UK Law and Practice Contributed by: Fergus Wheeler, Paul Yin, Tracy Liu and Medha Vikram, Latham & Watkins
2. Regulatory Environment 2.1 Licensing and Regulatory Approval Lenders must have an appropriate licence to carry out regulated activities in the UK. Whether lending requires a licence depends on the nature of the loan and the borrower’s sophistication: • no licence is needed for cash loans over GBP25,000 for “business use”; and • preferred equity/bonds/convertible instruments can be issued to lenders if the lender is a “professional client” under UK Financial Conduct Authority (FCA) regulations. Corporate lending alone does not generally require UK authorisation but is subject to UK AML requirements, necessitating FCA registration. Offshore entities lend - ing to UK borrowers are typically exempt. Lenders can generally take security over a UK borrow - er’s assets unless this involves mortgages or property rights over residential real estate. 2.2 Regulators of Private Credit Funds The FCA is the primary regulator for private credit funds in the UK. 2.3 Restrictions on Foreign Investments UK-based private credit managers must adhere to UK sanctions regimes under the Sanctions and Anti- Money Laundering Act 2018, which is the legal basis for imposing, updating and lifting sanctions. HM Treasury, through the Office of Financial Sanctions Implementation, enforces financial sanctions, includ - ing asset freezes on designated persons and restric - tions on investment and financial services. Foreign investment in UK private credit funds is only allowed if it does not come from sources on the UK financial sanctions lists or violate UK sanctions. 2.4 Compliance and Reporting Requirements UK FCA-regulated private credit funds must comply with various regulatory and reporting requirements. Generally, the UK regulatory regime requires:
Challenges in Fundraising for Private Credit Providers One-stop shop Capital allocators prefer a one-stop shop approach with a pan-European focus, allowing consolidated investment across the capital structure for a stream - lined strategy. Saturation The upper mid-market is saturated, increasing com - petition. Interest is shifting to the less competitive lower mid-market, offering more opportunities and potential returns. Challenges for newcomers Capital concentration around established funds poses challenges for new entrants. Established funds with proven track records and resources require newcom - ers to differentiate themselves through innovative strategies or a niche focus. Default risk Private credit market participants report low default rates despite macro challenges. However, lend - ers must monitor and manage default risks, as they impact capital access. 1.8 Impending Regulation and Reform The level of regulatory scrutiny in private credit mar - kets increased in 2025. The government ran an inquiry into the growth of private markets in the UK, which published a detailed report and recommendations in January 2026. Recommendations include that the UK financial services regulators should continue to moni - tor developments in the private credit markets closely. The Bank of England launched a system-wide explor - atory scenario exercise at the end of 2025, which will explore how private credit markets might respond to a severe downturn, and any wider financial stability implications. As private credit funds broaden their capital sources to include high net worth individuals and family offices, they may face increased regulatory scrutiny, despite not being deposit-taking institutions, as the private credit market continues to mature.
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