KPMG Regulatory
Barometer – H1 2024

Insights for the changing world

March 2024
Powered by: KPMG Regulatory Horizon

Quantifying Regulatory Pressure

Welcome to the KPMG Regulatory Barometer – measuring the impact of regulatory change

The KPMG Regulatory Barometer helps firms identify the key areas of pressure across the evolving UK and EU regulatory landscape and assess the impact of the change.

Financial services firms need to handle frequent regulatory updates from multiple sources, and it can be difficult to distil the volume and complexity of regulatory change into a single view. Geopolitical concerns, uncertain economic conditions with financial stability and cost of living implications, changing customer demands and behaviours, sustainability concerns, and use of new technologies, are all influencing regulatory agendas.

The Barometer:

  • Delivers a consolidated source of regulatory intelligence
  • Assesses the extent of regulatory pressure across key themes
  • Provides a single metric to represent the size and complexity of the challenge

A regulatory impact score is calculated for each of the Barometer key themes based on attributes such as volume of regulatory updates, materiality, complexity (including the extent of transformation required) and time to implementation. The theme scores feed into a single overarching metric that represents the overall level of regulatory pressure. The chart below shows how the scores have changed over time.

The aggregate regulatory pressure score for this edition of the Barometer is 7.3, a slight increase on the H2 2023 score of 7.2. This indicates that the regulatory burden has increased overall, a message that is consistent with comments from firms, although there are fluctuations in score across the key themes.


Financial Resilience has overtaken ESG and Sustainable Finance for the first time as the highest scoring area:

  • The score for ESG and Sustainable Finance remains very high, reflecting the pressure on firms to implement requirements, particularly in relation to reporting, risk and anti-greenwashing.
  • However, Financial Resilience has edged ahead due to the breadth and complexity of requirements to be addressed by firms in the short to medium term and heightened supervisory scrutiny.
  • There has been a marked resurgence of pressure around Governance, due to an increase in expectations and expansion of remits, coupled with increasing supervisory focus.
  • Scores for Operational Resilience and Capital Markets have also risen as key regulatory files are finalised and implementation deadlines approach, placing increased pressure on firms.
  • Meanwhile, the score for Customer Protection has fallen slightly in response to the shift from new policy to supervisory measures.

Key regulatory themes and messages

Regulators and supervisors continue to operate against a backdrop of challenging economic conditions and increasing geopolitical fragmentation as they seek to deliver against their mandates of financial stability, consumer protection and now also promoting competitiveness. They must also adapt to the rapidly changing financial landscape, including technology innovation, while managing any attendant risks and unintended consequences.

Regulatory and supervisory activity has intensified, with failures of firms in the US and Europe in 2023 leading to heightened scrutiny of risks. This manifests as policy revisions, tighter deadlines, lower tolerance for lack of compliance and an increase in supervisory exercises.

Questioning outcomes – the resulting pressure on firms is considerable and they are becoming more vocal in their challenges to policymakers, citing the impacts of regulatory compliance on profitability and competitiveness, and questioning whether initiatives will have the intended outcomes.

Fair challenge – regulators are seeking to apply more flexible and proportionate approaches, but progress takes time. In some instances, where it was argued that regulation was hurting competitiveness, regulators have responded to industry pressure and rolled back requirements. For now, this tension seems greater in wholesale investor protection regulation and there has been less political pressure to reduce financial stability measures.

EU:UK differences – the policy landscape is, in some respects, simpler to navigate and challenge in the UK, although politics and regulation are increasingly intertwined in both. The complexity of the EU legislative process and the need for the bloc to reach agreement, or at least compromise, exemplify the difficulty of delivering agile, proportionate and responsive regulation. Focus on strategic autonomy and competitiveness in the EU is driving greater pressure to direct investors’ savings to domestic assets. This may lead to further divergence in regulatory approaches, adding to the burden for firms operating across borders.

Managing regulatory change – 2024 will require considerable efforts from firms to manage their regulatory change book of work. The uncertainty of upcoming elections could add to the pressure, though it may also provide short term respite from new initiatives and cause others to be delayed or reconsidered. Profitability challenges may stress the resources available to firms to respond to continuing regulatory and supervisory demands.

