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Regulatory change, pressure on cost management and growth, and increased investment in technology and data are dominating the financial services industry.
Welcome to our weekly round-up for UK financial services regulation. Paul Staples summarises the key announcements and developments. Be sure to subscribe to receive our updates in your inbox every week.
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This week we lead with the Prudential Regulation Authority’s (PRA) insurance supervision priorities for the year ahead. While not exhaustive, this letter is essential reading for firms in the sector.
In our second item, as part of the Advice Guidance Boundary Review, the Financial Conduct Authority (FCA) reaches out to firms operating in the pensions market with an important consultation around a new form of regulated ‘targeted support’. This aims to tackle the ‘advice gap’ via groups of similar consumers. In doing so, the trade-off between outcomes for individuals and delivering a scalable service is in plain sight.
Alongside expectations for productivity improvements, the FCA sets out its proposals for the Financial Services Compensation Services (FSCS) levy limit for 2025/26.
And we round up this week with the latest FCA communication to credit information providers, and final guidelines from the European Banking Authority (EBA) on managing ESG risks.
PRA’s priorities for insurance supervision
The PRA has written to life and general insurers, setting out its priorities for supervision during 2025.
The regulator has made a number of internal changes as a result of the conclusion of the Solvency II review. These include establishing a dedicated Matching Adjustment permissions team, streamlining its approach to internal model application assessments and implementing a new ‘mobilisation’ regime to support potential new insurers looking to enter the UK market.
The PRA notes that rapid growth in the bulk purchase annuity (BPA) market is continuing, along with the associated demand for funded reinsurance arrangements. As such, both of these areas will remain a regulatory priority in 2025 with a focus on ensuring that competition for BPA business doesn't weaken firms’ pricing discipline or risk management standards, and that firms are meeting the PRA’s funded reinsurance expectations as set out in supervisory statement 5/24.
In the general insurance sector, the PRA has highlighted the need for firms to consider the current point in the underwriting and reserving cycles, and cautioned against overly optimistic future profit assumptions within internal models. While acknowledging that some drivers of economic uncertainty have reduced, the PRA cautions that many uncertainties still remain.
Other priorities highlighted in the letter include the life insurance stress test, liquidity resilience, solvent-exit planning, operational resilience, and climate risks.
Consultation on 'targeted support' reforms for pensions
As part of its wider Advice Guidance Boundary Review with the UK Government, the FCA is consulting stakeholders on a possible new support system for pension customers. The new system – referred to as ‘targeted support’ – would allow firms to provide support tailored to groups of people with similar circumstances, as opposed to providing bespoke support based on the consumer’s individual circumstances.
It's hoped that targeted support would be less costly and more efficient for consumers and firms alike, providing greater access to advice for consumers with more straightforward needs and smaller sums to invest. The regulator currently feels that the mass market is underserved by financial advisors, with just 8.6% of consumers taking financial advice in 2024. 'Targeted support' is seen as a means to bridge this gap within the pensions sector.
Questions have been raised, however, around the impact this may have on market competition and traditional pensions advice. The FCA has admitted that a 'targeted support' approach could benefit larger firms which are able to recommend their own products to consumers, providing them with a competitive advantage and potentially resulting in market consolidation. It's also concerned that the new approach could reduce the availability and increase the price of traditional, bespoke pensions advice.
The consultation is open for responses until 13 February 2025.
The FCA and PRA recently published a consultation paper which sets out its proposals for the management expenses levy limit (MELL) for the FSCS for the 2025/2026 period. The MELL for the period is £108.6 million and is made of:
the FSCS management expenses budget of £103.6 million
an unlevied reserve of £5 million.
The FSCS forecasts a 1.8% increase in overall controllable costs and a 1.2% reduction in volume and complexity-driven costs compared to the 2024/25 budget. The organisation is transitioning to a new hybrid operating model, aiming to deliver productivity improvements and cost efficiencies. It expects to achieve early productivity savings in 2024/25, with additional cost savings targeted in the future. The FSCS is also seeking to absorb general inflationary increases in controllable costs and maintaining cost savings from 2024/25 into 2025/26. The IT costs are expected to rise by 7% in 2025/26, and the investment budget is focused on essential initiatives to support its statutory functions.
The MELL will apply from 1 April 2025, the start of the FSCS financial year, and will last until March 2026.
The FCA’s letter outlines priorities for credit reference agencies and credit information service providers over the next two years, emphasising the need to support consumers amid ongoing economic challenges. Key focus areas include:
Consumer Duty
Firms must enhance complaint resolution processes, ensure fair pricing, and improve customer understanding of their services, including promoting access to free credit reports.
Operational resilience
Firms must safeguard against increasing cyber threats, protect sensitive data, and ensure preparedness for attacks.
Financial resilience
Regular reviews of financial resources, stress testing, and detailed wind-down plans are required to manage risks.
Credit information market study
Industry-led reforms, including a new governance body and FCA rules on mandatory data sharing, aim to enhance market quality, transparency, and competition.
Firms should act on these priorities to ensure compliance and improve outcomes for consumers.
The EBA has recently issued final guidelines on managing ESG risks for financial institutions, aiming to achieve climate neutrality by 2050. The guidelines require firms to:
assess the materiality of ESG risks using methodologies, such as exposure-based, portfolio-based, and sector-based approaches
integrate ESG risks into their risk management framework, including developing a plan
develop transition plans consistent with EU regulations to address the risks associated with transitioning to a low-carbon economy
monitor ESG risks through internal reporting frameworks, using indicators to track progress.
These guidelines will come into effect from 11 January 2026, with small and non-complex institutions exempt until one year later.
In our latest episode, David Morrey and Ben Farmer, discuss the latest updates on motor finance saga where the Supreme Court has expedited an appeal involving Close Brothers, and the FCA's involvement in urging a swift resolution. The FCA's consumer duty feedback, covering various updates and analyses, including the FCA's priorities for 2025, the review of consumer duty annual reports, and insights into complaints and root cause analysis.
