U.K. smarter regulatory framework

The U.K. has been engaged since Brexit in a programme of reform to revoke and replace assimilated law relating to financial services. The reform process involves the repeal and/or amendment of various legacy EU law requirements, which have since been assimilated into U.K. domestic law. The objective is to make the U.K. financial markets more competitive and the U.K. regulatory regime more agile, with firm-facing rules moved to the regulators' rulebooks. This process has already resulted in important divergences from the EU's financial services framework (for instance, numerous divergences are already evident in the MiFID framework with more likely to arise, and there will also be meaningful divergences between the U.K. and EU short selling regimes), but much of it is administrative ‘copy and paste’ of EU law into domestic rules, which is not intended to result in substantive change.

Significant progress has been made on the reform programme. For some areas, the process is complete with legislation and regulator rules in force. For example, the Securitisation Regulations 2024 and related FCA and PRA rules have applied since 1 November 2024, and the Data Reporting Services Regulations 2024 and related FCA rules have applied since 1 April 2024. In other areas, legislation is partially in force, but completion of the reform process requires regulator rules. For example, the Public Offers and Admissions to Trading Regulations 2024 partially entered into force in 2024. The FCA's final rules and policy statement are due in 2025. In other areas, there are draft regulations and the FCA final rules are due to be published, such as for money market funds, or the FCA is due to consult on its proposed rules, such as for short selling. The FCA is expected to take these forward in 2025. Following the government's November announcement that further legislative changes to the MiFID framework will be made, the FCA and PRA will in 2025 finalise the rules that transfer the firm-facing requirements of the MiFID Org Reg into their rules, and the FCA will consult on proposed rules on transaction reporting requirements. Legislation to implement these changes is also expected this year. There are still a number of files for HMT to review and the regulators need to consult on rules in these and other areas. The next phase of HMT's review and reform process includes the UCITS Directive, AIFMD, The E-Money Directive, the Payment Services Directive, certain parts of EMIR relating to CCPs and the equivalence regime. 

U.K. designated activities regime

FSMA 2023 introduced a new regulatory regime, the Designated Activities Regime (DAR), which gives the FCA powers over market participants engaging in particular activities. 

HM Treasury (HMT) has the power to make regulations providing for an activity to be a 'designated activity', if it relates to "financial markets or exchanges of the United Kingdom", or "financial instruments, financial products, or financial investments that are (or are proposed to be) issued or sold to, or by, persons in the United Kingdom". Persons carrying out a particular designated activity will be required to comply with the applicable legislative requirements and the regulators' rules unless an exemption is available.

Considerable progress has been made to introduce the DAR. The draft Financial Services and Markets Act 2000 (Designated Activities) (Supervision and Enforcement) Regulations 2024 (the "DAR Supervision Regulations"), consolidate the FCA's supervision and enforcement powers for designated activities under the draft Short Selling Regulations 2024 and the Consumer CompositeInvestments (Designated Activities) Regulations 2024. It is intended that this supervision and enforcement framework will be extended to activities designated by HMT in the future. The Securitisation Regulations 2024 and the Public Offer and Admissions to Trading Regulations 2024 include standalone supervision and enforcement provisions. 

The DAR maintains the purview of the FCA over certain activities, products and conduct regulated by assimilated EU law but that are not regulated activities under FSMA. To date, only the DAR regime for securitisations has been fully implemented, with the Securitisation Regulations 2024 and the regulator's related rules entering into force on 1 November 2024. This coincided with the revocation of the Securitisation Regulations 2018 and related EU assimilated law. The Financial Services and Markets Act 2000 (Public Offers and Admissions to Trading) Regulations 2024 have been made, however, the FCA's rules are yet to be finalised—these are expected in the first half of 2025. 

There are also separate draft statutory instruments designating other activities such as the draft Short Selling Regulations 2024 and the draft Consumer Composite Investment (Designated Activities) Regulations 2024. The FCA is consulting on a new product information framework for Consumer Composite Investments (responses are due by 20 March 2025) and plans to publish a further consultation with draft rules for consequential amendments and transitional provisions in early 2025. The FCA also plans to issue a policy statement and final rules in the first half of 2025. The FCA's consultation on short selling rules is still to be launched.

