We expect the fast pace of policy announcements to continue, and amid the noise of regulatory change, it’s valuable to step back and reflect on the key themes set to characterise FS regulation this year. This is particularly crucial amidst an increasingly complex geopolitical and macroeconomic backdrop, and as the impact of technological disruption, intensifying competition and changing customer needs continue to drive transformation. So what are the key policy and regulatory drivers for the year ahead, and how should firms approach the resulting opportunities and risks?
The Government’s Mansion House announcements and call for evidence on an FS Growth & Competitiveness Strategy have set a clear direction of travel for the sector. The Government wants to increase growth and participation in UK capital markets, better attract global investment, enable a higher degree of risk taking, support the adoption of new technologies and the transition to net zero, and for the regulators to fully embed their secondary international competitiveness and growth objective.
The final strategy, due this spring, will clarify how the Government plans to achieve this. This may materially change the regulatory agenda, particularly if further clarity is given on how potential tensions will be resolved between innovation, growth, consumer protection and financial stability. As FCA CEO Nikhil Rathi has highlighted, greater risk may boost growth, but that requires society to accept the potential for higher losses.
Capital markets reforms will be a key area of focus. In 2025, the FCA will progress initiatives designed to improve the UK’s regulation of secondary markets. This will include establishing a consolidated tape for bonds, developing a framework for an equities tape, and finalising reforms to the commodity derivatives framework. Regulatory data requirements are another area of change, with the FCA reviewing transaction reporting under the UK Markets in Financial Instruments Directive, and better tailoring transparency requirements for bond and derivatives markets.
The growth and competitiveness agenda is set to bring opportunities - it could empower firms to explore new markets, launch innovative products, and adopt more creative approaches to how they comply with rules and guidance. There will be a renewed imperative for firms to transform processes and modernise legacy technologies, in order to capitalise on new income streams, enhance customer journeys, and drive efficiencies and better insights in how they approach compliance and risk management.
It’s also likely to make the regulatory regime more proportionate, tailored and less administratively burdensome. While more streamlined requirements should drive cost efficiencies, opening opportunities for strategic reinvestments, more bespoke or tailored regimes for different activities or markets may increase the potential for divergence across jurisdictions. This could raise operational risks and compliance costs for multinational firms.
The drive for growth needs to be balanced against regulators’ expectations for firms to proactively identify, assess and mitigate risks in an increasingly complex and dynamic environment. Companies must constantly evaluate their governance and risk management frameworks to ensure they have the necessary structures, processes, capabilities and information to maintain financial and operational resilience.
Attention should also be given to emerging risks from the rapid adoption of new technologies, as regulators will expect governance and risk frameworks to adapt accordingly. For firms using internal models to calculate capital requirements, these models must accurately reflect evolving risks. Assumptions should incorporate forward-looking perspectives and account for economic and geopolitical uncertainties.
The growth of private credit and non-banks will continue to bring competitive challenges for banks, and pose risks which the UK regulators will continue to scrutinise. The Bank of England’s system-wide exploratory scenario exercise, which looked at the risks to and from non-bank financial institutions, has prompted a range of further supervisory actions which will be taken forward this year. The FCA is also due to publish the findings from its review of private assets valuation practices this year.
Operational resilience and third party risk management
In addition, firms face growing challenges to remain operationally resilient, including an increasing reliance on third parties. This year brings important milestones such as the UK's full implementation of the operational resilience policy, proposed operational incidents and third-party rules, and the EU Digital Operational Resilience Act.
The regulators have also been given powers to oversee critical third parties (CTPs). The new regime will not change the accountability of FS firms but will give them access to new information from designated CTPs, which firms should review to identify opportunities for improved oversight.
“Big opportunities lie ahead, and the Government and industry can work in partnership to grasp them.”
Chancellor Rachel Reeves and City Minister Tulip Siddiq, Foreword of HMT’s FS Growth and Competitiveness Strategy Call for Evidence
The Government has stressed its commitment to consumer protection and inclusion, so we expect focus on this area to continue, albeit noting possible tensions between this and the drive for growth and competitiveness. The shift towards greater customer centricity creates opportunities for firms to embrace the use of data, analytics and technology to create hyperpersonalised offerings.
The Government is due to publish its financial inclusion strategy in 2025. Firms should consider the role they want to play in this, exploring opportunities such as targeting new customer groups, and embedding inclusive product and service design to reduce cost to serve.
We also expect the FCA to double down on its Consumer Duty supervisory efforts, continuing work on value, which has business model implications particularly for the insurance sector. There will be a growing focus on supporting consumer understanding and decision making, particularly in the context of various initiatives to boost rates of savings and investments.
With the FCA’s review of the consumer support outcome, the ongoing Advice Guidance Boundary Review, and disclosure reform, firms should prepare to meet higher standards in how they use communications to support consumer decision-making. They also need to understand the additional associated risks. Under proposals for a new framework for Consumer Composite Investments, for example, Key Information Documents are to be replaced by a requirement to ensure customers ‘engage with understandable product information and use it’, which feels like a much higher hurdle.
