Briefing
‘Regulating for growth’ – the UK’s vision for financial services in 2025 and beyond
The new Labour government has placed financial services at the centre of its plans to grow the UK economy, and it has stated that UK regulators have an important role in facilitating this. But what does this actually mean for the sector and how it is regulated? After years of bolstering prudential safeguards following the 2007-2008 global financial crisis, are we entering a new era of deregulation? As the UK seeks to strengthen its position as a financial centre outside the EU, will we see increasing divergence of standards? If so, what are the implications for financial services firms, particularly those doing business across borders?
The story so far
The Chancellor of the Exchequer, Rachel Reeves, said in her first Mansion House speech on 14 November 2024 that the UK ‘has been regulating for risk, but not regulating for growth.’ She announced that the government is developing the first ever Financial Services Growth and Competitiveness Strategy, to be published in April 2025. This will set out the government’s approach to the sector for the next ten years and serve as the ‘central guiding framework through which the government will try to achieve sustainable, inclusive growth for the sector and secure the UK’s ongoing competitiveness as an international financial centre.’ (For more information on the Mansion House speech, please see our blog post here.)
This sentiment is not a new or unexpected one, given the PRA and FCA’s new secondary competitiveness and growth objectives introduced by the Financial Services and Markets Act 2023, and the previous messages of the UK government over the past few months. Prime Minister Sir Keir Starmer, in his speech at the International Investment Summit on 14 October 2024, emphasised the critical importance of economic growth and investment for the future of the UK. He cited economic growth as being ‘indispensable’ for achieving higher wages, enhancing public services, and ensuring overall national prosperity.
Following the Prime Minister’s speech, the UK regulators emphasised their commitment to economic growth. Sam Woods, Deputy Governor for Prudential Regulation and CEO of the PRA, delivered a speech on 17 October at Mansion House titled ‘Competing for growth’ in which he emphasised the PRA’s strong commitment to its new competitiveness and growth objective. On the same day, Nikhil Rathi, Chief Executive of the FCA, reiterated the FCA’s commitment to fostering economic growth in his speech titled ‘Growth: mission possible.’
But what exactly does ‘regulating for growth’ look like? In his October speech, Woods cited initiatives such as the reduction of ‘bureaucratic processes and some excess conservatism’ and making regulation more ‘efficient, evidence-based, and effective in supporting competitiveness and growth.’ Rathi talked about the need for ‘operational improvements’ in the FCA’s processes, such as digitisation and more efficient enforcement actions (stressing the importance of infrastructures and technology in supporting market growth). This sounds promising, and any sensible reduction in the regulatory burden and cost of compliance will make the UK more attractive for financial services firms, thereby supporting the growth of the financial services sector. But the government’s vision (and the regulators’ secondary objectives) extends to the UK economy more broadly, and ‘regulating for growth’ will also require a regime that fosters investment, lending and innovation. That may be more of a challenge.
In its November call for evidence in relation to the Financial Services Growth and Competitiveness Strategy, the government identified five core policy pillars (innovation and technology; regulatory environment; regional growth; skills and access to talent; and international partnerships and trade) as well as a number of priority growth opportunities (such as fintech and sustainable finance). The government has also launched a new Regulatory Innovation Office (RIO) with the aim of removing regulatory barriers to the emergence of new technologies. While the RIO will initially focus on four specific areas (engineering biology, space, artificial intelligence and digital in healthcare, and connected and autonomous technology), the government has made it clear that its remit could be broadened in future to include other sectors such as financial services.
Here are some specific examples of recent policy initiatives for financial services that may demonstrate how the government and UK regulators plan to deliver on their commitment to economic growth in 2025 and beyond.
Basel 3.1 standards
On 12 September 2024, the PRA published a policy statement, PS9/24: Implementation of the Basel 3.1 standards near-final part 2. This is the second of two near-final policy statements published in response to Consultation Paper CP16/22 and covers the implementation of the Basel 3.1 standards for credit risk, the output floor, and reporting and disclosure requirements.
PS9/24 aims to deliver a better-balanced and risk-sensitive approach to calculating regulatory capital under the Basel 3.1 framework, as well as supporting financial and economic stability and the growth and competitiveness of the UK while remaining aligned to international standards. The near-final policy set out in PS9/24 makes several important changes to the original proposals in CP16/22, including:
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lowering the proposed capital requirements for lending to SMEs;
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lowering the proposed capital requirements for infrastructure projects; and
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simplifying the approach to valuing residential property.
