EMEA perspective
Seizing opportunities: a proactive approach to compliance and risk management
Back to Regulatory Outlook 2025
Financial services (FS) firms can approach 2025 with cautious optimism about the future direction of regulation, given policymakers’ focus on economic growth and removing regulatory barriers to achieving it.1
However, it will be a busy year. Firms face a sizeable package of implementation work and, as part of this, will need to optimise efforts for success. Supervisors will expect firms to take a proactive approach to risk management, particularly in areas such as consumer protection, novel risks (especially geopolitical), and climate-related challenges.2 By embedding a robust risk culture, leveraging data-driven insights, and prioritising good customer outcomes, firms will put themselves in a strong position to navigate these complexities and unlock growth opportunities in this evolving regulatory environment. Firms should buckle up – 2025 will not only be a year for implementation, but an opportunity to rethink approaches to compliance and risk management.
FS policy landscape: more choices on the menu?
2024 witnessed a flurry of elections across the EU and UK, involving 57 separate contests.3 We now have new political leadership in the United Kingdom (UK), a new European Commission and a new European Parliament, albeit with the same coalition partners as before. More generally, many newly elected governments face difficult fiscal choices and the medium-term implications for the political landscape are still unfolding as coalitions and national policies are finalised.4,5 Moreover, major elections are not yet behind us, with Germany going to the polls in February and parties without a majority will remain under pressure over fiscal measures. All these developments will affect the direction of EU FS policy over the coming year.6
Political narratives and power transitions aside, gloomy economic realities persist and will dictate the political direction of travel. European Union (EU) and UK growth forecasts remain below 2% until 2029,7 while the EU and UK economies must source more than €700 bn per year of investment in green technology and infrastructure until 2030.8,9 With government debt and taxation running at multi-decade highs, unlocking private capital is increasingly seen as the pathway to growth.10
Figure 1: tax revenue as a % of gross domestic product (GDP)
Figure 2: Debt to GDP ratios
Source OECD11
Contrasting with post-Great Financial Crisis (GFC) sentiment, strengthened resilience has earned the FS sector recognition as a key enabler of productive investment. The political narrative on FS regulation across Europe is increasingly focused on economic growth, competitiveness and the removal of unnecessary regulatory barriers. This will be welcome news, but how far are governments and regulators willing to go and what are we likely to see in 2025?
Significant changes to regulations are unlikely to occur this year. The European Commission’s workplan, expected in early 2025, should provide clarity on how medium-term growth and competitiveness ambitions will be achieved in the EU, and further announcements around the UK Government’s 10-year UK FS strategy are expected in spring.12 Based on what we know so far, we anticipate developments along two lines: the first being government-led initiatives to facilitate investment (e.g. the UK National Wealth Fund), and the second being to assess the scope for reforming rather than entirely reversing aspects of post-GFC FS regulation.
EU political leaders and policymakers have long recognised the need to unlock private capital. The Savings and Investments Union,13 with a revamped securitisation regime,14 has the potential to breathe life into the Capital Markets Union (CMU) and Banking Union ambitions. However, some specific barriers to CMU, such as harmonising national insolvency laws, have not been removed, and progress more generally risks being thwarted if the project is used as a vehicle to further other, more controversial, Banking Union aspirations (e.g. European Deposit Insurance Scheme).
The UK Government’s recent announcements convey its resolve to reset its risk appetite in FS regulation, and a willingness to work closely with the industry to unlock growth. While the UK FS strategy debate will play out over several years, updated remit letters to regulators, calling for more openness to responsible and informed risk-taking – by firms and their customers – should have a more immediate impact on the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) approaches to supervision.15
EU and UK policymakers are likely to start with considering efficiencies in the implementation of existing regulations as a “quick win”. The UK’s PRA is in the process of creating a simplified prudential regime for small domestic deposit takers, focusing predominately on easing disclosures, internal Pillar 2 assessments and the supervisory evaluation process. Similarly, within the EU, re-examining proportionality in disclosures (e.g. the proposed Omnibus regulation aimed at streamlining ESG reporting) is on policymakers’ agenda.16 However, the overall scope and appetite for reengineering regulation for proportionality and simplicity remains unknown at this stage.
