Q4 2025 - European Regulatory Update for Funds

The final quarter of 2025 was marked by multiple regulatory developments in the UK and EU, which will be of interest to European private fund managers and non-European private fund managers that are active in Europe.

This update highlights the following topics observed during this period, including:

1. EU update - SFDR 2.0
2. EU update - Market Integration Package proposal
3. EU update - AIFMD 2
4. EU update - Commission Q&A on ELTIF Regulation
5. EU update - Approval of EU Retail Investment Strategy
6. UK update - FCA Consumer Composite Investments regime
7. UK update - FCA MiFID Client Categorisation proposal
8. UK update - FCA Policy Statement - Capital Requirements
9. UK update - FCA Conflicts of Interest Review

1) EU update - SFDR 2.0

On 20 November 2025, the European Commission proposed a set of amendments to the Sustainable Finance Disclosure Regulation or 'SFDR' as part of its efforts to simplify, streamline and reduce the burden of sustainability-related disclosures and requirements on market participants without undermining agreed policy objectives.

Please refer to our client alert "SFDR 2.0 - The Legislative Process Begins" for more detail.

2) EU update - Market Integration Package proposal

On 4 December 2025, the European Commission published the "Market Integration Package" ("MIP"), a set of proposals aimed at further integrating EU financial markets and breaking down perceived "barriers."

Operatively, those aspects of the MIP proposals relevant to EU AIFMs (and other firms) managing or marketing funds in the EU, are:

• The 'Master Directive' - amending, amongst others, AIFMD and MiFID
• The 'Master Regulation' - amending, amongst others, CBDF and MiFIR

The headline, relevant points addressed are:

• Marketing and Pre-Marketing: Many marketing provisions under AIFMD will be moved to the CBDF Regulation. There will be a new, more efficient passporting procedure including notification and de-notification procedures (utilising a central data platform). Pre-marketing for EU AIFMs will be simplified - there will be no reverse solicitation prohibition as a consequence of pre-marketing and no ability for national competent authorities to gold-plate. Pre-marketing by non-EU AIFMs is not addressed.
• Depositaries: A depositary passport will also be introduced, allowing an AIFM to appoint a depositary from a different member state to that in which the AIF is established.
• Delegation: Intra-group delegation will no longer be treated the same as third-party delegation, with many of the due diligence and ongoing supervisory requirements disapplied.
• Changes to ESMA's supervisory role: ESMA shall identify each EU group (containing an AIFM) that has an aggregate "net asset value" of €300 billion and the AIFMs within the group are established in more than one Member State, or the AIFM(s) manage or market AIFs in more than one Member State. For each, ESMA will carry out an annual review of the supervisory approaches in the application of the requirements of AIFMD that are taken by the national competent authorities with respect to AIFMs within each group.

3) EU update - AIFMD 2

As readers will be aware from our previous publications, AIFMD 2 is due to be implemented across the EU in April 2026, but, in certain key areas, the crucial "level 2" regulatory guidance is only now being published.

The European Commission formally adopted the text of the level 2 regulatory technical standards ("RTS") towards the end of November 2025 relating to liquidity management tools under both the UCITS and AIFM directives.

We have written previously about the level 2 guidance relating to liquidity management tools for open-ended funds. The substance of the new rules remains largely unchanged as compared to the earlier draft, and it is at least helpful for the industry to have clarity on the final shape of the rules in advance of the deadline for implementation (if not far in advance).

4) EU update - Commission Q&A on ELTIF Regulation

As mentioned in our Q2 2025 Client Alert, in 2025 the European Commission considered various important questions received from industry on the interpretation of the ELTIF Regulation.

In December 2025, the European Commission published an initial raft of responses to those questions. These included guidance on technical issues relevant to managers of open-ended ELTIFs (e.g., how to interpret the minimum holding period, whether an ELTIF can set a percentage of liquid assets that is lower than the maximum percentage of liquid assets required by law), but also more general topics relevant to all ELTIFs, including the manner in which investments held indirectly by an ELTIF through intermediate entities (e.g., SPVs) interact with the portfolio composition and borrowing requirements under the ELTIF Regulation, and whether such intermediate entities need to qualify as "qualifying portfolio undertakings."

Further European Commission guidance, including on the borrowing of cash and the calculation methodology for 12-month cash flows, remains pending.

5) EU update - Approval of EU Retail Investment Strategy

The EU Retail Investment Strategy, a package of proposals to significantly overhaul the EU legal framework for retail investments (currently underpinned by several key pieces of legislation, including EU MiFID II and AIFMD), saw progress towards the back end of the year, with political agreement reached on the package by the EU Parliament and Council in December 2025 (see press release here). The agreement follows the EU Commission's original proposal in May 2023, which has seen protracted negotiation. The agreed legal texts have not yet been published, but technical work will continue with a view to finalising them in early 2026.

