It’s already clear that investment managers will have a lot to contend with over the next few months – but they’ll also find opportunities. The anticipated levelling of the global markets was short-lived and rate volatility, borne out of uncertainty, looks set to continue. The appetite for globalisation has been much more muted with a greater regional disparity at play as countries continue to insulate themselves from geopolitical concerns and cater to domestic issues around social and economic reform. Unfolding regulatory redress and potential restructuring continue to colour the horizon. Digitalisation is driving innovative solutions that can help weather these changes and drive efficiencies across the industry.
Understanding the key themes that are likely to emerge from these challenges, and how they can respond to them, will help investment management firms find a way forward.
Ongoing service charges
In 2018, the FCA brought in new rules linked to MIFID II. These rules state that any company charging for ongoing financial advice has to give their clients a yearly assessment to check if the advice is still suitable. The Consumer Duty has added more requirements. Now, advisers also need to think about whether providing ongoing services is right for each client (the target market assessment), and they have to attest that it gives fair value for the fee that's being charged.
In 2024, the FCA looked at 22 of the UK’s biggest advice firms to determine if the ongoing advice they were offering was in line with the Consumer Duty. The FCA's survey results on firms' delivery of annual suitability assessments are more positive than expected, with 83% of cases receiving suitability reviews. However, 15% of clients either declined or didn’t respond to the review offer, and in less than 2% of cases, no attempt was made to deliver the review.
The FCA acknowledges variations in review quality among firms and notes that the survey sample may not fully represent the sector. Firms are expected to review their practices and proactively assess any shortcomings, taking appropriate action if harm was caused to clients. The FCA will monitor complaints and conduct further assessments of firms' responses. Additionally, the FCA plans to review existing rules on ongoing adviser services and evaluate firms' actions in response to the issues raised later this year.
What do investment management firms need to do now?
In order to comply with regulatory requirements, every firm must assess whether it has provided the expected service since 2018, and take necessary action if it hasn’t. The FCA will be monitoring firms' actions on this.
Additionally, it’s essential for firms to ensure that all future processes and services meet regulatory standards for ongoing advice, including COBS and Consumer Duty. Firms must first complete a high-quality, fair value assessment of their ongoing advice, which will determine which clients should receive the service and ensure that critical aspects are delivered to a high standard. Firms need to maintain clear records to demonstrate the delivery of the service or reasonable attempts to do so.
Ongoing advice fees under scrutiny from the FCA
MIFID II and beyond
For firms with an international presence, regulatory cross winds are creating further headaches. Rolling service charges effectively represent a potential breach of MiFID II – the ability to demonstrate that investment recommendations are in the best interests of clients. Although similar in scope to the Consumer Duty, MIFID II represents a more dogmatic, rules-based approach.
The new MIFID provisions include changes to pre- and post-trade transparency, the emergence of a consolidated tape and changes to payment-for-order flow (PFOF). These must be implemented by September 2025. The latest regulation around product governance requires assurance that provisions are fit for purpose. Governance should be aligned to evolving supervisory and regulatory expectations and show good customer value.
What do investment management firms need to do now?
Firms will need to perform a robust gap analysis of current systems, processes, and procedures. The best way to capture the ongoing compliance to MIFID is to implement or develop the current compliance management system to meet the incoming requirements. Using advanced analytics and traceability will ensure the right data points are captured. Systems and controls will need to be retested to make sure they’re aligned to the enhanced regulation.
Firms should also update their policies and procedure manuals and train the relevant staff on the new regulation.
ESG
The global market remains a fragmented regulatory environment. While there’s a significant shift towards more responsible and sustainable investment practices in 2025, the uncertainty created by the transition to a new US Government has made the appetite for building a global standard for product-level disclosures in sustainable investment less certain.
While the UK is implementing its own measures, it’s also influenced by international standards like the global frameworks from the International Sustainability Standards Board (ISSB) and the proposed impact of the EU Omnibus regulation, which aims to simplify sustainability reporting requirements.
Despite some hesitancy in the initial uptake of sustainability disclosure requirements (SDR), due mainly to the scope excluding overseas funds, asset managers, including some of the bigger players, have made a series of announcements on adopting the labels. A consultation is now planned on extending the SDR measures to overseas funds.
Elsewhere, the UK Government has encouraged the widespread adoption of the ISSB standards across the coming year with a view to enshrining these standards in law.
Two updates to the anti-greenwashing regulation in a final guidance from the FCA have given firms more clarity on how to manage this risk.
Legislation in late 2024 addressed the consistency and reliability of ESG-based investing framework ratings, a critical component of sustainable investment strategies. Ratings providers will now need to apply to the FCA for authorisation, with the new regulatory regime expected to go live at the end of a transition period.
There’s increasing demand from investors to include sustainability criteria into investment strategies, as their concerns about climate change and social justice rise. Integrating ESG factors can lead to better long-term performance, and more pension funds now measure their investments' impacts on society and the environment as a marker of success.
What do investment management firms need to do now?
A decision by the Government on ISSB disclosures is expected imminently. This will allow the FCA to introduce the standards for UK-listed companies, with the expectation that large entities would follow immediately after. It’s anticipated that currently listed companies will be required to report against the ISSB standards for periods beginning 1 January 2026, with large entities following immediately after.
