The tectonic shifts at play globally continue to impact the financial services sector, which plays an essential role not only in terms of growth and investment but also in supporting society to responsibly navigate a fast-changing environment. As such, the sector must employ agile risk management frameworks, alongside commitments to innovation, to manage the uncertainty alongside the growth.
The Government’s commitment to growth highlights the need for all stakeholders, including government, regulators and industry participants, to have a clear view on an understood risk appetite that will support a competitive and predictable UK regulatory approach. This should focus attention when needed on material harm, while also supporting innovation at a pace that maintains the UK’s pre-eminent position in the global financial services market.
The UK has always led the way in its approach to financial services regulatory policy and supervision. Certainty, predictability and associated professional expertise underpin a status for UK authorised firms that remains a sought-after brand label. There’s no doubt that, in part, the UK has set the bar at the highest level as a result, including when implementing international regulatory standards. The same might be said in relation to recent domestic development around, for example, the increased levels of consumer protection through the Consumer Duty. Now, with a growth objective front and centre, it’s clear that achieving the ideal balance of prescription and flexibility is already being tested. While there has been little tangible change in specific regulations to date, the way in which the UK regulators go about supervising and enforcing their rules is starting to evolve.
Motor finance discretionary commission arrangements remain a hot topic. Most significant, over and above any response from the regulator, will be the decision by the Supreme Court when it is handed down after the case is heard in April. Public interest in the outcome is inevitably significant and, while it’s difficult to anticipate how the precise nature and scale of any associated redress and remediation may play out, the impact on growth expectations for impacted firms could be material. As with the assessment of harm in other historic conduct of business areas of concern, impacted firms have much to do across data management and analytics if they’re to determine a robust foundation for any remediation exercise that may ensue.
Also notable is the forthcoming consultation in respect of potential adjustments to responsible lending and advice rules for mortgages. The potential here to acknowledge how digital innovation, alongside the reduction of complexity in the rulebook, could reduce the regulatory burden makes it an often-cited example by the regulators of the shape of the road ahead. Watch this space for these indicators of how the rhetoric of ‘regulation for growth’ may translate, albeit it over a period of time, into real shifts in policy and supervision.
Within the insurance sector, ease of access to products and services will undoubtedly continue to be a focus for the next 12 months. What most customers want and need is a frictionless customer journey, at all stages of the product and service life cycle. There's little doubt that further innovation can come from technology in various guises.
The digital customer journey unlocks a considerable amount of data which can be leveraged into further innovation from customer insights. A robust approach to managing the ever-present cyber threat is essential, however, when using large amounts of data. This, and related digital operational resilience, will be key as all firms across the insurance distribution chain seek to deliver growth in a robust, controlled and sustainable way.
For insurers, opportunities created by insurtech to harness insights from both internal and external data points will be a differentiator in the marketplace. We’re already seeing use cases around customer engagement, fraud detection, or AI-based valuations processes. Firms will need to create a benchmark for the quality and trustworthy nature of that data to determine which will have the most material impact, as any misjudgements will be costly. AI is one of many technologies innovating the life cycle and we’re seeing it within the London market as participants strive to harness data right across the distribution chain. The intent is not new but now AI is increasingly doing some of the leg work.
Banks are burdened with the challenges of complex legacy systems, which presents a potential competitive advantage to those newer brands built on much more recent architecture. While all firms still have a challenge around data accuracy and data lineage, the real value is yet to be released from non-financial and behavioral data derived from across the customer journey. It feels like tentative steps into AI adoption, with closely-controlled environments for testing use cases, and where the most visible examples of AI innovation are efficiencies built into the digital journey and client interface.
From an asset management perspective, investing in digital assets in the broadest sense has seen important step changes, with examples of tokenised bond issuances in some key jurisdictions. Moreover, crypto – as the poster child of the form – is increasingly viewed as a legitimate and sizeable asset class, with the prevalence of crypto currency exchange traded funds in the United States, for example. Given the volatility and risk involved, the question of optimum regulatory oversight remains to be answered.
