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EMEA cross-sector perspective

Managing the interconnectedness of risks, regulation, and public policy

Regulatory Outlook 2024

The challenging operating environment is creating a melting pot of interconnected risk


All things considered, the European financial sector has been remarkably resilient over the last few years – despite some notable scares (including the UK liability driven investment (LDI) crisis and the collapse of a European global systemically important bank (G-SIB)). The combination of improved firm-level resilience and proactive government, central bank and supervisory intervention has enabled the Financial Services (FS) sector to stay on its feet, with only the occasional wobble.

Nevertheless, the outlook for European economies is highly uncertain, and supervisors in Europe will be on high alert going into 2024. The resilience of firms across the full spectrum of the financial sector will be put to the test by an operating environment in which inflation will almost certainly stay above target all year1, and the long-tail impact of the past two years’ rapid rate rises will continue to be felt.

Geopolitical risks remain a particular concern, as demonstrated by the Bank of England’s decision to base the scenario for its System-Wide Exploratory Scenario (SWES) on a geopolitical shock to global financial markets. Their crystallisation could lead to inflation and interest rates staying high (or increasing again), and drive volatility in energy, commodity and bond prices, with a consequent impact on asset quality, increased cyber and operational risk, market risk, or sanctions risk.

A significant amount of risk has migrated outside the banking sector in recent years as banks have reduced their exposure to certain higher-risk activities following post-crisis regulatory reform.

The resilience of firms across the full spectrum of the financial sector will be put to the test by an operating environment in which inflation will almost certainly stay above target all year, and the long-tail impact of the past two years’ rapid rate rises will continue to be felt.

The worry for financial stability authorities is that risks outside the traditional macroprudential regulatory perimeter crystallise and ultimately affect the banking sector. Until a more comprehensive, non-bank financial institution (NBFI)-specific framework is in place (either globally or in Europe), supervisors will continue to use banks as a proxy to manage risks emanating from the NBFI sector and will expect banks to address identified weaknesses in counterparty risk management, liquidity risk management, operational risk management and margining practices. The limits to this “indirect” supervisory approach to NBFIs may not be far off, as recently acknowledged by one senior supervisor.2

When these developments are combined with the short-, medium-and long-term effects of climate change; increased cyber risks; risks from use of emerging technologies; and increasing geopolitical fragmentation; the cumulative effect is that Boards and senior management’s bandwidth will be stretched, especially in the Risk Function. Prioritisation will be even more necessary than usual – reinforcing the importance of robust and comprehensive risk identification processes that home in on the most material risks to firms.

Maintaining both the short-term viability and medium-term sustainability of firms’ business models is increasingly challenging – further complicated by the need to consider how actions taken in response to the broader macro environment interact with regulatory and supervisory objectives – such as the UK Consumer Duty (‘the Duty’). Firms will need to demonstrate that management has the appropriate capabilities and management information (MI) to steer the business in an agile and responsive way.

The volume and interconnectedness of regulatory change will require firms to take an integrated approach to regulatory change management


2024 will be a critical year for multiple significant regulatory change programmes for FS firms. The list is daunting, including but not limited to: major prudential reforms (such as Basel for EU and UK banks and Solvency II and Solvency UK for EU and UK insurers respectively); climate risk management, transition planning and disclosure rules, the Duty, the UK’s Model Risk Management principles, the European Central Bank’s (ECB) revised guide on internal models, the EU’s Digital Operational Resilience Act, and more. The task is complicated by a breakdown of consistency between jurisdictions in the implementation of global rules (such as Basel), the absence of a coordinated approach in nascent areas (such as Artificial Intelligence (AI) and digital assets), feedback from regulators and supervisors highlighting variability in firms’ practices, and the increasing prioritisation of measures to boost competitiveness and/or economic security relative to other jurisdictions.

Nevertheless, regulators and supervisors will expect firms to get implementation right first time across the board. The Financial Conduct Authority’s (FCA) instant engagement with firms on the Duty demonstrates the lack of supervisory latitude for incomplete or patchwork compliance, even on Day One. UK banks’ experience with regulatory reporting, or SSM banks experience with the BCBS 239, shows how expensive it can be for firms that get this wrong.

