Travers Smith's Alternative Insights: Artificial Intelligence – Humanity's sunset or the dawn of a golden age for financial services?

Key insightsRegulators favour evolution over revolution: The FCA's principles-based approach means that UK private capital firms face no new AI rulebook, but must apply existing governance frameworks more rigorously as AI tools become increasingly autonomous.Governance and resilience demand urgent attention: As AI deployment deepens, firms must map their exposure to AI supplier concentration, invest in cybersecurity, and ensure that senior managers — not machines — remain clearly accountable for decisions.It's a case of when, not if: Despite alarming predictions from within the AI industry about the risks, the productivity gains from disciplined AI deployment are real, and firms that build the right governance and skills infrastructure now will hold a lasting advantage.Links:one safety researcher at AnthropicMills Reviewearlier issue of Alternative Insightsjoint statement from UK regulatorsUK's Financial Policy Committee warned

Some clarity, at last: After nearly a year of debate, key elements of SFDR 2.0 seem to be all but agreed: a three-category product labelling regime that is unlikely to apply before early 2029. There will be further negotiations over the precise details.New benefits, new burdens: Alternative asset managers may be heartened by the EU Parliament's support for an opt-out for some professional-only AIFs and an exemption for legacy funds, but those positives may be offset by proposed new disclosure and reporting requirements that add cost and complexity.Private markets not specifically addressed: By failing to adopt the Council's provisions for real and private assets, the EU Parliament is running the risk that active ownership strategies — a cornerstone of private markets investing — may be locked out of the new framework, making its text a step backwards in key respects.Links:proposalpositionheraldedargued

Reform in name only: The FCA's proposals recycle large portions of EU-derived rules into new British ones. For larger managers, the regulatory burden will feel much the same.Small managers, bigger burden: The firms the reforms claim to help — smaller managers and new market entrants — may face more rules, as they will fall within a detailed regulatory framework for the first time.A missed strategic opportunity: Brexit was a chance to design a competitive, ground-up framework for asset management to attract international businesses to the UK, but the FCA has failed to seize it.Links:quarterly-statistical-release-q1-2026.pdfCP26/28: The UK AIFM Regimequarterly-statistical-release-q1-2026.pdf

Key Insights:Policy calm, but fragile: The UK government has engaged constructively with the private capital sector since 2024, but the incoming administration's intentions on capital gains tax and wealth taxes remain unclear.Tax disputes an increasing headache for businesses: The UK tax authority's escalating scrutiny of executive remuneration – reflected in high-profile court victories and an apparent jump in investigations – is presenting financial and operational challenges for the private capital sector.Asymmetry favours the agency: HMRC dictates the pace, scope and terms of enquiries.Links:https://www.ft.com/content/6b8cd156-c5bb-4cce-8c54-818fd19fab96?syn-25a6b1a6=1https://www.traverssmith.com/knowledge/knowledge-container/the-uks-carried-interest-tax-regime/https://www.traverssmith.com/knowledge/knowledge-container/uk-government-proposes-reform-of-taxation-of-llc-members/https://www.traverssmith.com/knowledge/knowledge-container/all-change-for-uk-aifmd

Sustainability issues are manageable: Policymakers and industry initiatives are clearing sustainability obstacles, but – although vital – these are usually not the main obstacle to defence investment in Europe.Due diligence challenges remain: Human rights and end-use risks cannot be fully eliminated, and governments and investors need to work hard to manage them.Commercial hurdles persist: The real barriers are commercial: for example, slow procurement, unclear demand signals, and lack of long-term contracts.Links:https://www.investeurope.eu/publications-policy/publications/2026/model-limited-partnership-agreement-lpa-language-for-defence-dual-use-investment/https://eiriscrn.net/grid/https://www.rusi.org/explore-our-research/publications/insights-papers/private-capital-uk-defencehttps://www.ft.com/content/72878c3e-a4c6-4e4d-86c1-6df11593e4ac?syn-25a6b1a6=1https://www.gov.uk/government/publications/the-defence-investment-planhttps://www.traverssmith.com/knowledge/knowledge-container/backing-british-can-the-uk-become-the-leading-destination-for-defence-investment/

Alternative Insights Summit 2026: In London last week, Travers Smith's clients and friends convened to discuss the key issues of the day in the private markets.Increasing access to private market returns: One theme was the need for UK pension funds to take more advantage of the returns available, while sponsors should approach the wealth market with transparency, good governance – and without over-reliance on potentially fickle capital.Defence is a vital opportunity: With Europe on a war footing, defence offers compelling returns across technology, infrastructure and supply chains – but government must provide faster procurement, clearer contracting and stronger demand signals to mobilise private capital at scale.Links:https://www.traverssmith.com/knowledge/events-container/alternative-insights-summit-2026/

