Quarterly prudential risk radar - March 2025

The UK government is placing financial services at the centre of its plans to grow the economy, with a focus on "regulating for growth" rather than just risk. The first Financial Services Growth and Competitiveness Strategy is set to be published in April 2025, outlining the government's approach to the sector for the next decade.

In a significant development, the Bank of England has announced a further delay in implementing Basel 3.1 regulations, pushing the deadline to 1 January 2027. This decision, made in consultation with HM Treasury, aims to allow more time for clarity on US implementation plans. However, this shift in the timeline creates further scope for divergence between EU and UK/US regulations since the former has largely implemented Basel 3.1 already. This misalignment may alter the competitive landscape for firms operating across jurisdictions and increase the complexity (and cost) of operating across borders. Future moves to seek closer political linkages between the UK and Europe are also likely to be more difficult since regulatory equivalence could be harder to achieve.

Regulatory pressure remains high, but there is a clear shift towards improving competitiveness and growth. The Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) are working on streamlining authorisations and Senior Manager Function (SMF) approvals. Additionally, the PRA is exploring ways to reduce reporting requirements for banks, following similar reductions for the insurance sector.

In response to the government's focus on growth, regulators are prioritising ideas to boost investment. The FCA has announced four main areas of focus for 2025-2040: economic growth and innovation, financial crime, consumer resilience, and improving its own efficiency and effectiveness as a regulator.

Firms’ capacity to exit the market in an orderly manner remains a priority. The PRA's trading wind-down deadline is in March, and non-systemic banks and building societies are required to comply with newly-introduced solvent exit rules from October. For building societies in particular, these rules have been the subject of discussion about the extent to which they are consistent with existing legal and regulatory frameworks. 

Banking

The announcement of the delay to Basel 3.1 in January means firms must now consider whether to proceed with their existing implementation programmes. 

Feedback appears to suggest there is limited scope for changes to credit risk rules, and the delay is intended to ensure that market risk components of the UK and US regimes remain aligned due to the volume of cross-border activity and uncertainty surrounding US adoption of the Basel framework. However, many firms’ implementations are well advanced, and there is a risk that further rule changes may still require further work.

The delay also generates uncertainty around the necessity of the Internal Capital Requirements (ICR) regime and parallel Capital Requirements Regulation (CRR) updates published alongside Basel 3.1 (including securitisation and own funds rules). However, clarity on the revised Pillar 2 framework under Basel 3.1 is expected in Q2 2025, to be implemented before the end of 2026. Firms in scope for Small Domestic Deposit Takers (SDDT) continue to weigh up the relative benefits of entering the regime. Reduced risk sensitivities under Pillar 2 are under debate, with several banks considering whether the regime will be sufficiently dynamic to support alternative strategic growth options. 

With the October implementation deadline approaching, firms are also starting to engage with internal and external stakeholders to develop their Solvent Exit Analyses (SEAs).

For lenders providing motor finance, there will be a significant focus in 2025 on provisions and liabilities for expected redress, with some estimates placing these on a par with payment protection insurance during the 2010s. Concerns initially eased when Rachel Reeves signalled the Treasury’s intention to intervene in the Supreme Court proceedings. While this request was not upheld, many in the industry hope this is due to the Court’s expectation that the Treasury’s submissions may be largely picked up by other participants, such as the FCA. 

Investment firms

MIFIDPRU investment firms continue to be subject to increasing regulatory intervention as the Investment Firm Prudential Regime (IFPR) matures and increasing numbers receive the outcome of SREP visits. The FCA is active in targeting high-risk firms through targeted reviews or section 166 reports.

Private equity firms are particularly active in the sector, where consolidation (and in some cases, deconsolidation) remain key considerations when it comes to deal structuring to maximise capital efficiency in investment firm groups. In conjunction with the PRA, the FCA issued new guidelines to describe how it undertakes prudential assessments of change in control applications, which appear to increase the focus on common management and degree of separability. 

During Q1 2025, the FCA is also expected to consult on further changes to the prudential regime for Personal Investment Firms (PIFs), which could result in risk-calibrated capital and liquidity requirements not dissimilar to the more complex MIFIDPRU regime.

Insurance

After Solvency UK was fully mapped into the PRA Rulebook at the end of 2024, insurers are now expected to follow UK rules. Following the speech published by Sam Woods (CEO of the PRA) in October, life insurers will be expected to take advantage of the flexibility now allowed under the Matching Adjustment to invest in a broader range of assets across the UK economy.

In line with the path set by the PRA for non-systemic banks, an SEA will be required by July 2026, as confirmed in October.

Priority matrix - March 2025

This graph covers a selection of key themes which are discussed in this article. 

Basel 3.1: the implementation date has been further delayed to 1 January 2027, with full implementation targeted by 1 January 2030. The PRA is expected to publish the final policy statement in Q1 2025. Although this remains a key focus for firms due to the significant changes and the need for preparation, there is a rebalancing of immediate priorities.

Strong and Simple: the SDDT regime continues in line with published timelines. Although there are extensive consultation responses to work through, the PRA is expected to publish final policy on the capital elements of the regime in Q1 2025. Therefore, SDDT remains a priority for affected firms and those seeking permission.

IFPR: while the FCA appears to be increasing its regulatory intervention for firms that fail to meet its expectations under MIFIDPRU rules, no material changes to the rules are expected in the short term, with the regime relatively well embedded among most firms.

Recovery and wind-down: wind-down will be a significant regulatory priority in 2025, as many firms look to design SEAs for the first time and take forward significant industry-wide feedback on recovery planning published in 2024.

Solvency II: as Solvency UK has become fully embedded into the UK regulatory framework, there is limited regulatory change expected in the short term, reducing the current level of priority and application.

Forward view

Q1 2025

• Securitisation: consultation on further changes to general requirements expected.
• Leverage ratio: consultation on changes to leverage ratio thresholds.
• Basel 3.1: publication on streamlining capital communications.
• Banking data review: consultation expected which will focus on regulatory reporting.
• Insurance: launch of the Life Insurance Stress Test (2025).
• Margin requirements: PRA/FCA consultation on margin requirements for non-centrally cleared over-the-counter (OTC) derivatives.
• Personal Investment Firms: during Q1 2025, the FCA is expected to consult on further changes to the prudential requirements for PIFs following CP23/24.
• IFPR: removal of legacy links to the CRR.

Q2 2025

• Climate: PRA looking to consult on changes to climate change expectations outlined in SS3/19 (timing uncertain).
• Motor finance: FCA expected to set out next steps for review of historical Discretionary Commission Arrangements (DCAs).

Q3 2025

• Solvent wind-down: final preparations for compliance on 1 October 2025 implementation date (non-systemic banks).

Q4 2025

• Solvent wind-down: implementation of solvent exit framework for non-systemic banks.

Q1 2026

• Banking: restatement of remaining CRR rules (including securitisation and definition of capital).
• Insurance: implementation of revised liquidity reporting for larger insurers following CP19/24.

Q2 2026

• Solvent wind-down: implementation of solvent exit framework for insurers.

Q1 2027

• Basel 3.1: revised implementation date on 1 January 2027.
• SDDT: implementation date on 1 January 2027.

For more information or to discuss how these changes may impact your business, please contact Gavin Sharpe or James Roberts.