“Faced with increasing regulatory divergence, firms need a coherent, increasingly technology-driven and agile approach to identifying and implementing regulatory change.”
– Rob Smith, Partner and Regulatory and Risk Advisory Lead, KPMG in the UK

There may be further compromise going forward and ultimately some tapering of regulatory pressure. However, novel risks mean that regulation will keep evolving. The difference between good and bad regulation will be whether it achieves the intended outcomes without unnecessary cost, complexity or commercial implications.

EU and UK regulation – alignment or divergence?

EU:UK alignment divergence

Post-Brexit, the EU and UK are now following their own policymaking agendas. However, fundamental regulatory concerns continue to be shared and the first Joint EU-UK Financial Regulatory Forum has established the framework for ongoing discussion and collaboration.

Divergence of policy detail and timing increases complexity for cross-border firms. The UK has begun to tailor rules to a more UK-centric and principles-based style of rulemaking, while the EU has its own complex legislative agenda for financial services. Both jurisdictions are considering the impact of regulation on competitiveness.

As part of the Edinburgh Reforms, HMT is moving forward with the repealing and reforming of 43 ‘core files’ of retained EU law in a way that is ‘thoughtfully planned and sequenced to minimise unnecessary disruption while taking the opportunity to maximise the potential for the greatest economic impact’. The Treasury Select Committee reported that progress has been too slow, to which the government responded by asserting that the current plans allow an appropriate amount of time for consultation and implementation.

EU and UK regulatory requirements align to different extents across the nine Barometer themes – in some cases reflecting different starting points due to previous UK and EU Member State ‘gold-plating’ and national rules.

Delivering ESG and sustainable finance

Delivering ESG and sustainable finance

Implementing
8.4
Delivering ESG and sustainable finance

2024 marks a significant shift from rule-writing to rule implementation, particularly for the firms that will be impacted by CSRD. Regulatory and supervisory initiatives linked to ESG and sustainable finance continue to have significant impacts for firms across financial services. Although political delays are resulting in loss of momentum on certain initiatives, and this is likely to be compounded by upcoming elections, firms are pressing ahead with the areas of work that have already been set out by regulators and are focused on potential business opportunities.

The volume and complexity of potential reporting and disclosure requirements present significant challenges. With the first wave of key standards now finalised, focus is shifting to implementation and developing the assurance landscape.

Regulatory approaches to the management of climate and environment-related risk, including potential capital treatments, are also still evolving, and supervisory expectations are rising to reflect anticipated increases in the maturity of risk management and governance practices.

ESG and Sustainable Finance therefore continues to have a very high regulatory impact score. The pressure on FS firms remains intense, due to expanding reporting and disclosure requirements, lower tolerance from supervisors where firms fail to meet expectations, and growing momentum around nature and social impacts. More than ever, firms will be expected to demonstrate and evidence their sustainability credentials and take concrete actions to prevent greenwashing, whether through detailed transition plans, disclosures or the adoption of product labels.

See Reinforcing Governance Expectations for more on the EU Corporate Sustainability Due Diligence Directive (CSDDD) and UK Corporate Governance Code.

Developing/
Implementing
8.4
Delivering ESG and sustainable finance

Tackling greenwashing

Greenwashing concerns are paramount in regulatory and supervisory responses and the supervisory toolkit is expanding to reflect this. Regulators and supervisors are sending clear messages that, without appropriate action, greenwashing could undermine the transition and result in poor consumer outcomes. Firms should note that greenwashing can occur intentionally or unintentionally and in relation to entities and products that are within or outside the remit of existing regulatory frameworks.

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Reporting and disclosures

Sustainability-related regulatory and corporate reporting requirements have moved from design to operationalisation. Discussions continue across jurisdictions on how to make standards interoperable or at least complementary, to support harmonisation and reduce the burden on firms. However, this will take time and, even where it can be achieved to some extent, the broad scope and granularity of requirements will require significant coordination and data gathering efforts.

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Climate and environment-related financial risk for banks and insurers

Consideration of climate and environment-related risk is a key element of the BAU supervisory cycle, and regulators have set clear expectations and consequences for failing to act. Firms are expected to embed consideration of sustainability factors into their risk frameworks and stress testing. Longer term changes to capital and solvency requirements are still being considered.

