Top Trends and Insights in the Financial Services Sector - April 2025

Introduction

Welcome to Cambitas’ financial services summary, featuring the latest updates in UK and EU regulations.

If you’d like to discuss anything contained in this article, please contact us using the contact details below.

OVERALL THEMES

A significant focus in the ongoing efforts of the PRA and FCA is to lessen the regulatory burden. This initiative follows Prime Minister Starmer’s earlier request for regulators to explore ways to cut down on red tape. This will involve a revamp of the SMCR, a simplification of the Consumer Duty, and reforms to the AIFMD, among other measures. Recently, both the FCA and the PRA released documents outlining their plans for the upcoming year(s), which are detailed in the update below. Meanwhile, the EU continues to regulate actively, with extensive consultations on MiFID II and EMIR 3, as well as in other areas like the AI Act. In terms of other topics discussed below, the PISCES sandbox, designed to facilitate intermittent private share dealing, is a promising innovation that several of our clients will find appealing. Reforms to the AIFMD and the Consumer Composite Investments scheme will also be welcomed by those affected. The UK must seize the opportunity to reduce regulatory red tape: with the economic outlook being highly uncertain and the potential for a recession or even a depression looming, the UK must do everything possible to remain competitive as a capital destination. The steps taken so far, though appreciated, should only be the beginning…

Another point to highlight from this month’s update is the PRA fine imposed on George Hambro, a former NED of Wyelands Bank. This is crucial reading for anyone serving as a non-executive director at a regulated firm.

UK: FCA Releases Strategy & Work Programme

In March 2025, the FCA published its five-year strategy. The FCA oversees the activities of 42,000 companies, which contribute approximately £200 billion to the economy. The strategy document highlighted the FCA's main objectives: to become more intelligent (including through technology), promote growth, assist consumers, and combat crime.

The strategy was followed on 8 April by the FCA’s annual work programme. The work programme aligns with these core objectives, suggesting various methods for the FCA to utilize technology in order to streamline data collection, enhance system access, and promote growth by reducing regulatory burdens. Key points include:

• Expedite the review of capital requirements for specialized trading firms.

• Introduce proposals to simplify certain conduct requirements for commercial insurance companies.

• Consult on potential changes to the £100 contactless limit, allowing firms with robust fraud controls to set their own limits.

• Continue efforts to simplify the Consumer Duty.

• Clarify potential motor finance redress, contingent on Supreme Court and other legal schedules.

• Update the redress framework following the recent Call for Input.

• More frequently indicate that the FCA is ‘minded to approve’ promising start-up firms, aiding them in securing funding.

UK: PRA Business Plan 2025/2026

The PRA has published its Business Plan for the forthcoming year. Some highlights from the “multi-sector” section include:

• Critical third party regime: FSMA 2023 granted HMT the authority to classify certain third-party service providers as ‘critical’ to the UK's financial system (known as ‘CTPs’). The PRA, Bank, and FCA are evaluating third-party service providers to recommend to HMT those that could be designated as CTPs, and to assist HMT in their designation process thereafter.

• The FCA, Bank, and PRA's rules on operational resilience became fully effective in March 2025, ensuring that firms can now deliver key business services within established impact tolerances. The PRA will continue collaborating with the FCA to evaluate firms’ operational resilience capabilities, especially where firms have initiated significant digital transformation projects. The PRA also plans to finalize the operational incident, outsourcing, and third-party reporting consultation throughout 2025.

• The PRA and FCA plan to consult on modifications to the SMCR to lessen the administrative load. This will involve replacing the certification regime.

UK: PISCES

In December of last year, the FCA consulted on the regulatory framework for a new platform designed to facilitate the intermittent trading of private company shares. This platform will be named PISCES - the Private Intermittent Securities & Capital Exchange System. In an unusual step, the FCA is releasing an “early update” after the consultation closed. This update confirms that the FCA does not plan to make significant changes to its proposals or enforce the alternative approach it consulted on. However, the FCA is suggesting various technical adjustments to better align PISCES with private market practices. Consequently, the FCA has published a statement outlining its current thinking to allow potential operators of a PISCES system time to develop their own rulebooks and engage with the market. The statement, which includes a table listing various post-consultation technical changes, is available here.