As a result of these changes, the PRA estimates that the Tier 1 capital requirements of major UK firms will be virtually unchanged by the final rules, with an aggregate increase of less than 1 per cent when the rules are fully phased in, compared to the 10 per cent increase that will result from the EU’s implementation of Basel 3.1. According to the PRA, this has been achieved in part through ‘some adjustments relative to international standards to support the international competitiveness of the UK,’ though the PRA says that ‘the near-final policy and rules still align with international standards, including by removing pre-existing deviations.’ The PRA highlighted that in preparing the policy statement it had given particular consideration to the competitiveness and growth objective.
PS9/24 also delayed the implementation of the UK rules until 1 January 2026, with a four-year transition period, whereas the new standards have already started to come into effect in the EU from the beginning of this year. In part, the PRA wanted to bring the UK into line with the US, which has yet to finalise its own Basel 3.1 standards. However, the incoming Trump administration has voiced opposition to what the US calls the ‘Basel Endgame,’ which could lead to further delays. Bank of England officials have indicated that they intend to proceed regardless, but the resulting fragmentation in the timing and degree of capital requirements could lead to regulatory arbitrage and create logistical challenges for banks operating in multiple jurisdictions.
‘Strong and simple’ – a new prudential framework for small UK banks and building societies
Another area in which the UK is seeking to boost growth and competition - diverging from the EU in the process - is in its plans to create a ‘strong and simple’ prudential framework for non-systemic banks and building societies. As explained by David Bailey, the PRA’s Executive Director, Prudential Policy, in a speech at the Building Societies Association in September 2024, the intention is to help smaller firms innovate and grow, thereby advancing the PRA’s new secondary competitiveness and growth objective.
This initiative is not new. The PRA first published a discussion paper and feedback statement in 2021, setting out its vision to simplify prudential requirements for smaller, domestic-focused banks and building societies while maintaining those firms’ resilience. (For more information, see our blog post.) Unlike the EU capital requirements regime, which broadly applies to all banks in a similar way, the strong and simple framework will create a two-tier regime in the UK.
Since then, there have been a number of announcements and publications from the PRA as it develops the framework. In 2023, following two consultations, the PRA published final rules on the criteria for determining eligible firms and on liquidity and disclosure requirements. More recently, in September 2024, the PRA published a consultation paper (CP7/24) setting out its proposed simplified capital regime for Small Domestic Deposit Takers (SDDTs). The SDDT regime will be implemented on 1 January 2027, one year after the Basel 3.1 standards come into effect in the UK. In the meantime, the PRA is introducing a transitional capital framework so that small firms will not need to apply the Basel 3.1 standards before the SDDT capital regime is introduced. In November 2024, the PRA published a policy statement (PS19/24) setting out which firms will be eligible for this interim capital regime (ICR) (final rules are expected to be published in Q1 2025).
Easing of ring-fencing regime
The Labour government is also proceeding with plans to liberalise the bank ring-fencing regime, which was introduced following the global financial crisis in order to promote financial stability and competition within the UK banking market. The regime requires UK banks with core deposits in excess of £25bn to separate their retail banking services from non-retail activities such as investment and international banking, with the aim of protecting retail banking from shocks originating elsewhere in the group and in global financial markets.
On 11 November 2024, HM Treasury published a response to its 2023 consultation on near-term reforms relating to the bank ring-fencing regime. It also published a draft version of the Financial Services and Markets Act 2000 (Ring-fenced Bodies, Core Activities, Excluded Activities and Prohibitions) (Amendment) Order 2024. The consultation, launched in September 2023, proposed to implement near-term reforms to the ring-fencing regime for UK banks based on recommendations set out in an independent panel’s report published in March 2022. For more information on the consultation, see our blog post.
In its response, HM Treasury said there was broad support for the proposed reforms, but respondents highlighted several policy and legal issues, which the government has sought to address. Under the new regime, the ring-fencing deposit threshold will be increased from £25bn to £35bn, thus raising the level at which the requirements would apply. Further, the reform will introduce a secondary threshold to exempt retail-focused banks with trading assets of less than 10 per cent of tier 1 capital from the ring-fencing regime, unless they are part of a global systemically important bank (G-SIB). Other changes under the reform include allowing ring-fenced banks to operate branches and subsidiaries outside the UK or EEA and permitting ring-fenced banks to carry out a broader range of activities, such as making direct and indirect equity investments in SMEs.
