UK financial services will see a year of change in 2025

Some of the changes will merely pull former EU law properly into UK regulatory rulebooks with minor tweaks, but other proposals are new and significant and include a number of new regulated activities.

With the Financial Services and Markets Act 2023 (FSMA 2023) now law and a new government in place, firms can look to how the UK’s smarter regulatory framework will be built – a framework which will apply for years to come. This framework will encompass authorised and regulated firms as well as unauthorised firms.

In an environment of perma-change, it is easy for firms to get caught up in meeting compliance deadlines for individual legislative or regulatory initiatives. The early days of the year offer a good time for boardroom executives, and senior managers and others responsible for compliance, to look at the bigger picture; the core themes driving forthcoming policy and regulatory change, to ensure that their regulatory change programs take into account how such themes could impact long-term business strategies, and not just focus on piecemeal implementation.

Growth

In November 2024, the government opened a call for evidence on a planned new financial services growth and competitiveness strategy. The resulting strategy is expected to be published this spring. In the paper, the government identified five core policy pillars central to the sustainable growth of the sector.

• innovation and technology;
• regulatory environment;
• regional growth;
• skills and access to talent;
• international partnerships and trade;

The government also provisionally identified priority growth opportunities. These include:

• fintech;
• sustainable finance;
• capital markets, including retail investment;
• insurance and reinsurance markets; and
• asset management and wholesale services.

In addition to the strategy, other priorities within financial services policy were identified, including: increasing access to finance, to ensure that SMEs have the capital they need to grow and compete, and doubling the size of the mutuals sector to help drive innovation and inclusive growth throughout the UK. Further priorities include addressing barriers to financial inclusion, working with industry to roll-out 350 banking hubs over the current parliament, tackling financial and economic crime, and increasing representation of women in senior roles through the Treasury’s Women in Finance Charter.

The Financial Conduct Authority (FCA) has made various announcements along similar lines. Notably, at the end of November 2024, Emily Shepperd, the regulator’s chief operating officer, delivered a speech introducing the FCA’s five-year strategy, which will shape the FCA’s work up to 2030. The new strategy has four themes: becoming a more efficient and effective regulator; tackling financial crime; building consumer resilience; and supporting economic growth and innovation.

Whilst the FCA is independent of government, under FSMA 2023 the Treasury can require the regulator to “have regard to” certain government policy matters. We can expect to see more on the five year strategy in the first quarter of this year.  

Engagement

The idea of a more efficient regulator will be welcomed by firms. Knowing what regulatory expectations are and the likely timings for engagement with regulators, for example around variations of permission, allows more accurate planning for future growth and development. Too often we have heard grumbles from clients that dealing with the FCA is often like dealing with a black hole.

Whilst it is fair to say that the FCA has significantly improved on its own service levels metrics in recent times, there is still room for improvement on response times from the regulators – not least considering the tight response times that the regulators often impose on authorised firms. There also remains a need for better dialogue, both generically and specifically.

Outcomes-based regulation

Being an efficient and effective regulator involves being clear with firms on what is required of them. The FCA has already started discussing with industry how to remove inconsistent and unnecessary rules and regulations, which will help to avoid uncertainty. As an overarching theme in the coming months, the FCA wants to explore how the outcomes approach adopted under the consumer duty could be implemented on a broader basis.

Outcomes-based regulation has many attractions, including the potential removal of ‘red tape’, flexibility and the ability to respond quickly. However, it is a seismic change from the highly regulated and codified approach that the UK has followed for years. It comes with the requirement that firms will be able to identify and then be confident in their judgement of what is the “right thing”. This is not always easy, especially where there are competing interests even between cohorts of customers.

From the regulators’ side, an outcomes-based approach to regulation requires more, and better, guidance. That guidance needs to be easily identifiable and searchable. More and more guidance is being issued through speeches, ‘Dear CEO’ letters, feedback statements, and changes to website pages, among other channels – not all of which are clearly announced and searchable. This makes it difficult to identify what the FCA’s expectations on the “right thing” are.

If this approach continues, the question will not be “what do the rules say?”; the question will be “what does the guidance say?”, followed swiftly by a follow up question of “where is the latest guidance?” Firms will need to consider how they can stay on top of informal guidance.

July 2025 will mark the second anniversary of the introduction of the consumer duty. Following the initial rush to implement, the data is now coming through. This will enable the FCA to assess how well firms have complied. We have already seen this in FCA feedback statements, such as for board reports and the payments consumer duty multi-firm review. What is clear is that publications in relation to one sector, such as insurance, need to be reviewed by firms in other sectors, as there are lessons to be learned.

Expected in the first quarter of 2025 are the findings from the review of firms' treatment of customers in vulnerable circumstances as well as the findings on the call for input on whether, where and how, under the consumer duty, the FCA could simplify its requirements whilst ensuring support and protection for consumers. 

