We lead with an insightful recent speech from Nikhil Rathi, Chief Executive of the Financial Conduct Authority (FCA), which encapsulates the regulator's mood and motivation to support growth initiatives. For those individuals tasked with embedding the Consumer Duty, the removal of the requirement for a Board champion may in fact receive a mixed reaction. More widely, however, the industry can take some comfort in the FCA’s apparent proclamation that there will be no new mass redress events. As preparations continue behind the scenes for the publication of the regulator’s new five-year strategy, many of the likely themes are becoming increasingly clear.
Elsewhere, a recent FCA paper responds to growing industry interest in AI use cases; here in respect of credit decisions.
Our mixed bag of topics also includes the FCA’s approach to non-bank leverage, recent messages from the Financial Stability Board (FSB), aiming to balance the support of both stability and innovation, and finally, updates from Europe on the benchmarking of internal models.
FCA speech on growth
Nikhil Rathi has delivered a speech to the Association of British Insurers highlighting that while the FCA aims to reduce unnecessary regulatory burdens and support growth, this commitment doesn't detract from its primary objectives. He affirmed the FCA's commitment to consumer protection, referencing market studies into concerns about premium finance charges and commission arrangements in pure protection.
Rathi stressed the importance of building trust between regulators and the industry, acknowledging concerns about the pace of regulatory change. The FCA aims for fewer large-scale changes in its upcoming five-year strategy.
Rathi referenced various activities and initiatives detailed in the FCA's monthly regulation roundup, including the removal of the expectation for a Consumer Duty Board champion and the emphasis on innovation, particularly in AI, alongside support for safe experimentation through the FCA’s Regulatory Sandbox.
Read about 'The Gordian knot of growth'
Read more on the regulation round-up
AI’s role in credit decisions
The FCA has published a research note (intended to stimulate debate, and therefore not necessarily indicative of any imminent regulatory changes) examining the issue of how to explain any role played by artificial intelligence (AI) in consumer credit decisions.
Interestingly, the study found that while participants felt more confident in their ability to judge the accuracy of the decisions made by algorithms when they were provided with more information about how they worked, on average their judgments were worse.
While providing more information may be well-received by consumers, the study finds that this won't always aid understanding. However, it also notes that this is likely to be highly context-dependent. As such, the most important finding – which represents a common theme with firms’ obligations under the Consumer Duty – is the importance of testing specific customer communications to evaluate whether these help or hinder understanding of AI’s role.
Read more on the research note
FCA’s approach to non-bank leverage
Sarah Pritchard, the FCA’s Director of Consumers, Competition and International, recently gave a speech at the Investment Association Roundtable, discussing the regulator’s approach to non-banking institutions and their use of leverage. Non-banking financial institutions (NBFIs), those which sit outside of traditional regulatory frameworks for banks, have experienced remarkable growth in recent years, now making up nearly 50% of global financial assets compared to 40% for the banking sector.
Within the speech, Pritchard highlights that the use of leverage by these NBFIs provides significant benefits to the UK’s capital markets. For those less familiar, leverage in this context refers to the use of borrowed capital to increase potential investment returns. In helping NBFIs to hedge their risks, fund productive investment and provide liquidity to the system, Pritchard states that leveraging effectively underpins well-functioning markets. With these benefits, however, comes the potential for risks – especially when leverage becomes concentrated or is used by firms which are connected to essential institutions.
Pritchard proceeds to discuss the FCA’s approach to managing these risks. Notably, the regulator intends to focus on improving anonymous public disclosure of information, allowing market participants to better understand emerging risks and market dynamics. Given the global nature of the NBFI sector, Pritchard highlights that she is co-chairing a working group to assess global risks alongside Cornelia Holthausen of the European Central Bank, recently conducting a consultation regarding the availability of data on risks and potential policy measures which could be applied to manage them.
Read more on the FCA’s approach to non-bank leverage
FSB letter to finance ministers and central bank governors
The Financial Stability Board (FSB) recently issued its letter to the G20 finance ministers and central bank governors. The letter details the FSB’s dedication to enhancing global financial stability through extensive reforms, prioritising safety and soundness and supporting innovation. Under South Africa's G20 Presidency, the FSB’s focus is on promoting and monitoring the implementation of reforms, addressing data gaps in non-bank financial intermediation, and assessing technological innovation.
Efforts are also directed towards enhancing cross-border payments and addressing systemic risks in non-bank financial intermediation. The work of the FSB includes a thematic review of crypto-assets and monitoring AI adoption. The FSB expresses that it remains committed to driving reforms and promoting their implementation across our members to ensure international financial stability.
Read more on the FSB Chair’s letter to G20 Finance Ministers and Central Bank Governors
EBA consultation on benchmarking of internal models
The European Banking Authority (EBA) has released a consultation paper on the draft Implementing Technical Standards (ITS) for the 2026 benchmarking exercise. This paper proposes amendments to the Commission Implementing Regulation (EU) 2016/2070, focusing on the benchmarking of internal models for market and credit risk.
The key highlights include updates to the templates and instructions for the new Internal Model Approach (IMA) framework, reflecting the Fundamental Review of the Trading Book (FRTB) standards. Additionally, the paper outlines amendments to the asset class definitions in the Credit Risk IRB templates, ensuring alignment with the revised ITS on supervisory reporting.
The EBA invites comments on these proposals, particularly on the new templates and the reduced subset of instruments for the AIMA exercise. Stakeholders are encouraged to submit their feedback by 26 May 2025.
This consultation is a crucial step towards enhancing the accuracy and consistency of risk assessments across institutions, ultimately contributing to a more robust and transparent financial system.
Read more on the consultation on amending draft ITS on benchmarking of internal models