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ESG and markets

As financial services firms and the real economy transition to more sustainable business models, ESG-related mechanisms are expanding to support them. In areas such as carbon markets and ESG data and ratings, there is a mix of regulator and industry-led initiatives. Where formal regimes are absent or slow to develop, markets are tending towards voluntary self-regulation.

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Portfolio management and advice

EU investment firms and fund managers already need to integrate sustainability risks and factors in their business, understand client preferences, and take account of certain sustainability considerations within the product manufacturing and distribution process. ESMA guidelines adding detail to existing requirements became effective from October 2023. While similar requirements have not been adopted in the UK, the FCA has convened an industry-led working group to support firms advising consumers on products that make claims about sustainability.

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“2024 marks a significant shift from rule-writing to rule implementation, and the pressure on FS firms remains intense. Although we may see some delays or loss of momentum due to political uncertainty, firms must press ahead with the areas of work that have already been set out by regulators and continue to focus on potential business opportunities.”

Richard Andrews

Partner and ESG Lead,
KPMG in the UK

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“The countdown is now on for firms captured in the first wave of CSRD as they mobilise to meet the 2025 reporting deadline. Firms that will be captured in later years would also be wise to start planning their approaches. 2024 will bring more updates on ESG reporting, including Sustainability Reporting Standards for the UK, increasing focus on nature and further developments in the assurance landscape.”

Hilary Eastman

Partner and ESG Reporting Lead,
KPMG in the UK

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“Regulators remain laser-focused on climate and environment-related financial risks. As requirements continue to evolve to include broader sustainability risks, it will be critical for firms to keep adapting their risk practices whilst at the same time clearly demonstrating improvements in implementation, if they are to satisfy their supervisors.”

Heather Townson

Director, ESG Risk,
KPMG in the UK


Maintaining financial resilience

Maintaining financial resilience

Implementing
8.5
Maintaining financial resilience

With continuing economic uncertainty and increasing geo-political fragmentation, prudential regulators and supervisors are seeking a balance between maintaining robust levels of financial resilience, addressing system-wide vulnerabilities, ensuring that firms are able to exit smoothly from the market, and promoting competitiveness in their respective jurisdictions.

Finalisation of the Basel III reforms, an Interim Capital Regime for smaller firms, new UK requirements for solvent exit planning, updated approaches to model risk management and intensifying supervisory scrutiny of risk data aggregation, regulatory reporting and governance all contribute to the increasing regulatory pressure for banks.

Revision of prudential regimes for insurers across the UK, Europe and globally are at different stages of progress, from implementation (SUK) to final development (EU Solvency II, ICS).

In addition to ongoing policy changes to the prudential framework for investment firms, the FCA has completed a supervisory review of IFPR implementation and identified financial resilience as a supervisory priority for several sectors.

Stress testing remains a key supervisory tool in monitoring vulnerabilities. Revisions are required to ensure that testing remains fit for purpose in a digital age and accurately reflects emerging risks. The Bank of England’s System Wide Exploratory Scenario (SWES) is the first exercise to take a broader view of system-wide dynamics, reflecting a growing focus on NBFIs, which now account for more than 50% of global financial markets.

The volume of initiatives and the need for firms, particularly banks and insurers, to take significant actions in the short term to deliver against multiple, complex regulatory requirements, coupled with intense supervisory scrutiny, results in an increase in regulatory pressure score. (For climate and environment-related financial risk for banks and insurers see Delivering ESG and Sustainable Finance).

Implementing
8.5
Maintaining financial resilience

Banks

Banks are facing into the demands of implementing the final Basel reforms, with some uncertainty persisting around timeframes and consistency of requirements across the UK, EU and US. Following bank failures in 2023, solvent exit has emerged as a priority, with credit and funding risks, wider risk management and governance, and regulatory reporting also high on the supervisory agenda. The establishment of regimes that are robust, yet proportionate, and which facilitate competitiveness, may increase the divergence between UK and EU approaches.

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Insurers

Insurers need to review balance sheet, and operational and governance implications of changing prudential frameworks. Key pieces of regulatory change require firms’ immediate attention, notably the requirement for CFOs to attest to the benefits of the sufficiency of the fundamental spread and quality of the Matching Adjustment (MA). For Bulk Purchase Annuity (BPA) writers, PRA scrutiny of their Funded Reinsurance arrangements will only increase. The development of targeted resolution frameworks for insurers, in the UK and EU, is another significant area of focus, alongside the requirement for UK insurers to plan for solvent exit.

