews conducted by the FCA in late 2024 and early 2025 have highlighted areas where firms are excelling (e.g., reviewing communications, tailoring support for vulnerable customers) but also where further work is needed (e.g., overemphasis on process over outcome, inaccessible post-sale support). Expect continued FCA scrutiny and supervisory actions in this area through 2025, with a focus on firms demonstrating tangible improvements in customer outcomes, not just compliance with processes.
Senior Managers and Certification Regime (SMCR): Accountability in Focus
The Senior Managers and Certification Regime (SMCR) continues to be a cornerstone of accountability within the UK financial services sector, including for investment fund firms. While the regime has been in place for some time, the FCA, in collaboration with HM Treasury and the Prudential Regulation Authority (PRA), is conducting a review to enhance its effectiveness.
For investment funds, SMCR ensures that senior individuals are personally accountable for their actions and for the conduct of those they manage. This includes responsibilities related to fund management, risk management, compliance, and client money. The ongoing review aims to streamline certain aspects of SMCR, making it more efficient and outcomes-focused, without diluting its core principles of individual accountability. Firms should expect continued emphasis on clear allocation of responsibilities, robust governance frameworks, and a culture that prioritises good conduct.
Emerging Technologies and New Asset Classes: The Regulatory Frontier
The rapid advancement of technology continues to reshape the investment fund landscape, bringing new opportunities and regulatory challenges:
- Digital Assets and Crypto-funds: The UK’s approach to cryptoasset regulation is evolving. While the EU’s MiCA (Markets in Crypto-Assets) regulation sets a comprehensive framework, the UK is developing its own bespoke regime. The FCA has engaged with the industry on the future framework for a safe, competitive, and sustainable crypto sector. As of early 2025, specific crypto-related fund offerings are still under careful review, with the FCA using existing powers to encourage strong standards for firms registered for AML supervision. Expect further clarity and potential specific rules for investment funds dealing in cryptoassets as the UK’s broader crypto regime matures.
- Artificial Intelligence (AI) and Machine Learning: The increasing use of AI in fund management (e.g., for portfolio optimisation, risk analysis, compliance) raises questions about data ethics, algorithmic bias, model risk management, and the explainability of AI-driven decisions. While a specific “AI for funds” regulation isn’t yet in place, the broader EU AI Act, which will apply from early 2025, could set precedents. Fund managers leveraging AI will need to demonstrate robust governance, risk controls, and transparency around their AI systems.
- Tokenisation: The tokenisation of traditional assets and fund units holds significant potential for efficiency and liquidity. The FCA is working with global counterparts to assess regulatory and supervisory principles that could apply to the use of tokenisation to support consumers and protect market integrity. This collaboration could pave the way for broader adoption of asset tokenisation within the fund industry.
Sustainability and ESG: Integrating Green Finance
The focus on Environmental, Social, and Governance (ESG) factors continues to intensify, with a growing expectation for transparency and integrity in sustainable investment products.
- Sustainability Disclosure Requirements (SDR): The FCA’s SDR, which includes a labelling regime for investment funds, is designed to combat “greenwashing” and provide clearer information to investors about the sustainability characteristics of products. While the initial deadline for compliance with naming and marketing rules for retail-facing UK funds was April 2025, firms will continue to embed these requirements and address any ambiguities in their disclosures. Expect ongoing FCA oversight to ensure firms are meeting the spirit of the SDR rules.
Conclusion: A Dynamic and Outcomes-Focused Future
The regulation of investment funds in the UK in May 2025 is characterised by a strong emphasis on post-Brexit regulatory divergence, an unwavering commitment to consumer protection through the Consumer Duty, and proactive engagement with technological advancements and new asset classes. The FCA’s strategic priorities for 2025/26 highlight its aim to be a “smarter regulator,” supporting growth, helping consumers, and fighting financial crime.
Fund managers operating in the UK should anticipate a continued evolution of the rulebook, with a clear trend towards proportionality and an outcomes-focused approach. Adapting to the granular requirements of the Consumer Duty, engaging with the ongoing reforms of the AIFMD regime, and staying abreast of developments in digital asset regulation will be paramount. The future of UK fund regulation promises to be dynamic, aiming to foster innovation and competitiveness while ensuring a high standard of investor protection and market integrity in a rapidly changing global financial landscape.
