The Treasury’s plan to cut red tape, the FCA’s five-year plan, and other regulatory updates for financial institutions

Insight

27.03.2025

Financial Institutions 360: Regulatory update

Read other sections of this edition of the Financial Institutions 360:

A theme since the Prime Minister’s “Christmas Eve” letter to the regulators – about how they could support the government’s growth initiative – has been cutting red tape and reducing the regulatory burden on firms. This has been most evident in the abolition of the Payment Systems Regulator, and also in decisions by the FCA not to go ahead with its EDI proposals, and to propose changes to retail lending rules.

The Government is also continuing with the previous government’s Smarter Regulatory Framework, replacing assimilated EU law with FCA rules.

Treasury policy paper on cutting red tape

On 17 March the Treasury published a policy paper, setting out an action plan aimed at cutting the administrative and regulatory burden, titled “New approach to ensure regulators and regulation support growth.”

The Government has identified three actions:

Tackle complexity and the burden of regulation
Reduce uncertainty across our regulatory system
Challenge and shift excessive risk aversion in the system

Points to note:

The Government commits to cut administrative costs for business by 25% by the end of this Parliament.
The Treasury will look to review the number of the PRA’s and FCA’s “have regards” to identify opportunities to rationalise them. These are set out in the Treasury’s remit letters to the regulators, and include such matters as leading the world in sustainable finance, and reinforcing financial inclusion and supporting home ownership.
The Financial Ombudsman Service (FOS) needs to be “set up” in such a way that it works well for consumers, small businesses and financial services firms. The Government will consider whether to legislate following the review by the Economic Secretary to the Treasury, who will be looking at:
- its framework which has led to it working as a “quasi-regulator”;
- whether it is applying today’s standards to actions that have taken place in the past; and
- the practices that have grown up over time on compensation.
The Treasury will work with the regulators, the Office for Investment and the City of London Corporation on establishing a concierge service to make it easier for international firms to navigate the UK regulatory landscape.

The regulators made various pledges to support the Government’s growth agenda. These include:

The FCA commits to provide 50% more dedicated supervisors to early and high growth firms, to help them navigate the regulatory system and support their growth, and each firm in the regulatory sandbox will be provided with a dedicated case officer.
The FCA will indicate more often that it is “minded to approve” start-ups to help them secure funding.
The FCA and PRA are both aiming to reduce regulatory reporting requirements for firms.

The FCA’s Five-Year Strategy

On 25 March the FCA published its strategy for 2025 to 2030, setting out its vision and priorities for the next 5 years. The FCA’s key priorities are to support growth, fight crime, help consumers and be a smarter regulator. The FCA notes that the financial and insurance services sector contribute over £200 billion to the UK economy, and employ over 1 million people directly.

A smarter regulator: the FCA intends to reform how it regulates, including how it supervises the approximately 42,000 firms within its remit. It will take a more flexible approach, including streamlining how it sets its supervisory priorities, and provide more firms with direct contact points at the FCA. On 31 March the FCA will launch “My FCA”, a single-entry point for firms, which is intended to make it easier to manage regulatory obligations.

Supporting growth: as well as its ongoing work in capital markets, the FCA is also focusing on tech initiatives, including the tokenisation of asset management and launching Open Finance within the next year.

Helping consumers navigate their financial lives: the FCA aims to support consumers through initiatives including allowing product innovation, widened access to products such as mortgages, the new regulatory regime for targeted support, and supporting the Government’s financial inclusion strategy.

Fighting financial crime: the FCA will continue to speed up its enforcement work, use technology to identify abnormal and anomalous trading statistics, support firms in using new, developing technology in their anti-crime systems, and increase public awareness of potential scams.

FCA next steps on motor finance

The Supreme Court is due to hear the much-anticipated appeal of the Court of Appeal’s motor finance judgment in the first week of April.

On 11 March the FCA published a statement about motor finance complaints and how it intends to progress the issue once the Supreme Court has handed down its decision. The FCA has decided that, if further to the Supreme Court’s decision it decides that there have been “widespread failings” by firms which have caused consumer harm, it will implement a redress scheme. This will be subject to FCA rules and checks that it is being run properly. The FCA intends to publish its decision within 6 weeks of the Supreme Court judgment.