Investors must face reality: A new report argues that a decade of disclosure targets and stewardship has failed to drive real-world decarbonisation, because technology development and government policy – not investor pressure – are the primary determinants of how quickly economies transition.Private markets have real advantages – but clear limits: A sponsors' greater agency over portfolio companies gives private markets a genuine edge, but fiduciary duties mean no manager can pursue climate goals unless it is in the interests of their LPs or consistent with a specific mandate.Policy engagement is the under-used lever: Private markets managers – closer than most to what makes a project financeable – are well placed to tell governments what conditions will attract private capital, and that expertise could be deployed more deliberately, and more often.Links:https://www.fmg.ac.uk/sites/default/files/2026-05/What-Can-Investors-Do-About-Climate-Change_final.pdfhttps://www.edf.org/https://www.lse.ac.uk/global-school-of-sustainabilityhttps://collaborate.unpri.org/group/761/abouthttps://www.bain.com/how-we-help/private-markets-decarbonization-roadmap/

KEY INSIGHTSGovernance creates value: Effective AI governance is not a compliance exercise – for private capital firms, it is a discipline central to value creation, which can be applied as rigorously to their own operations as to their portfolio companies.Humans must stay in control: An effective AI governance framework places human oversight and accountability at its core, with named individuals responsible, clear rules on data and tools, and meaningful review of every AI-generated output.Nimbleness is now essential: As technology, regulation and use cases evolve rapidly, firms must continuously adapt their AI policies – and embed a culture that empowers, even requires, staff to use AI actively while remaining alert to its risks.Links:Corporate governance | OECDResponsible-AI-Quick-Guide-for-Asset-Owners.pdfFCA, Bank of England and Treasury joint statement on frontier AI models and cyber resilience | FCAAnthropic Partners with Blackstone, Hellman & Friedman, and Goldman Sachs to Launch Enterprise AI Services Firm - BlackstoneThe EU AI Act – the current state of play | Travers Smith

KEY INSIGHTSEU is not retreating: Despite framing its agenda as simplification, the EU is rebuilding its environmental product regulation to be more digital, more enforceable and, in several areas, more consequential than before.Environmental regulation offers a strategic opportunity: The EU is recasting product rules as industrial policy, with significant implications for supply chain intensive businesses, among others.Greenwashing and PFAS demand action now: Tougher rules on environmental claims and accelerating litigation risk around forever chemicals mean that consumer-facing and industrials-exposed portfolio companies cannot afford to wait for regulatory certainty before acting.Links:A Simpler, Clearer and Better Enforced EU Rulebook - European CommissionMoving Parts: A Guide to the EU's Evolving Product Regulatory Landscape | Travers SmithEU's Digital Product Passport: Advancing transparency and sustainability | data.europa.euCircular Economy - Environment - European CommissionUpdates to EU CBAM: Balancing climate and competitiveness | Travers SmithAll news - ECHA

Deregulation is gaining ground: On both sides of the Atlantic, regulators are shifting focus toward burden reduction — but concerns about increasing risks are also prominent.Systemic risk concerns are real but manageable: Legitimate questions about hidden credit problems, bank-fund linkages and the widening distribution of private markets products deserve scrutiny — but the risks are being actively monitored, and sophisticated investors are still backing the asset class with conviction.Engage now, but with eyes open: The industry has a rare opportunity to shape a more proportionate regulatory framework in both the EU and UK — but caution is required: history suggests that what enters the legislative process as simplification does not always emerge that way.Links: https://www.traverssmith.com/knowledge/knowledge-container/aifmd-ii-the-next-phase-of-eu-alternative-investment-fund-regulation/https://www.traverssmith.com/knowledge/knowledge-container/eu-retail-investment-directive-and-regulation/https://www.efama.org/newsroom/news/ris-reality-check-why-we-must-hit-pause-retail-investment-strategyhttps://www.traverssmith.com/knowledge/knowledge-container/eu-market-integration-package/https://www.traverssmith.com/knowledge/knowledge-container/buy-side-story-the-fcas-2026-regulatory-priorities-for-the-sector/https://www.traverssmith.com/knowledge/knowledge-container/fca-private-market-valuation-review/https://www.sec.gov/newsroom/press-releases/2026-40-sec-cftc-jointly-propose-amendments-reduce-private-fund-reporting-burdenshttps://www.theguardian.com/business/2025/oct/14/jp-morgan-jamie-dimon-losses-private-credit-sectorhttps://www.ft.com/content/5c9939bf-3c85-43b0-b605-842f24cd8753https://www.bankofengland.co.uk/news/2025/december/boe-launches-system-wide-exploratory-scenario-exercise-focused-on-private-marketshttps://www.fca.org.uk/publication/regulatory-priorities/wholesale-buy-side-report.pdf