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MiFID and MiFID-exempt firms

Supervisory work and policy amendments continue for investment firms under the UK and EU prudential regimes. Firms should continue to track the outputs of supervisory reviews, regulators’ changing expectations, and amendments to the frameworks.

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Regulating digital finance

Regulating digital finance

Emergent
7.0
Regulating digital finance

Accelerated adoption of digital innovation in financial services continues. This is providing significant benefit to customers and service providers, but also introduces novel risks to consumer protection and, on a wider scale, to financial stability. After beginning somewhat tentatively, regulators are now pushing ahead more decisively with their proposed frameworks.

Distributed ledger technology could bring efficiency and reduce risk in trading lifecycle processes but could also potentially disintermediate incumbent players.

The uptake of cryptoassets requires regulators to determine whether they can be accounted for within existing regulatory frameworks, or whether new approaches are necessary. Central banks are also considering minting their own CBDCs to safeguard the traditional role of currency.

While some jurisdictions are pursuing prescriptive bespoke frameworks for AI, others are opting for more flexible principles-based approaches where they can lean heavily on existing structures.

The digitisation of data offers opportunities to improve and personalise consumer financial services. Regulators are supporting this through the development of Open Banking and Open Finance frameworks whilst simultaneously increasing their scrutiny of Big Tech firms who hold vast amounts of consumer data and continue to expand their presence within financial services. The challenge is to support innovation whilst still protecting customer data and ensuring that holders of data do not have an unfair competitive advantage.

And finally, on the frontier, regulators and policy makers are also beginning to consider the impact of innovations like quantum computing.

Since the H2 2023 Barometer, regulators are continuing to push ahead with their frameworks around digital finance, with some now even finalised and ready to be implemented. This has resulted in a slight increase in pressure for firms.

Emergent
7.0
Regulating digital finance

Crypto-assets and CBDCs

Regulators have continued to publish consultations on how to regulate the cryptoasset sector, while also beginning to move into the implementation phase. Some individual rules entered into force in late 2023, predominantly around financial crime and consumer promotions, and the first major overarching framework (MiCA) is set to apply from mid-2024. The development of CBDCs also continues, with the BoE entering the design phase and the ECB entering the preparatory phase of their respective projects.

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Artificial intelligence and machine learning

Artificial intelligence and machine learning techniques can enable firms to offer better and more personalised products and services to consumers and improve operational efficiency and risk management. However, they can also pose new challenges for firms and regulators and amplify existing risks. Financial supervisors had already begun to issue individual ad-hoc guidelines and are now also working towards designing more comprehensive overarching plans. Some jurisdictions have chosen to pursue prescriptive bespoke frameworks, while others are opting for more flexible principles-based approaches that lean heavily on existing structures.

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Platformisation, Big Tech in Finance

Over the past few years, several Big Tech players have entered the financial services arena and begun offering a variety of platform-based solutions directly to consumers, while also becoming critical third-party providers to traditional firms within the ecosystem. However, unlike traditional firms – which are designed to operate exclusively within the financial services domain – some Big Tech firms are choosing to develop and distribute financial products as part of their wider portfolio of existing activities. Policymakers and regulators are consequently having to examine whether the current regulatory framework is fit for purpose.

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Data sharing and innovation

Open Banking is seen as a successful driver of innovative products and services for consumers. Regulators and policy makers are now embedding and refining the regime, and are advancing proposals that broaden the Open Banking principles of data sharing further to create an Open Finance framework.

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“As Solvency UK comes into focus, insurers have a strategic opportunity to review their balance sheet and, operational & governance frameworks to make best use of freed up capital and improved investment flexibility. Meanwhile, Bulk Purchase Annuity writers face more intense regulatory scrutiny of their business models, especially their use of funded reinsurance.”

Huw Evans

Partner, Insurance,
KPMG in the UK

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“As the industry awaits the PRA’s final rules on Basel 3.1 and with bank valuations still in the doldrums, firms must increasingly look to how they can make best use of their capital and liquidity arrangements. The output floor has brought a renewed focus on balance sheet structuring and, as rates stabilise, there is further challenge around managing the future interest rate risk position. Firms are also watching carefully how the PRA will examine firms’ model risk arrangements when SS1/23 goes live in May.”