Under a redress scheme, firms will need to determine whether customers have suffered loss, and if so, what the appropriate compensation would be. The FCA considers that this will be better for consumers in that they will not need to bring a complaint (or rely on a claims management firm to do so), and more orderly and efficient for firms.

Consumer Duty – review of overlapping FCA rules

On 25 March 2025 the FCA published Feedback Statement FS25/2, setting out immediate areas for action and further plans for reviewing FCA requirements in light of the introduction of the Consumer Duty, further to its Call for Input in July 2024. The FCA had asked stakeholders for their views on whether they could amend or simplify any of its rules, if they overlapped with a Consumer Duty outcome.

The FCA is proposing to take steps including the following:

Pilot a smaller firm guide, to provide dedicated guides to FCA requirements in one place.
Consult on removing outdated or conflicting requirements including references to Treating Customers Fairly and Principles 6 and 7.
Review and potentially withdraw all Dear CEO and portfolio letters pre-dating the FCA’s 2022-25 strategy.
Review certain mortgage requirements (for further detail, see our briefing on payments and retail banking), including consumer disclosure requirements.
As part of the ongoing review of the Consumer Credit Act, review the financial promotion rules for consumer credit including the Annual Percentage Rates.
Review Assessment of Value reporting for asset management (later in 2025).
Streamline and simplify its investment and borrowing powers rules in Chapter 5 of the Collective Investment Schemes Sourcebook.
Consult on updating specific record-keeping and reconciliation requirements in CASS.
Under the Consumer Duty, clarify:
- the interaction between product governance and fair value, and
- the application of the Consumer Duty to firms in retail distribution chains that do not interact directly with consumers.
Subject to stakeholder feedback, review the Senior Management Arrangements, Systems and Controls Sourcebook.

The FCA intends to share an update on its programme of work in September of this year.

Consumer Duty: customer support

On 7 March 2025, the FCA published a review of customer support under the Consumer Duty – with some overlap with its work on vulnerable consumers. The FCA initially reviewed 407 firms, followed by a more in-depth review of 40 firms. As usual, it has published areas of good practice and areas for improvement, across four areas:

Meeting customers’ needs – how has the firm satisfied itself that its customer support is effective at meeting customer needs, including the needs of customers with characteristics of vulnerability?
Access to support – how has the firm satisfied itself that its customers can access support easily and without unreasonable barriers (the notorious “sludge”)?
Culture, Governance & Accountability – how has the firm ensured that good customer support is reflected in its governance, leadership, strategy, and people policies?
Outcomes monitoring – what data and MI is the firm using to monitor the impact its customer support is having on customer outcomes?

Designated Activities Regime

On 14 January 2025, the Treasury published the FSMA (Designated Activities) (Supervision & Enforcement ) Regulations 2025, which provides the powers to the FCA to supervise and enforce the designated activities regime. The Regulations list the relevant designated activities, which are so far only short selling and manufacturing, advising on, offering or selling consumer composite investments for or to retail investors located in the UK .

On 15 January the Treasury published the Short Selling Regulations 2025, which replace the assimilated law relating to short selling and create a designated activity of short selling. The regulations also provide rule-making powers to the FCA.

Changes to MiFID Organisational Regulation (MiFID Org Reg)

On 18 March 2025, the Treasury published a Policy Note and Draft SI: Draft Markets in Financial Instruments (Miscellaneous Amendments) Regulations 2025, relating to amendments to the MiFID Organisational Regulation. They are consulting for technical comments only.

The SI revokes the MiFID Org Reg, and makes various technical changes to other legislation, including to the RAO, to restate key definitions from the Mifid Org Reg. It is not intended to make policy changes.

The FCA has been consulting on transferring the firm-facing provisions of the Mifid Org Reg to the Handbook.

Diversity and inclusion and non-financial misconduct

In March 2025, the FCA and PRA announced that they have decided not to proceed with the data collection part of their diversity and inclusion proposals published 18 months ago.

This is partly due to negative feedback regarding the regulatory burden these would place on firms, and partly because of the Employment Rights Bill, which is bringing in overlapping requirements such as requiring firms such as a requirement for employers with over 250 employees to produce “equality action plans”. The Equality (Race and Disability) Bill also proposes an extension to the current gender pay gap reporting to race and disability pay gap reporting, another of the regulators’ proposals.