The independent panel’s 2022 report also recommended that HM Treasury review how to align the ring-fencing and resolution regimes in the longer term to ensure simpler and more coherent regulation, as both regimes seek to address the same issue of ‘too-big-to-fail.’ In September 2023, the government published a response to a Call for Evidence on aligning the regimes, in which it said that it would set out its policy response and any proposals for further reform in the first half of 2024. This did not happen before the general election in July, and the Labour government has yet to indicate its next steps in this area.
The FCA’s review of retail conduct requirements
This trend towards deregulation (or, at the very least, simplification of existing regulation) is not limited to prudential requirements. On 29 July 2024, the FCA published a Call for Input asking for views on whether, where and how it can refine and simplify its retail conduct rules and guidance through greater reliance on high-level rules while ensuring it continues to support and protect consumers. The deadline for comments was 31 October 2024.
This initiative arose out of the introduction of the Consumer Duty. The FCA is exploring whether this outcomes-based approach could be expanded and replace detailed and prescriptive requirements that cover similar issues to the duty. The Call for Input is a response to concerns that firms, particularly smaller firms, have expressed about the length and complexity of the FCA’s rules and guidance. The FCA says it wants to address potential areas of complexity, duplication, confusion or over-prescription, which create regulatory costs with limited or no consumer benefit – so the ultimate aim is one of efficiency. Although the Call for Input is primarily focused on retail conduct rules and guidance, it also invites views on the FCA’s wider rules and guidance.
The FCA says it intends to outline its approach in early 2025. While many in the industry welcome the prospect of a simpler rulebook, they also acknowledge that the scale of the project is potentially significant and could demand substantial resource as firms adjust to the new approach. Some respondents have also stressed the need to maintain interoperability with EU standards.
The journey towards growth and competitiveness: on your marks, get set…
These are just a few examples of steps the UK government and financial services regulators are taking to boost the UK financial services sector and the economy as a whole. The FCA has also overhauled the listing regime to attract more companies and investors to UK stock markets, and it is currently consulting on a new, more flexible and proportionate product information framework for Consumer Composite Investments, which will replace the PRIIPs regime that the UK inherited from the EU. The PRA has introduced reforms to the Solvency II rules for insurers, designed to support a more competitive and dynamic sector in the UK and reduce barriers to investment in new asset classes. Sam Woods told the House of Lords’ Financial Services Regulation Committee on 8 January 2025 that the reforms have already cut reporting requirements for the sector by a third and that the PRA is considering how to cut reporting requirements for banks. In addition, he said the PRA is planning to introduce a new sandbox that will allow insurers to make new investments before receiving official approval to do so. The FCA and PRA have also scrapped the EU bonus cap and are consulting on rules to reduce vesting periods for certain individuals.
It is clear that economic growth is a key focus for the current UK government – and the UK regulators seem to be adopting this mindset, as evidenced by the examples outlined above. Increased growth requires a willingness to take on increased risk, and there seems to be a consensus among both the government and regulators that markets should be encouraged to move in this direction – Rathi, in his October 2024 speech, described the new secondary growth objective as ‘liberating’ and talked of there being a ‘much-needed, more candid conversation about our collective risk appetite.’ Woods made similar comments in his October speech, stressing that the role of regulators is ‘not to eliminate risks, but to ensure risks are properly managed.’
The journey towards competitiveness and growth is just beginning. There is still much more to be done, and we can expect an increasing number of UK regulatory developments in the coming years to support these secondary objectives. The road ahead should become clearer when the government publishes its Financial Services Growth and Competitiveness Strategy in April. But one of the difficulties faced by the government and regulators will be determining exactly how to achieve economic growth whilst ensuring financial stability is preserved, not to mention consumer protection. As Woods said in his October speech, although the PRA is strongly committed to its new growth objective, they are going to think about this in a ‘careful, balanced way.’ More recently, in his evidence to the House of Lords’ Financial Services Regulation Committee in January 2025, he said that the PRA does not see advancing or supporting growth as meaning a ‘race to the bottom.’ On the contrary, its view is that high regulatory standards make the UK more rather than less competitive as a financial centre.
As a final thought, it is important to remember that while regulators have an important role in facilitating the government’s growth agenda, they cannot do this alone. When striking that balance and resetting their risk appetite, they will need the support of the government and of Parliament, to which they are ultimately accountable.