The FCA has provided pre-application support to firms, allowing potential operators to give feedback on the technical changes and apply for new permissions or modify existing ones. The FCA plans to release the final rules in June 2025, after which the PISCES sandbox will be open for applications.

UK: Contactless Payment Regime

The FCA has published an “engagement paper” seeking feedback on the different ways it could reform contactless payments in future. At present, contactless payments can be made without additional authentication, like a PIN, for amounts up to £100 per transaction, or £300 across multiple transactions. One suggested reform is to allow firms with strong controls to set higher limits. Alternatively, the FCA is considering either removing contactless limits from legislation entirely, adjusting the single transaction limit from £100 to £200 or more, or modifying or eliminating the cumulative and consecutive limits. The FCA is seeking feedback by 9 May 2025.

UK: Reform of AIFMD

In April 2025, HM Treasury published a consultation on changes to the UK Regulations for Alternative Investment Fund Managers (AIFMs). The AIFM Directive, implemented throughout Europe in 2013, created a unified set of regulations for managers of hedge funds, private equity funds, investment companies, real estate funds, and certain retail investment funds. The consultation suggests a simplified framework for regulating AIFMs and the depositories they utilize. It sits alongside a call for input from the FCA indicating its approach to regulating AIFMs.

According to the new regulations, only the largest companies will follow a system akin to the current one, with certain rules being eliminated. Medium-sized companies will remain under a regulatory framework, though it will lack many of the detailed prescriptive requirements. Small companies will only need to adhere to fundamental baseline standards. The thresholds will be established as follows:

• Large AIFMs - over £5billion net asset value

• Mid-sized AIFMs - between £100million and £5billion

• Small AIFMs - up to £100million

Companies won't need to apply for a variation of permission when crossing thresholds, but they might need to inform the FCA.

The consultation also seeks input on several other proposed changes, such as custody and depository requirements, as well as reporting and remuneration rules. The consultation will end on 9 June 2025, and the new regulations will be implemented sometime next year.

UK: MiFID

On 3 April 2025, the FCA issued PS25/2 including final rules regarding instruments subject to the UK derivatives trading obligation (DTO) and post-trade risk reduction services (PTRRS) which are exempt from the DTO. The FCA's rules incorporate the proposals from its consultation in July last year, with only minor adjustments. The most significant change is the inclusion of a reduction in OIS (overnight index swaps on the US risk-free rate SOFR) with a 12-year tenor under the DTO's scope. These final rules will be implemented starting 30 June 2025.

UK: Consumer Composite Investments

The FCA have consulted on further changes to the regime for Consumer Composite Investments (CCIs). A CCI is an investment where the returns rely on the performance or value changes of indirect investments. This encompasses funds, structured products, insurance-based investment products, contracts for difference, and other complex investments such as derivatives.

The new consultation, dated 16 April 2025, follows CP24/30, where the FCA first proposed the CCI regime. The new consultation includes:

• An updated method for calculating transaction costs.

• Amendments to existing cost disclosure requirements under the MiFID Org Reg.

• Transitional provisions providing firms the flexibility to transition to the new regime when they are prepared.

• Related changes to the FCA Handbook.

The consultation will end on 28 May 2025, and the FCA plans to issue the final rules later in 2025. It will address the feedback from both CCI consultations simultaneously.

UK: an SMCR Fine for a NED

In its announcement dated 2 April 2025, the PRA has imposed a £72,000 fine on George Hambro for violating individual conduct rule 2, which mandates that directors must act with due skill, care, and diligence. Between 2017 and 2020, Mr. Hambro's actions did not meet the expected standards for someone in his role at an authorized firm, showing a significant lack of due skill, care, and diligence regarding: capital recognition, large exposure assessments, and Wyelands’ internal Engagement Policy to manage potential conflicts of interest risks.