Other areas to watch include the development of a regulatory framework for Buy Now Pay Later. The FCA has signalled its intention to look carefully at the affordability rules, which could be an important test case for the regulator’s risk appetite.
The FCA is also due to announce next steps for its motor finance commission review in May 2025, which could result in a significant redress bill. The review has also exposed challenges in the redress system, which the regulator is exploring more broadly. Changes to the redress system could give firms greater confidence to take more innovative approaches, and support building greater risk into the system.
The Chancellor pledged in her Mansion House speech to make the UK a global leader in sustainable finance. This year, the Government will consult on taking forward transition plans, consider the value case for a UK taxonomy, and proposals for economically significant companies disclosing information using future UK Sustainability Reporting Standards (the UK’s adoption of the ISSB standards).
Meanwhile, the FCA is to introduce disclosure requirements for listed companies in line with the new Sustainability Reporting Standards, and expand its Sustainability Disclosure Requirements (SDR) regime to portfolio management. By the end of the year, larger asset managers will need to make their inaugural SDR entity-level disclosures. Additionally, the PRA intends to update its expectations for firms’ management of climate-related financial risks, while the FCA and PRA are due to confirm new diversity and inclusion requirements.
Firms can unlock business value by taking a strategic approach to complying with these various initiatives, and embedding sustainability into their wider business strategy. They also need to manage geopolitical tensions and international divergence, which are expected to become more pronounced following the US election, and as they continue preparations to comply with non-UK regulations such as the EU’s Corporate Sustainability Reporting Directive.
To keep pace with the rapid speed of technological change, we expect a drive for faster progress on initiatives such as Open Finance, tokenisation and the UK’s payments infrastructure, which firms should capitalise on as they develop their transformation, digitisation and cost reduction programmes.
Artificial intelligence
Artificial intelligence (AI) will remain high on the regulatory agenda, with the Government planning to introduce highly-targeted legislation focusing on the most powerful AI models, and to take forward all recommendations set out in the AI Opportunities Action Plan report.
While the FS regulators have so far made clear that existing technology-agnostic frameworks have been sufficient to identify and mitigate AI risks, they are exploring when and if the current rules need to change. Firms should keep a close eye on potential changes to the regulators’ approach, while continuing efforts to deploy AI responsibly and capitalise on opportunities for productivity and transformation. Firms will also need to prepare for the enforcement of regulation in other jurisdictions, including the EU AI Act.
Digital assets
In November 2024, the City Minister Tulip Siddiq declared that “cryptoassets are here to stay”, announcing plans to publish draft secondary legislation as early as possible in 2025. A few days later, the FCA unveiled its crypto roadmap. It’s due to issue discussion papers and consultations throughout 2025, and implement the full framework during 2026.
Digital assets have the potential to have a transformative impact on FS. Existing digital asset firms and prospective new market entrants should begin to assess their systems, operations and practices, to identify potential gaps against the new requirements, some of which will become clearer after regulatory consultations.
Firms should also keep abreast of global developments. The EU, UAE and Asia are fast developing more proactive frameworks, while we may see a fresh approach to regulation in the US.
Payments, Open Finance and Smart Data
HMT published its National Payments Vision in November 2024, marking a commitment to a less complex regulatory change agenda, and a resilient payments infrastructure. The Vision puts innovation at the core of the Government’s plans, with Open Banking and Central Bank Digital Currency key initiatives to be further explored.
The Government has also taken forward previous initiatives to establish the legislative basis for new Smart Data schemes, and confirmed its intention for the Open Banking framework to lay the foundations for Open Finance. Firms may need to consider the impact of changes to Open Banking and schemes in other sectors, and the potential for emerging business models.
Digital identity and authentication
Digital identity is emerging as a potential solution to the ongoing challenge of rising levels of online fraud. The Government has advanced previous initiatives through a new Bill to establish a Trust Framework on a statutory footing and a trust mark for registered providers.
Firms may consider how they can leverage digital identity solutions to support efforts to combat fraud, as well as addressing other challenges such as streamlining customer journeys, and promoting financial inclusion.
Wholesale markets
Innovation in wholesale markets in another priority area. In 2025 the FCA will launch the Private Intermittent Securities and Capital Exchange System (PISCES) Sandbox to trial the development of a new type of secondary market for trading shares in private companies on an intermittent basis. The FCA has also signalled it is open to ‘adjustments’ to the regulatory framework to encourage wholesale trading and improve market liquidity, including potentially tailoring requirements for ‘specialised firms’.
From implementation to transformation - take a strategic view of regulatory initiatives, and use the policy and regulatory agenda as a catalyst to drive transformation and strategic change programmes.
Identify opportunities - whether that be exploring new markets, launching innovative new products, or identifying high-impact use cases for AI or other technology solutions.
Proactively manage emerging risks - use technology-led risk and compliance solutions to identify, assess and mitigate risks in an increasingly complex and globally fragmented policy environment.
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