Regulatory perimeter artificial intelligence

The U.K. has not yet introduced any AI-specific legislation or rules for the financial sector, relying instead on general regulation which is technology neutral. In 2025, the U.K. government will progress implementation of the new AI Action Plan. The FCA and PRA will continue to explore what, if any, changes should shape their future regulatory approach to AI, including through the FCA's inaugural
'AI Sprint' at the end of January 2025 and the Bank of England's establishment of an AI consortium.

In contrast, the EU's Artificial Intelligence Act will mostly apply from 2 August 2026, setting out a regulatory regime for various categories of AI providers, developers and suppliers. Some provisions of the AI Act apply earlier. Certain prohibited AI systems will be banned under EU law from 2 February 2025, and penalties and the rules on general-purpose AI models will apply from 2 August 2025. Financial institutions will be focused on mapping the AI systems they are using, determining their status under the EU AI Act for these AI systems (i.e., deployer
or provider), implementing compliance frameworks and considering contractual measures (e.g., transparency and documentation, data governance and liability).

Financial promotions and marketing

In recent years, wide-ranging and significant changes have been made to the U.K.'s financial promotion regime. These include the introduction of a regulatory gateway for authorised firms to approve financial promotions of unaffiliated unregulated firms, strengthening of the rules applicable to authorised firms, re-classifying securities into three broad bands clarifying when promotions may be made to retail investors, bringing certain qualifying cryptoassets within scope of the financial promotion regime (although they otherwise remain outside the regulatory perimeter for now) and changes to the financial promotion exemptions for high net worth individuals and sophisticated investors. In 2024, much of the FCA's work on financial promotions related to helping firms to embed the changes, including issuing guidance on cryptoasset promotions. The FCA continued to combat clone scams, issue alerts on illegal financial promotions and engage with firms providing and advertising unauthorised debt advice and debt solutions to consumers via online promotions. Much of this work will continue into 2025.

Issues relating to financial promotions by finfluencers have been a regulatory focus throughout 2024 and that is likely to continue into 2025. Early 2024 saw the FCA issue guidance on financial promotions on social media, including an infographic, prepared jointly with the ASA, to assist influencers in their decisions on whether to promote a financial product or service. Towards the end of 2024, the FCA announced that it had issued numerous alerts against social media accounts operated by finfluencers which could contain unlawful promotions.

Individual accountability

During 2023, and further to the Edinburgh Reforms announcement in December 2022, HMT published a call for evidence and the PRA and FCA published a Discussion Paper (DP 23/3) to build a joint evidence base for considering possible improvements to the existing Senior Managers & Certification Regime (SM&CR).

HMT's call for evidence was deliberately broad in scope, asking whether SM&CR had effectively delivered its objectives, whether those objectives remain relevant and correct for the U.K. and the potential impact of the SM&CR on the U.K.'s international competitiveness. DP 23/3 was similarly wide-ranging, asking for views on the effectiveness, scope and proportionality of SM&CR. In her Mansion House speech on 14 November, Chancellor Rachel Reeves announced that HMT, PRA and FCA will "shortly" publish the outcome of the review, including a commitment to consult on removing the Certification regime. Please also see the discussion on D&I below which covers current PRA and FCA proposals to update aspects of the SM&CR regime in relation to diversity and inclusion.

FSMA 2023 introduced a framework for SM&CR for U.K. exchanges, CCPs and CSDs and enabled HMT to further extend the regime to credit rating agencies. This may be progressed in 2025 depending on the outcome of the review of the SM&CR.

In 2021, the regulators mooted extending SM&CR to payment and e-money firms but there has been no specific developments on this. HMT confirmed in August 2023 that the government would set out next steps regarding future consultations on this once the broader SM&CR review has finished.

In the EU, the revised prudential regime (referred to as the “Risk Reduction Measures Package”) in the form of Regulation (EU) 2024/1623 (CRR III) and Directive (EU) 2024/1619 (CRDVI) was finalised on 19 June 2024. This includes new provisions as regards individual accountability. CRDVI requires institutions to prepare individual statements of responsibilities for all members of the management body in its management function, senior management and key function holders, and to map duties with details of reporting lines, governance arrangements and lines of responsibility.

In 2025, firms will need to continue to implement these requirements. CRDVI also introduces administrative and periodic penalties for members of the management body in its management function, senior management, key function holders, other material risk takers and any other natural persons identified as responsible for a breach of national provisions transposing CRD, a breach of CRR or breach of a supervisory decision based on CRD or CRR. Please refer below to the Prudential regulation section for more on CRR III and CRDVI.