This decision is another consequence of Wyelands Bank's wind-down, following the fine of its CEO for breaches of three other conduct rules, which we previously reported. Notably, while the bank itself only received public censure instead of a fine, two senior board members have now been fined personally.

The conduct leading to Mr. Hambro's fine included:

• He neglected to make necessary inquiries regarding the suitability of the funding mechanism for a £10 million capital injection into Wyelands, which was indirectly financed by a loan Wyelands had given to a third party. This oversight led to Wyelands incorrectly reporting that capital to the PRA as Common Equity Tier 1 capital;

• He failed to adequately question the resignation date of an executive, impacting the assessment of the bank’s large exposures limit;

• He did not ensure sufficient compliance with the Engagement Policy when proposing transactions or potential transactions.

Mr. Hambro was a “Notified NED” of Wyelands and an executive within the alliance that included Wyelands. A Notified NED is a NED who is not an SMF and holds no executive responsibility. In FCA terms, Notified NEDs are referred to as “Standard NEDs.” The individual conduct rules apply to NEDs, along with senior manager conduct rule 4, which requires cooperation with regulators and disclosure of relevant matters to the regulator.

This serves as a crucial reminder for NEDs of regulated firms. The era of merely being a “nodding head” is over. It is vital that all NEDs demonstrate a high level of diligence, with potentially even higher expectations for those who are also executives within the broader group.

EU: Benchmarks

Using a common supervisory action (CSA), EMSA has been examining how benchmark administrators adhere to the ESG disclosure requirements outlined in the Benchmark Regulation (BMR). The CSA included the disclosure of ESG factors in both the benchmarks statement and methodology, along with specific disclosure requirements related to climate benchmarks methodology. The findings set out in the report include:

• The absence of specific guidance on defining and calculating ESG factors has led to varied and inconsistent calculation and disclosure practices among administrators and benchmarks.

• Administrators have adopted inconsistent approaches in the underlying assumptions used to determine the factors.

• The report offers clarifications on transparency expectations for administrators and provides guidance on the definitions and methodology for calculating ESG factors, including identified good practices.

• It also offers recommendations to the Commission for potential amendments to Level 2 measures, including suggestions for streamlining ESG disclosure requirements to reduce the burden on administrators while ensuring the feasibility and value of disclosed ESG information.

There are some potential areas for benchmark administrators to consider regarding the report’s findings:

• Evaluate your exclusion criteria. If they are only high-level (e.g., exclusion of controversial weapons or tobacco), they may be insufficient to qualify as ESG benchmarks. ESG benchmarks should incorporate ESG data in the selection of constituents or focus on specific ESG goals.

• ESG benchmark administrators must make their "best efforts" to obtain the necessary data for ESG calculations. If reweighting is required due to missing data, they should be transparent about this. Indeed, ESMA states that increased transparency regarding data and data coverage would be good practice.

EU: MiFID

On 10 April 2025, ESMA published its final report on technical standards specifying the criteria for establishing and assessing the effectiveness of investment firms’ order execution policies. It is expected that the RTS will apply 18 months after entry into force.

Separately, in a letter dated 4 April 2025, ESMA have requested that the Commission provide clarity on the definition of fractional shares under MiFID, to avoid inconsistencies between member states by relying on definitions under national law.

EU: EMIR 3

ESMA has issued a consultation paper on technical standards regarding clearing thresholds under EMIR 3. Although EMIR 3 is now in effect, the clearing thresholds remain unchanged from the previous legislation. EMIR 3 introduces a new calculation method for financial counterparties and non-financial counterparties. Financial counterparties must calculate their uncleared positions and their total OTC exposure (both cleared and uncleared) separately, while NFCs only need to include their uncleared positions for the clearing thresholds. The consultation paper addresses the values of the clearing thresholds for aggregate and uncleared positions, the criteria for determining which OTC derivative contracts are objectively measurable as risk-reducing, and the mechanisms for reviewing the clearing threshold values.