The proposed rules impose new 'value for money' requirements for manufacturers and distributors of investment products. Firms will be obliged to identify and quantify all costs and charges related to their investment products based on agreed standards (including peer groupings for products and national supervisory benchmarks), and to assess whether total costs and charges are justified and proportionate.

The RIS also proposes measures including improvements to risk warnings, simplified suitability and appropriateness assessments, enhanced best interest and inducements requirements, firmer provisions to ensure marketing is fair, clear and not misleading, and updated PRIIPs KID templates imposing strengthened standards. The agreed package also includes updated client classification rules, which will allow more retail investors to be treated as professional clients.

Once the Level 1 changes are finalised, attention will turn to the Level 2 and 3 measures and delegated acts, all due to follow. Member states will have 24 months to transpose the rules following their publication in the Official Journal, and they will start applying 30 months after publication (with the exception of the new rules under PRIIPs, which will start applying 18 months following publication).

When the final rules do land, they will require careful consideration and implementation by firms. Governance and distribution arrangements may be subject to significant uplift, particularly for those firms with substantive EU and UK operations which may be subject to diverging regimes (for example, navigation may be required between the new RIS value for money requirements and the UK Consumer Duty). Non-EU product manufacturers with EU distribution networks will also need to take heed of the new requirements.

6) UK update - FCA Consumer Composite Investments regime

Following two open consultations, on 8 December 2025 the FCA published a Policy Statement (PS 25/20) setting out its final Consumer Composite Investments ("CCIs") rules. These rules, published as part of a suite of measures branded as a 'landmark package to boost UK investment culture,' introduce a single, unified, domestic regime governing disclosures to be provided to retail investors in respect of all retail investment products, including investment funds. The new CCI regime intends to support retail investors in making more informed investment decisions whilst affording firms greater flexibility in the manner in which the nature, investment objectives, risks and costs of their products are disclosed to retail investors. The rules will replace a number of disparate regimes currently in force, including the 'on-shored' EU PRIIPs Regulation and the disclosure requirements of the UCITS Directive.

A CCI is defined in The Consumer Composite Investments (Designated Activities) Regulations 2024 as an investment where returns depend on the performance of an underlying or reference asset, or how its value changes over time. The term encompasses a wide range of products, including investment funds, structured products, structured deposits, contracts for difference, insurance-based investment products and other instruments.

Key elements of the CCI disclosure regime include:

• Manufacturers of CCIs are required to prepare a 'product summary,' being a short and concise successor to the Key Information Document, or "KID," setting out the essential characteristics of the CCI, and provide this to UK retail investors in good time before the CCI is made available to these investors. The product summary must be distinct from other marketing materials and contain sufficient information to function as a standalone document. Disclosures in the product summary must be easily comprehensible to retail investors and should equip them to make effective, timely and informed investment decisions.
• Product summaries must include certain prescribed heads of information, referred to as 'core information disclosures,' in machine-readable form. These heads of disclosure include general product characteristics, costs and charges information, risk and return information and, where applicable, past performance.
• Manufacturers of products do not need to prepare CCI disclosures in respect of products which are marketed by way of materials featuring clear and prominent disclosures to the effect that the product is intended for and only available to professional investors and whose distribution strategy and arrangements are appropriate for such non-retail offering.
• Distributors of CCIs are only permitted to distribute such products to UK retail investors where certain conditions are met. These include a requirement to ensure that an up-to-date product summary is made available to the retail investor ahead of its investment, that the distributor take reasonable steps to promote engagement with the salient disclosures in the product summary, and that a version of the product summary in durable medium is provided to the retail investor.
• The new Chapter 2A of the FCA Handbook's Product Disclosure sourcebook ("DISC") obliges manufacturers and distributors of CCIs to cooperate and share information with each other in order to ensure that the information needs of investors are met. However, distributors are not permitted to reformat or modify the product summaries they are provided by manufacturers.

The new CCI disclosure rules certainly provide manufacturers greater flexibility to adapt regulatory disclosures to the product in question, particularly when compared to the highly prescriptive requirements of the PRIIPs regime. However, the extent to which the product summaries enhance the ability of retail investors to make better and more informed investment decisions will depend on the consistent application of the new rules by firms and continued feedback and guidance from the FCA. Counterintuitively, the lack of prescribed templates may also create a greater operational and compliance burden for firms who must now design and prepare compliant product summaries from a blank sheet of paper.