Counter - intuitively, FS firms do not necessarily welcome every rule reduction. Regulatory streamlining, however well-intended, can drive fatigue and costs in meeting and evidencing compliance with amended requirements. Regulators’ cost benefit analyses need to incorporate that cost.
Fewer tick boxes, less cost; no doubt welcome. But if we streamline disclosure, affordability or product rules, will firms be spooked if they have responsibility for outcomes without the comfort blanket of rules or guidance?
Nikhil Rathi, chief executive of the FCA, October 2024 17
Uncertainty around the direction of United States (US) FS sector regulation may influence how European policymakers decide to proceed more broadly. In this regard, the timing of US Fundamental Review of the Trading Book (FRTB) and final Basel III standards implementation will be most closely watched. Sustainability regulation is expected to lose momentum under the new US Administration, but progress may also face stronger headwinds in Europe, as sustainability considerations jostle for space alongside the growth and competitiveness agenda.
Beyond engaging with public consultations, one opportunity for firms to position themselves to take advantage of governments’ growth priorities is to enhance their capabilities around customer protection. Despite policymakers’ ambitions to mobilise consumer capital to invest in new businesses and infrastructure, tougher consumer protection measures (e.g. Retail Investment Strategy, Ireland’s Consumer Protection Code and the UK Consumer Duty)18 may temper growth-enhancing measures. Firms with a consumer-first culture, robust and informative data capabilities and controls aligned to delivering “good customer outcomes”, will be best placed to take advantage of future growth agenda opportunities.
So what does this all mean for FS firms’ 2025 strategies? It will take time for policymakers to make their pro-growth agenda a reality, and FS firms will need to decide how to respond to the developing situation, including how emerging messages should affect decisions on the pace and ambition of their own net zero strategy, and how to facilitate increased demand for private funds to fuel growth. In the meantime, firms will need to deliver against the renewed focus on supervisory constants explored within the sectoral perspectives of our report.
New regulations: challenges and opportunities
Despite the pivot towards a pro-growth and competitiveness agenda, this year will see a large volume of adopted regulations take root. These changes are significant (e.g. Basel 3.1 in the UK and residual elements of the Capital Requirements Regulation 3 (CRR3) and Capital Requirements Directive 6 (CRD6) in the EU and, regardless of external events, there are limited prospects for delay – EU FRTB rules being an exception, where specific contingency mechanisms were included in legislation. Although the mechanisms have already been used once, they can be used again.
Supervisory expectations for compliance will be high, particularly for files that have had an extended lead-in, e.g. final Basel III standards. Within the EU, CRD6 requirements for senior managers will prompt EU banks to reconsider their distribution of responsibilities, presenting an opportunity for banks to re-think their strategy for managing regulatory compliance. While the UK Government will consult on replacing the certification component of its Senior Managers and Certification Regime with a more proportionate regime, we do not foresee any reduction is supervisors’ appetite to hold boards and senior executives accountable for delivering outcomes aligned with supervisors’ statutory objectives.
Incoming and recently adopted regulatory changes may require or incentivise firms to reconsider their structure and geographical footprint. Third country firms are already considering the effect of the CRD6 restrictions on cross-border banking activities into the EU, and the PRA’s reinforced stance on risk management practices for bank and insurance branches (booking models and reinsurance)19 may also raise questions about where firms’ activities are located. Easing of UK ring-fencing and ring-fenced rules may offer ring-fenced banks some new opportunities, but supervisors will be cautious of any additional risks created through strategic changes to the banks’ geographical footprint. For example, a liquidity crisis spilling over from the jurisdiction where a UK ring-fenced bank’s overseas entity is based.
In addition to compliance challenges, incoming regulatory changes will reset the business returns earned across activities – some immediately positive or negative – while others will evolve as transitional allowances roll off. Firms may need to consider optimisation across pricing, product structures, asset mix and collateral arrangements. For example, while CRR3 and Basel 3.1 rules will increase the capital intensity of some lending activities,20 new opportunities may be created for non-bank financial institutions. EU and UK insurers in particular, might be able to leverage recent rule changes easing investments in long-term assets.21
In summary, the political priority of growth and competitiveness will not alleviate what for firms will be a heavy implementation schedule in 2025. As always, new regulations bring business and strategic challenges which will require decisions on the viability of lines of business, on pricing and on legal entity structures. At the same time, challenges for one firm or sector will create opportunities for others. Good decision-making will require analysis and risk assessment underpinned by robust data.