In the meantime, firms should consider what advanced tooling could be incorporated into the strategy to automate and streamline ESG activities. Adopting enhanced analytics will enable tracking of sustainability contributions to verify compliance and potentially allow firms to exploit the demonstrable impact through new revenue streams.
Reviewing sustainability reporting for accuracy will help to avoid litigation over greenwashing.
ESG: A purpose-driven approach
Financial crime
Keeping pace with the evolution and escalation of financial crime remains front and centre for regulatory compliance. Investment firms need to constantly monitor and test the effectiveness of their systems and controls.
Compliance is costly and a number of firms are turning to AI as a solution that can deliver increased effectiveness alongside improved cost control. However, the investment required and the regulatory risks of new solutions are still barriers to adoption, so financial crime compliance remains primarily people-driven for the majority of firms.
In addition to the latest APP fraud prevention measures, some key provisions from the Economic Crime and Corporate Transparency Act 2023 come into effect this year. These include the new failure to prevent fraud offence from 1 September 2025 and new identification and verification (ID&V) requirements at Companies House, expected later this year.
The UK Government’s growth agenda and focus on reform of regulation (see the Action plan for regulatory reform) will have an impact on the role of the FCA and is likely to lead to further changes to the UK Money Laundering Regulations and possibly to other relevant legislation. The overall impact seems likely to be positive for industry, but it does create some additional uncertainty in a market already poised for upheaval due to geo-political tensions, which mean that further sudden shifts in sanctions and revenues are possible.
In the meantime, there’s no sign that the FCA is wavering in its approach to financial crime. The most recent large fines have been imposed in the banking sector but the root causes of these fines – issues with transaction monitoring and sanctions screening are also relevant for investment management firms and signal the FCA’s willingness to take concrete action.
What do investment management firms need to do now?
Focus on non-negotiable basics with core due diligence, with timely screening and monitoring to an appropriate standard. This should include consideration of continuous know your customer (KYC) where appropriate.
Complete a risk assessment for failure to prevent fraud, ensuring that it incorporates a sufficiently wide range of fraud risks and controls to demonstrate that reasonable steps have been taken to avoid the new corporate criminal offence.
The FCA has signaled that wholesale brokers’ financial crime controls will be the subject of scrutiny this year. Any organisation with a brokerage arm should be reviewing their control frameworks in anticipation.
Judicious adoption of AI tools for financial crime monitoring should include careful consideration of configuration, data quality, training, and testing before deployment.
Artificial Intelligence (AI)
Investment managers are both investing in AI companies, and using it in their advice to clients.
Any case for adding AI to a portfolio must now focus on ensuring diversification and a continued commitment to include funds whose objectives are in alignment. While regulators have an uphill race to match the speed of AI, the importance of a strong and sustainable ecosystem remains.
Broad benchmarking standards include the UN General Assembly’s March 2024 resolution promoting safe, secure and trustworthy AI systems. Investing in chip manufacturing companies and hosting AI platforms, such as AWS, Microsoft, and Google, as well as companies developing the technology, such as OpenAI. Infrastructure, provide a more predictable environment.
DeepSeek’s recent breakthrough r1 language model, achieving high performance with minimal computing power, forced a reassessment of the AI supply chain. While software developers and platform providers may benefit from lower costs, the event reshaped investor outlooks on AI’s evolving landscape.
Elsewhere, while AI-driven investment tooling is becoming more prevalent it would almost certainly fall foul of the EU AI Act which would categorise it as ‘high risk,’ given the impact to customers financial wellbeing and economic stability. If the AI system is classified in this way it must comply with strict obligations, including data quality and bias prevention, to avoid misleading retail investors.
The system must be transparent and explainable so investors can understand how AI-driven investment recommendations are made, and include a layer of human oversight to ensure it can’t make fully autonomous investment decisions without human intervention.
Complete transparency is required if the interaction is driven by AI. This includes AI-powered chatbots providing market analysis or any investment education advice. Failure to disclose this would render it ‘prohibited AI’ as it would be seen to be exploiting consumer vulnerabilities and encouraging reckless financial decisions.
What do investment management firms need to do now?
Demonstrating complete transparency is key and all the relevant regulatory compliance documentation and reporting should be in place. And finally, there should always be human oversight of AI-driven financial decisions. Any high-risk application should be aligned to the relevant organisational risk management controls; operating reliably and securely without manipulation risks. The firm will also need to maintain records and have access to detailed documentation for regulatory reporting purposes.
AI-driven investment advice must be explainable, fair, and reliable. This can be challenging in light of the non-deterministic algorithms that underpin much of AI. Potential solutions include AI governance frameworks with in-house policies to ensure uniform adoption across the organisation.
Next steps
The key theme for investment management this year will be transparency and trust, both for investors and for regulators. It’s one thing to be doing the right thing, but it's another to be able to demonstrate it. Firms must have the ability to draw down the necessary documentation and reporting. Any commitment to innovative technology must be grounded in transparency and value to allow firms to exploit efficiencies while adhering to the increasingly stringent regulations.
For more insight and guidance get in touch with David Morrey.