Steven Hall

Partner, Financial Risk and Resilience,
KPMG in the UK

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“Regulation isn’t the answer to everything but is has to be the guardian that fosters trust, ensuring AI’s power benefits all and harms none. Financial services regulators have been clear that they expect firms to adapt their risk management and governance frameworks to ensure the safe and ethical use of AI.”

Chris Steele

Partner, Risk and Regulation,
KPMG in the UK


Strengthening operational resilience

Strengthening operational resilience

Implementing
8.0
Strengthening operational resilience

Regulatory authorities in the UK, EU and globally agree that a broad approach to operational resilience — incorporating equally important components such as people, processes, technology and information — is essential. In an increasingly digital and interconnected world, and with a proliferation of emerging vulnerabilities, operational resilience is paramount in minimising negative impacts on individual firms and their customers, as well as wider impacts on financial stability and the functioning of financial markets. Firms operating in multiple jurisdictions must ensure that they are meeting all relevant regulatory requirements.

UK and EU Regulators require firms to demonstrate end-to-end operational resilience in their most important business activities. Cyber and ICT resilience are fundamental and are driving new requirements, particularly in the EU. Strong governance and accountability are expected, as is robust testing of disruption scenarios, with firms encouraged to consider the possibility of multiple concurrent disruptions.

Operational resilience remains a key priority in supervisory work programmes as deadlines approach. The ESAs are focused on the implementation of DORA, including the development of regulatory technical standards. The BoE, PRA and FCA continue to assess progress against existing operational resilience policies.

Resilience expectations have extended to a wider range of participants operating in the financial sector. Regulators have progressed their work to develop policy and oversight approaches for critical third parties.

The regulatory pressure score has increased slightly, reflecting the challenges of implementing DORA by January 2025, meeting UK regulatory deadlines for firms and FMIs and additional requirements for critical third parties.

Implementing
8.0
Strengthening operational resilience

Enterprise-wide resilience

Principles and rules introduced in the last few years target enterprise-wide resilience. Regulators expect firms to map their most important business services from end to end, identify severe but plausible stress scenarios, and carry out testing to identify weaknesses. Firms must define the amount of disruption that they would be willing to tolerate and monitor and measure their ability to remain within these tolerances.

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Digital resilience

Additional demands on systems, processes and data in financial markets have increased regulators’ focus on firms’ digital and ICT resilience. The EU’s DORA specifically addresses increasing threats from cyber-attacks and increasing reliance on digital technology. DORA is intended to harmonise ICT resilience requirements across the EU and will result in consequential amendments to other legislation. Given the broad scope of the Act, many firms will need to make structural and strategic changes.

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Third-Party Risk

Regulatory requirements and supervisory expectations around outsourcing and third-party risk management continue to expand in the EU and the UK, reflecting the growing reliance on, and stability risks posed by, critical third parties and more robust requirements for digital resilience. Significant progress has now been made on defining the parameters for bringing critical third-party providers within the regulatory perimeter in both jurisdictions. This is likely to require the providers to build out their regulatory compliance functions, however, the frameworks should make it easier, from a data collection point of view, for financial services firms to comply with their broader operational resilience requirements.

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Payments

Payments

Developing/
implementing
7.0
Payments

The continuing and rapid evolution of the payments landscape and technology and its resulting impact on consumer behaviours and expectations poses benefits and challenges for providers and regulators alike.

In stark contrast to ten years ago when cash was king, consumers and businesses now make use of a wide variety of forms of digital payments and, whilst still essential for some, cash use is in decline. This is driving regulatory change to ensure there is an agile and flexible regime that supports innovation and competition, whilst simultaneously ensuring that payment systems are efficient and do not put consumers at risk or exclude them from access to products and services.

Regulators are considering the systems underpinning payments and looking at how to ensure markets work well. They are doing this with an eye on future market opportunities and developments such as Open Banking or the introduction of new forms of digital currency.

Whilst offering many consumer benefits, the increasing number of digital forms of payment has opened the door to new frauds and scams. Alive to the potential impact and scale of this issue, regulators are establishing a suite of rules to protect consumers and encouraging firms to consider making changes to reduce risk.

In both the UK and EU, there is strong understanding of the continued need for access to cash. Activity is underway to bolster existing measures, in an attempt to stem the decline of cash which may be detrimental to some consumers. Regulators are also seeking to understand the drivers for the continued use/need for cash with a focus on future solutions.