Unlocking value for the future through better risk management
Despite signals from European governments on easing FS regulatory, burdens, the activities of supervisory authorities and their expectations around compliance are a separate matter. We expect European supervisors to maintain, and in some cases increase, the pressure on firms to deliver high standards of risk management. A “one and done” approach to tackle risks that are dynamic in nature (e.g. customer vulnerability, cyber, climate or geopolitics) is unlikely to meet supervisory expectations. The European Central Bank’s (ECB) proposed updated guidelines on risk culture, and its criticism of banks’ weaknesses in identifying and managing novel risks point towards firms demonstrating proactive behaviours. The European Insurance and Occupational Pensions Authority’s (EIOPA) geopolitical risk stress test and the future PRA dynamic general insurance stress test also point towards a reinforced intention from regulators to ensure firms’ resilience and adaptability to a broader range of risks.
“One area I would like to highlight concerns strong governance and sound risk culture – the hallmark, I would even say the “North star” of a safe banking system. They are more important than ever, especially in the current risk environment, in which banks are facing economic, competitive and geopolitical headwinds.”
Elizabeth McCaul, member of the European Central Bank Supervisory Board, November 2024. 22
Sustainability risk is a prime example: as climate change and nature degradation continue, environmental risk is rising. Litigation risk is increasing. The weakening of the political impetus to take action is also increasing transition risks. We do not expect the requirements supervisors set for how firms manage risks to change radically this year, but supervisors have significant latitude to raise their supervisory expectations of compliance with existing rules. Firms need to continue to develop robust risk, controls and monitoring frameworks at sufficient pace to keep up with the evolution of risks and standards.
Geopolitical risk will also continue to attract supervisory attention. The ECB and PRA consider it a top priority – FS firms were required to prepare for geopolitical risk shocks as part of stress testing exercises last year, and should not expect the supervisory focus to reduce.23 Developments in the US and Ukraine may still have material impacts on trade, and ultimately on EU large exporting countries’ economies.24 Banks and insurers’ risk modelling teams will be challenged to capture these dynamics adequately, especially for commercial lines.25
Financial risks, especially credit and liquidity risks will continue to be a focus for supervisors. For example, in addition to the broader findings discussed in our Global Regulatory Landscape, the Bank of England’s (BoE) recent system-wide exploratory stress test identified particular vulnerability in the sterling corporate bond market in stress and it has signaled its intention to run future exercises for surveillance and risk assessment. For UK life insurers, funded reinsurance recapture risk, new liquidity risk reporting metrics and remediation action from stress tests will need to form part of a broader risk management approach managed at board level, informed by solid management information (MI).26 Despite European households’ resilience to the changing macroeconomic conditions and the shift towards higher interest rates, the ECB’s latest supervisory priorities places emphasis on banks’ abilities to identify deteriorations in asset quality in a timely manner, and translate this into prudent provisions and capital levels.27
Rising supervisory expectations on consumer protection, and especially vulnerability will require firms to enhance their data capture capabilities to evolve with the times.28 For example, characteristics of customer vulnerabilities change with the macroeconomic environment, requiring firms to challenge themselves continuously to identify vulnerable customers on time and provide them with adequate support.29,30 More broadly, the premium finance and motor insurance markets are under considerable supervisory scrutiny, especially in the UK and Ireland.31 Supervisors may broaden their scrutiny of consumer outcomes to other areas of FS throughout the year.
Overall, strong MI, data and risk culture, including in relation to model risk, will be key to build strong foundations for the future. Many regulatory and supervisory implementation programmes are data led – or will be enhanced by the sound management of data (e.g. to tackle fraud and financial crime). A proactive approach to risk management underpinned by robust models and input data will enable firms to keep pace with rising supervisory expectations. The use of (Generative) Artificial Intelligence, if correctly harnessed, could be a gamechanger to support firms in this journey.