The FCA is still considering its proposals on non-financial misconduct and whether any further work is necessary, and will report back in June.

Ongoing financial advice services

On 24 February 2025, the FCA published its multi-firm review of ongoing advice, further to concerns that ongoing advice was being charged for but not provided. The review focused on delivery of suitability reviews, which the FCA found were delivered in the majority of cases, or were offered and not taken up. The FCA has provided some examples of good practice and areas for improvement.

FCA review of firms’ treatment of customers in vulnerable circumstances

On 7 March 2025, the FCA published the findings of its review into firms’ treatment of customers in vulnerable circumstances. As part of this work the FCA had been considering whether it would be necessary to rewrite its 2021 Vulnerability Guidance, which predated the Consumer Duty. The FCA has decided not to do so, but has instead published case study examples of good practice and areas for improvement.

As part of the FCA’s review, it undertook:

A survey of 725 firms.
A follow-up request to 29 firms, focusing on outcomes monitoring.
A multi-firm review of power of attorney and bereavement customer journeys in retail banking.
Consumer research.

The FCA also published a report setting out good practice and areas for improvement in delivering good outcomes for customers in vulnerable circumstances.

It is worth noting that as part of its work on outcomes monitoring, the FCA found that a small number of firms, particularly in the wealth and asset management sector, had identified zero or very few customers in vulnerable circumstances.

The FCA would like to see firms taking active steps to encourage consumers to share information about their circumstances or needs. Firms should also ensure that once a disclosure is made, consumers do not have to repeat this information to other parts of the business.

Prudential requirements

On 5 March 2025 the PRA published a consultation on adjusting the threshold for application of the Leverage Ratio – Capital Requirements and Buffers Part of the PRA Rulebook. The requirements for firms over the threshold is also knows as the total exposure measure and includes a requirement that they must hold resources including a minimum of 3.25% of Tier 1 capital. The PRA is proposing to increase the leverage ratio threshold from £50bn to £70bn, which will come into force on 1 January 2026.

Consumer redress/polluter pays

On 14 January the FCA published an update on its work on consumer redress liabilities and “polluter pays”. The FCA is concerned about firms, such as those involved in the British Steel DB transfer mis-selling scandal, selling their books or entering into administration and leaving the FSCS to pick up the redress bill.

The FCA provides further information on its expectations for firms regarding their compliance with Principle 4 (Financial Prudence) and the threshold conditions. The FCA notes that poor practice in this area has meant that the FSCS has paid out £760m in redress for personal investment firms which had left the market between 2016 and 2022.

The FCA expects firms, among other things, to:

take reasonable steps to ensure any potential and actual redress liabilities have been considered and provided for;
ensure a customer contact exercise is completed; and
agree on the transfer of liabilities alongside the customers or assets.

The FCA says that it intends to apply more scrutiny at the gateway assessment stage where they identify a greater risk of polluter behaviour, including closely examining the fitness and propriety of senior manager candidates.

The FCA also published a separate webpage on what firms or consumers should do if they identify and wish to report “polluting behaviour”, which includes: phoenixing, lifeboating, fronting, sale at undervalue, restructuring, and proceeds of sale not applied to redress.

T+ 2 > T+1

In February, the European Commission publishing its legislative proposal on T+ 1. On 19 February 2025 the UK Government confirmed:

The Government will legislate to change the current T+2 requirement under the UK Central Securities Depositories Regulation to a T+1 requirement.

It will legislate for it to be mandatory from Monday 11 October 2027 and firms should start making preparations now, including making the necessary investment in their systems and processes.

New requirement to obtain DBS check for authorisation/change in control

The FCA published a Handbook Notice in December 2024. It included, among other changes to the Handbook, amendments to the relevant form to require criminal background checks for all applicants rather than on a risk-based basis. This was introduced further to a recommendation from the FATF, and controllers and beneficial owners will now have to obtain criminal background checks from the DBS, or equivalent for persons outside England and Wales.

This requirement applies to those making an application for authorisation or registration with the FCA and for a notice of an intended acquisition or increase in control. It came into force on 17 January 2025.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.