For investment managers, a keen area of focus is the journey to reduce the cost of advice. Many organisations are spending a lot trying to achieve this, with significant capital outlay at the top end of the industry. Any expectation of achieving significant efficiencies from technology, including AI, is limited by the current regulatory regime and the need for human input and subjective assessment in more complex areas of advice. FCA proposals on streamlined advice may change this.
Emerging innovation will always bring potential pitfalls and there needs to be a shared view on the appetite for risk in this regard across all the key stakeholders of government, regulators and industry participants. The sandbox approach can continue to support innovation in a relatively safe space. All stakeholders need to continue to work together to balance progress, efficiency and growth while avoiding an intolerable risk of harm to customers.
There are truly once-in-a-generation events happening all around the globe, and the resulting volatility and uncertainty presents a challenge for financial services. It also allows the industry to do what it does best: manage risk and support growth – in business and in people.
Banks, over more recent times, have seen relatively higher interest rates drive profitability that has supported investment in technology infrastructure, and this remains a trend. As the traditional banks reinvent themselves, the newer fintechs, who have grown rapidly in a more favourable environment, will now find making money isn’t as easy as it once was.
Unpredictable developments continue to affect confidence in global markets. More than ever, firms need to rely on risk scenario planning that’s not just forward-looking enough to predict likely impacts, but also effectively enables governance and sure-footed decision making to take place at pace. One thing is certain: big changes in the macroeconomic environment will always lead to winners and losers across the financial services market.
The cost of living and the cost of doing business remain challenging. For the insurance sector, this translates into ‘doing more with less’. Supply chain uncertainty and associated costs continue to be a material factor for the economics of insurance. Alongside this, there’s an increased demand for cyber coverage and political risk coverage. Climate risk was also headline news at the start of 2025 when catastrophes such as the Los Angeles wildfires saw the insurance sector deliver irreplaceable support to rebuild communities, while working out the long-term balance sheet impact.
UK deal activity remains buoyant. The asset managers and wealth managers continue to see a development of strategic partnerships to drive growth. Two themes are driving this consolidation process. Firstly, large multi-faceted existing organisations want to benefit from vertical integration of wealth management alongside mainstream banking services. Secondly, multiple smaller firms will consolidate in a bid to address their shared challenges and deliver a cost-efficient return. All these firms are finding that unlocking the true value via complex consolidation programmes is a major challenge and takes time, with a number of examples perhaps representing consolidation in name only.
The bulk purchase annuity market is a major area of activity. It is garnering interest from other insurers, private equity and other investors entering the market, with lots of opportunity for consolidation and volume play. Firms are working hard to understand the operational and financial viability of these operations over multiple timelines.
Deal volumes in the banking market are lower in number, but there are significant integrations within the retail banking world that will continue to play out over the course of the year. Despite a long-held expectation that newer fintechs would be eaten up by big players, this is yet to fully materialise. In fact, we see more and more fintechs and payments firms with an eye on becoming authorised deposit takers in the short to medium term.
In a similar vein, a world that includes authorised banks from the likes of Google and Amazon may still feel some way off. However, the role that these global behemoths already play in distributing and connecting financial services, alongside other third-party authorised persons, is hugely significant. The interdependence as critical third-party suppliers, resulting in the sometimes uncomfortable meeting of big tech and traditional financial services, can mean that over the short to medium term all parties can benefit from the growth in the world’s truly global marketplace.
Navigating regulatory change amid a real need for growth requires a careful balance. Any innovation must manage the cost of expansion across legacy infrastructure. Long-term stability will remain a key prerequisite to any plans, and ensuring good outcomes for clients, customers and markets will have to underpin any innovation. Financial services will focus on the evolving risk management framework with a drive for agility supported by a strong governance structure to weather the storm of ongoing uncertainty.
The digitalisation journey of the financial services sector continues to vary across the subsectors. AI transformation is in its infancy with multiple conflicting regulatory priorities across the operational architecture. Fintechs, unencumbered by legacy baggage, may find the journey easier but reaching the end destination is going to require the regulatory framework to keep step with innovation. Meanwhile all parties need to build an effective dialogue that enables the perfect mix of vision, technical know-how, investment and trust.
For insight and guidance on the key trends, opportunities, and risks for financial services firms, contact Alex Ellerton.