D&I

D&I issues were in the spotlight throughout 2024 and this will continue into 2025. The key expected regulatory developments for 2025 are new PRA and FCA final rules and policy statements in response to their 2023 consultations on diversity and inclusion in the financial sector (CP 18/23 and CP 23/30). The final rules had been expected in 2024. The regulators have stated that they now intend to publish policy statements and final rules in 2025. The regulators had proposed at consultation stage that the rules would apply 12 months after the final rules are published. The FCA has stated that it will prioritise its work on non-financial misconduct and, following the publication of the survey results, will continue to engage with the industry to raise standards. 

The regulators deliberately synchronised their 2023 proposals where appropriate, and the proposals apply differently depending on the type, size and nature of the firm (including how SM&CR applies). Firms with fewer than 251 employees would be exempt from some of the requirements. As a high-level summary, the proposed rulemakings relate to (i) D&I strategies—the regulators proposed that firms be required to develop and maintain D&I strategies (as opposed to policies) that contain at least information on the firm's D&I objectives and goals, a plan for meeting those, a summary of the arrangements to identify and manage obstacles to achieving the firm's D&I objectives and goals and how the firm ensures its staff has adequate knowledge of the D&I strategy; (ii) D&I targets—it was proposed that a firm be required to set targets to improve diversity across the firm, not only at management level; (iii) senior management functions— responsibility for D&I would need to be allocated to Senior Managers; (iv) fitness and propriety and conduct rules—it was proposed that clarification would be added to the effect that identified patterns of behaviour, such as bullying, discrimination and harassment, could be considered in fitness and propriety assessments; (v) regulatory reporting—it was proposed that firms annually report data across a range of demographic characteristics, inclusion metrics and targets; and (vi) disclosure—the regulators consider that firms should publicly disclose D&I data.

The regulators’ final rules and policy will consider the recommendations made by the House of Commons Treasury Select Committee in its "Sexism in the City" report. That report made several recommendations, such as prohibiting prospective employers from asking for salary history, introducing a legal requirement to include salary bands on job adverts, reducing the size threshold for gender pay gap reporting from 250+ to 50+ employees for firms in the financial services sector to capture more firms, requiring businesses with wide gender pay gaps to explain the disparity and publish an action plan and amending the Changes to the Women in Finance Charter including strengthening the link between executive pay, and performance on improving diversity. Stronger protections for whistleblowers in sexual harassment cases were also recommended. The FCA has stated that in 2025 it will enhance its communications to whistleblowers and better promote the FCA's whistleblowing reporting channels. The Committee also recommended that the regulators should not proceed with their proposals for extensive diversity data reporting and target setting, and instead focus on the responsibility of senior management and boards for bringing about more diversity and inclusion. The regulators have said that they agree that data reporting should not be a tick box exercise and that they will carefully consider this recommendation, noting that other reports have highlighted the benefits of data. The PRA and FCA will jointly set out their next steps in this regard in Q2 2025.

Enforcement

Following significant concerns raised in response to the FCA's initial proposed new approach to publicising its enforcement investigations and changes to its Enforcement Guide, the FCA published a revised set of proposals at the end of November 2024 (responses may be submitted until 17 February 2025). The FCA is considering amendments to the public interest test. First, it is proposed that the test would include the impact of an announcement on the relevant firm and be central to the FCA's consideration of whether to announce an investigation and name the firm. Secondly, the potential for an announcement to seriously disrupt public confidence in the financial system or the market would be an additional factor in the test.

It is also proposed that firms would be given more time to respond to notices of proposed announcements. A relevant firm would be given a copy of any draft announcement and 10 business days' notice to make their representations, with a further two business days' notice of publication of any announcement if the FCA decides to proceed after taking these representations into account. Originally, the FCA had proposed only one day. The new proposed period is also intended to give firms time to consider whether they want, or are required, to make an announcement themselves.

The FCA's board intends to finalise the proposals by the end of March 2025. The FCA has stated that it will not make proactive announcements of investigations that are on-going when the proposals come into effect, although it may reactively confirm on-going investigations that are already in the public domain, where this confirmation is in the public interest.

FCA liability