Data led

The outcomes-based approach is coupled with the increased reliance on data. The findings shared by the FCA from its review into firms’ approaches to complaints and root cause analysis show how the FCA is using data to inform its approach and identify good and poor practice. Data analysis to inform regulation and regulatory action will only increase in the coming years.

Designated activities by unauthorised firms

Against this fundamental issue of how best to approach regulation, there is nonetheless a lot of detailed change proposed for UK financial services, including the role of the designated activities regime (DAR). The DAR applies to areas where regulation is required but not necessarily FCA authorisation.

Under FSMA 2023, the DAR regime has already been applied to the public offer and admission to trading regime and the securitisation regime. Most recently, the DAR has been proposed for regulating unauthorised firms under the new consumer composite investments regime, which will replace PRIIPs. Eventually, all the ‘designated activities’ might be collated into a single statutory instrument so that we have the Regulated Activities Order complemented by the Designated Activities Order. Currently, the DAR is being introduced piecemeal, so knowing what is within the FCA’s purview is not straightforward.

Third party service providers

A major area to keep under review will be the regulators’ approach to outsourcing and to ‘critical third parties’ (CTPs).

Outsourced service providers will find themselves increasingly subject to regulation under the designation regime for CTPs even if they do not need to be authorised in the UK.

The CTP regime is a major initiative – the new rules came into force on 1 January 2025. The Treasury is still to designate which companies will be CTPs, however. 

Although CTPs now have their own regulatory framework, authorised firms using a CTP will need to continue to comply with their own third-party oversight obligations, including assessment and monitoring of the risks attaching to the use of CTPs. This is also being enhanced by the proposed changes to reporting on third party operational incidents, which will provide more data to the regulators on why and how operational incidents occur.

The new regulatory regime for CTPs does not reduce the obligation on authorised firms to undertake due diligence and ongoing monitoring of third parties whom they appoint. It will continue to be the case that a firm cannot delegate its regulatory liability.

Approach to enforcement

A further significant change, where an FCA board decision is expected in the first quarter of 2025, is the proposed new approach to enforcement. 

In its original consultation, the FCA proposed a ‘naming and shaming’ of firms early on in investigations, but this idea was met with significant resistance and the regulator has revised its position in its second consultation paper. An example of the softening of the original proposals is that it plans for the impact of an announcement on the relevant firm to form part of its public interest test and to be central to its consideration of whether to announce an investigation and name a firm. There will be more emphasis on enhanced supervision rather than formal enforcement.

Other major items for the coming year include the FCA’s market study into how pure protection insurance products are distributed following concerns that competition is not working well in that market. If previous market studies are an indicator of what might happen, we can expect to see significant changes in that market.

Consumer finance

A major rewrite of the Consumer Credit Act 1974 is long overdue, but with a demand on parliamentary time, it is questionable whether it will occur in 2025. In the meantime, the focus will be on FCA rules to the commission arrangements in connection with motor financing. There have been legal cases on the matter that have considered various issues, including levels of transparency and customer understanding of commissions received when motor dealers assist customers with obtaining credit from lenders to finance the purchase.

One of the cases has been appealed to the UK Supreme Court. The outcome of this case will impact the consumer finance sector and industries with discretionary commissions in connection with consumer-facing products that will need to comply with the new legal framework.

Cryptoassets

The new government has stated that it will be extending the scope of regulation of cryptoassets. The intention, amongst other things, is to extend the Regulated Activities Order to include cryptoasset trading platforms. A discussion paper on a proposed admissions and disclosures regime was published by the FCA in December 2024, with a further discussion paper signalled for early 2025.

Sustainability

On ESG, the focus to-date been heavily on climate and the environment, but the FCA’s sustainable finance rules apply to products or services with “sustainability characteristics” and these are defined to mean environmental or social characteristics, the FCA having previously decided that governance does not need to be specifically covered. The FCA will be publishing their proposals regarding the application of the sustainability disclosure regime (SDR) to portfolio managers in the second quarter of 2025. In the meantime, the grace period granted by the FCA to the funds sector for settling all the changes to names and investment policies and objectives will expire around Easter.  

Also expected in 2025 is a revised Stewardship Code and a policy statement on non-financial misconduct. In the interim, the FCA has published its culture and non-financial misconduct survey findings, which indicate its short-term expectations for behaviour.

Providing ESG ratings will also become a new regulated activity. The necessary legislation is expected to be laid before parliament in early 2025, although it is likely to take around four years for the new regime to be fully developed and for ESG ratings providers to become FCA-authorised.

During 2025 we may also start to see action being taken under the FCA’s anti-greenwashing rule. 

Overall, 2025 looks like it will be a pivotal year across the financial services industry.