Regulatory pressure intensifies around governance and financial resilience for financial services firms

• Pressure on firms remains intense with an aggregate score of 7.3, up from 7.2 in September ’23
• Financial resilience edges ahead of ESG and Sustainable Finance to have the highest regulatory impact score
• Renewed focus on Governance drives largest change in score
• Divergence between EU and UK rules continues

KPMG UK launches the fourth edition of its Financial Services Regulatory Barometer, providing a biannual measure of the regulatory pressure* faced by financial services firms in the UK and EU. The latest aggregate Regulatory Impact Score stands at 7.3 (out of 10), up from 7.2 in September 2023, reflecting the sustained regulatory burden facing the industry in the UK and across the EU.

Philip Deeks, Head of KPMG’s Regulatory Insight Centre, comments: “Regulatory pressure remains high, and firms are becoming more vocal in their challenges to policymakers, increasingly citing the impacts of regulatory compliance on profitability and competitiveness.

“Political and regulatory agendas are becoming increasingly intertwined. Some regulators are applying more flexible and proportionate approaches, but, as we see in the Barometer, progress takes time. Regulators must strike a balance between reducing the regulatory burden while promoting safety, soundness and consumer protection in an unpredictable world.

“We expect to see further compromise going forward and ultimately a tapering of regulatory pressure. In that sense, there may be something of a pendulum swing – but novel risks mean that regulation will necessarily keep evolving. The difference between good and bad regulation will be whether it achieves the intended outcomes without unnecessary cost, complexity or commercial implications.”

Financial resilience (score of 8.5 – up from 8.4 in September ’23)

Financial Resilience has overtaken ESG and Sustainable Finance for the first time as the highest scoring regulatory theme. The main challenge for banks is the implementation of the final Basel III reforms, while insurers are battling with prudential regimes at various stages of progress. Both sectors are facing new UK requirements for solvent exit planning.

ESG and sustainable finance (score of 8.4, down from 8.5 in September ’23)

The regulatory impact score remains very high, thanks to the focus on greenwashing, expanding reporting and disclosure requirements, lower tolerance from supervisors where firms fail to meet expectations, and growing momentum around nature and social impacts. Although political delays are resulting in loss of momentum on certain initiatives, and this is likely to be compounded by upcoming elections, firms must press ahead with the areas of work that have already been set out by regulators and focus on potential business opportunities.

Strengthening operational resilience (score of 8.0, up from 7.9)

In an increasingly digital and interconnected world, regulators are seeking to minimise the negative impacts that disruptions could have on individual firms and their customers, as well as wider impacts on financial stability and the functioning of markets. The slight increase in regulatory pressure score reflects the ongoing challenges of implementing the Digital Operational Resilience Act (DORA) by January 2025. New rules for critical third parties to the financial sector are expanding the regulatory perimeter.

Governance (score of 6.9, up from 5.2)

There has been a resurgence of pressure around Governance, due to the expansion of regulatory remits and greater supervisory focus. The need for good corporate governance is paramount – including embedding appropriate accountability, robust oversight by non-executive functions, effective management of conflicts of interests and clear audit trail for decisions. Non-financial misconduct is under scrutiny and the likelihood of enforcement actions is increasing.