All of this points to firms needing to take an integrated approach to regulatory change management. Taking a siloed approach not only misses opportunities for firms to exploit synergies between different implementation programmes (for example, where data collection exercises can kill two birds with one stone). It also increases the risk of ‘getting it wrong’ where different regulatory initiatives interact or conflict – for example, leaving prudential reform to risk teams, Duty to compliance teams and climate‑related reforms to sustainability teams will inevitably result in sub-optimal outcomes for one or more of those workstreams.

Similarly, answering the question of how far and how fast to move on AI in 2024 will require involvement of multiple stakeholders within firms. Experience with the Cloud demonstrated that leaving technology issues such as AI to tech teams, with little regard for the impact on risk appetite, strategy or reputational risk, will not cut it with supervisors. Firms should look to identify where synergies in risk management and controls can reduce overall development and maintenance costs.

Tensions between public policy objectives are complicating choices for firms


Navigating the regulatory landscape for FS firms requires a strong understanding of not only the objectives of FS regulators, but also of how government policy will shape the regulatory landscape. The goals of regulators, in particular prudential regulators, do not necessarily always align with those of government.

Climate policy in Europe is a good example. As macroeconomic conditions have deteriorated, governments have prioritised easing the financial or operational burden on the real economy – for example, by relaxing certain elements of climate policy (as was the case in the UK in 2023) or reducing the burden of corporate sustainability reporting requirements (as was the case in the EU).

To the extent that either of these shifts in government policy increases the likelihood of a bumpier transition to net zero, FS regulators and supervisors are driven by their statutory objectives to take additional steps to ensure the resilience of FS firms to physical and transition risks. Supervisors will also continue to be alert for evidence of possible greenwashing – the ECB, for example, recently highlighted that some EU banks’ lending activities do not align with their climate disclosures and will monitor EU banks’ Pillar 3 disclosures on ESG risks closely in 2024.4 The challenge, for regulators, will be to avoid taking this too far and stifling the availability of transition finance or insurance coverage for climate-related risks. In connection with this, there are reports5 that the issuance of sustainability-linked loans slowed following an FCA letter setting out greenwashing concerns, demonstrating the difficulty of striking the right balance.

For firms, increased uncertainty over the future path of climate policy in the UK, or limitations in (or delays to) the availability of climate data for certain portfolios in the EU (such as small and medium-sized enterprises), complicate the task of complying fully with supervisors’ expectations of a climate-resilient business strategy and risk appetite.

Another example of tension arising between government objectives and regulatory objectives arose in 2023 as the UK government set out a series of proposed reforms related to the pensions sector, aiming to channel investment into productive assets. Life and pension firms need to consider how the proposals will deliver good outcomes to customers under the Duty – pursuing higher returns when customers bear all of the investment risk could lead to conflicts and ultimately breach of the Duty if not managed appropriately. Governments and regulators equally need to consider how to strike the right balance to ensure that patient capital is channelled into infrastructure investment and productivity improvements.



Navigating this complex and changing environment will, as ever, put senior executives and Boards at European firms to the test. Firms that succeed in connecting the dots – between managing short-term and long-term risks, between different regulatory implementation programmes and between their objectives and those of their stakeholders – will be best placed to prosper in the year ahead.

  1. The ECB expects headline inflation in the Euro area to be 3.2% in 2024, while the BoE does not expect inflation to return to its 2% target until the end of 2025. See here: ECB, ECB staff macroeconomic projections for the euro area, September 2023, available at; and BoE, When will we get back to low inflation?, November 2023, available at
  2. ECB, Interview with the Financial Times, October 2023, available at
  3. FSB, Main monitoring aggregates of the FSB’s Global Monitoring Report on Non-Bank Financial Intermediation, 2023, available at For the purpose of this figure, the FSB defines NBFIs as all financial institutions except commercial banks, central banks and public financial institutions
  4. ECB, Green lending: do banks walk the talk?, December 2023, available at
  5. Reuters, Loans linked to ESG face overhaul by under-pressure banks, November 2023, available at

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