Whilst firms can choose to comply with the new CCI regime by 6 April 2026, the final rules will come into effect on 8 June 2027, and firms may continue to use PRIIPs and UCITS disclosures until that point.

7) UK update - FCA MiFID Client Categorisation proposal

Further to the announcement in July 2025 of its intention to review client categorisation rules, the FCA in December 2025 published a detailed consultation paper (CP 25/36) which sets out its proposals to reset how wholesale firms distinguish between retail and professional investors. These proposals seek to liberalise the elective professional client test with a view to enhancing growth whilst simultaneously maintaining consumer protections.

The FCA's proposed changes to the existing client categorisation rules include:

• Streamlining the concept of 'per se professional clients,' including by removing the prescriptive list of entities falling within this category and updating the thresholds applicable to 'large undertakings' from Euros to GBP.
• Removing the quantitative limb of the elective professional client test in 3.5.3(2) of the FCA Handbook's Conduct of Business sourcebook. This change will be particularly well received by the private funds industry to which the prescriptive quantitative tests in MiFID have always been ill suited.
• Enhancing the qualitative limb of the elective professional client test (now referred to as the 'qualitative assessment'), including by providing a non-exhaustive list of factors that should be taken into account in conducting such assessment.
• Introducing a wealth assessment whereby clients with £10 million or more in investible assets or cash would not need to be subject to the 'qualitative assessment.'
• Requiring alignment between a firm's opt-up processes and its obligations under the FCA Consumer Duty and general duty to act in the client's best interests.
• Improving safeguards around clients opting out of retail protections.

Under the FCA's proposals, firms would be required to review the categorisation of all existing elective professional clients within one year of the new regime coming into effect. If implemented, this may represent a considerable operational challenge for some firms though this should not impact point-of-sale investor categorisation considerations (e.g., in the context of the sale of fund interests where the UK AIFMR imports the MiFID professional client standard into its 'professional investor' definition).

Note that no changes are proposed with respect to the client categorisation of local authorities and local authority pension schemes in anticipation of forthcoming changes to the consolidation of pension schemes.

The proposals in CP 25/36 have received a warm initial welcome from the private funds community on the basis that they afford firms greater flexibility in assessing the expertise, knowledge and experience of elective professional investors, and in the hope that they may reduce the barriers to investment in private products by sophisticated and sufficiently resourced persons.

In addition to the proposed reform of the client categorisation rules, CP 25/36 also sets out proposals in relation to the simplification and rationalisation of conflicts of interest rules which are currently set out in Chapter 10 of the Senior Management Arrangements, Systems and Controls sourcebook of the FCA Handbook. This body of rules has accumulated gradually over time and is, in places, substantively duplicative.

8) UK update - FCA Policy Statement - Capital Requirements

In late 2025, the UK Financial Conduct Authority (FCA) published Policy Statement 25/14 intended to simplify and consolidate certain of the rules relating to regulatory capital UK firms are required to maintain as a condition of their FCA authorization.

This will not apply to all UK regulated firms, but rather those regulated as 'MIFIDPRU investment firms' (e.g., investment advisers and discretionary investment managers, as well as certain others), as well as parent companies of such regulated firms that are required to comply based on consolidated capital requirements.

The new rules do not change the level of regulatory capital firms are required to hold or the way in which it must be held, rather they are intended to provide clarification, reduce unnecessary complexity and remove provisions that are not relevant to investment firms.

The new rules will come into force in April 2026, though as referenced above, they are not expected to materially change firms' existing regulatory position.

9) UK update - FCA Conflicts of Interest Review

In Q4 2025, the FCA launched its Conflicts of Interest and Fair Treatment of Customers in Private Markets Review ("Conflicts Review").

The Conflicts Review commenced with a multifirm survey which required respondents (a sample of UK asset management firms) to provide detailed information on how they identify, manage and mitigate conflicts of interest while managing or advising private equity, private credit and real estate funds. Responses were due 2 January 2026.

The purpose of the survey is to enable the FCA to gather insight into the range of practices across the industry, particularly around conflicts governance, oversight and conflict management frameworks. This is consistent with the FCA's renewed focus on conflicts of interest in private markets generally-various recent publications from the FCA have highlighted concerns about co-investment by funds under common management, preferential treatment of investors, and internal governance and disclosure frameworks. It is also signals a continuing trend on the part of the FCA toward more assertive, evidence-based supervision.

Consistent with its previous Private Markets Valuation Review (which concluded in early 2025), it is expected that the FCA will ultimately provide feedback to the industry on areas of good practice and perceived weakness, with the goal of ultimately ensuring the fair treatment of investors in private markets funds. Such feedback will be of significant importance to the UK asset management industry when it is received.

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