UK-regulated payment firms are also busy embedding the Consumer Duty and ensuring compliance now the implementation deadline has passed.

There is a slight increase in regulatory pressure around payments as implementation deadlines for anti-fraud measures come closer in the UK and the EU has agreed to require instant payments.

Developing/
implementing
7.0
Payments

Payment infrastructure and innovation

The payments infrastructure continues to develop to ensure that, as payments evolve, the systems underpinning them continue to be effective, efficient, secure and expand consumer choice. Work on the UK NPA and European Commission retail payments strategy is progressing, and in both jurisdictions work to renew payment systems is underway to ensure they remain resilient, flexible and innovative. The utility and importance of access to cash for UK and EU citizens continues to be recognised as a priority, with work in progress to protect access whilst simultaneously supporting a flourishing payments sector.

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Consumer protection

Regulatory interventions to disrupt or prevent fraud and scams have had some impact, however instances remain stubbornly high and reducing them is a key priority for policy makers and regulators. In the UK 2024 will see the PSR advancing its package of measures to tackle authorised push payment (APP) scams with the extended Confirmation of Payee (CoP) regime and mandatory reimbursement of APP fraud victims coming into force, bolstered by further outputs from new scam data publication rules. The EU is following suit with its proposals in PSD3.

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Competition/Access and Choice

Alongside ensuring faster, more secure, and more efficient payments, policy makers want to support innovation and competition in the payments industry and ensure that markets are functioning well. In the UK the government and regulator are keenly focused on fees in the card market.

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Enhancing customer protection

Enhancing customer protection

Implementing
6.8
Enhancing customer protection

The nature of products and services, how they are delivered, and communications with customers continue to evolve. The ongoing question for regulators about the optimal level of customer protection is set against uncertain economic conditions impacting the cost of living, the need to encourage greater private investment to aid economic recovery, and increasing digitalisation. If deployed well, generative AI has the potential to fundamentally enhance consumer protection – unfortunately, the reverse is also possible. Whilst all these factors remain important to regulators, and levels of scrutiny remain high, the shift from new policy to supervisory measures has resulted in a slight drop in regulatory pressure score.

Regulators continue to challenge firms on whether they are appropriately balancing their own commercial and operational considerations with the needs of end-customers, and how this is embedded throughout the firm, at all stages of the product lifecycle and customer journey. Firms must be able to demonstrate progressively how their culture, strategy, business model, product design and operating model deliver fair treatment to customers. This is increasingly being delivered through supervisory focus on product governance, assessment of outcomes and consideration of value for money/fair value.

Continuing economic uncertainty has further increased the number of vulnerable customers. Many customers will exhibit characteristics of vulnerability at specific points in their lives and they should be able to achieve outcomes that are as good as those of other customers. The increase in the level and sophistication of scams and fraud, which tend to have a greater impact on vulnerable customers, is another area of regulatory concern as, despite regular interventions, incidences remain high.

In the UK, the Consumer Duty has been implemented and firms continue to work towards fully embedding it in their operating models, as well as seeking to identify the commercial opportunities that it offers. The FCA is challenging firms to provide evidence of how they are delivering good outcomes. As FCA expectations evolve, it is likely that further finessing of systems, controls and, specifically, MI will be an ongoing focus, especially in the run up to the July 2024 board reporting deadline.

Implementing
6.8
Enhancing customer protection

Outcomes-focused

Regulators are continuing to seek to move firms’ mindsets away from narrow rules-based compliance to a more holistic assessment of the impact of their conduct and the outcomes they are generating. This approach, with new rules under consideration or recently implemented, will have a material impact on firms’ cultures, strategies and operating models.

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Vulnerable customers

Global economic factors impacting the cost of living continue to fuel regulatory focus on the fair treatment of vulnerable customers across all sectors. These factors, and increased regulatory scrutiny, are likely to have a material impact on firms’ existing processes, procedures, products and services as well as on training and development implications for their employees. Given the complexity that comes with considering the different types and interconnectedness of customer vulnerabilities, firms will need to consider broad conduct risks to mitigate any associated operational challenges.

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Value for money

The implementation of the Consumer Duty in the UK introduced a requirement for all sectors to develop and apply a price and fair value framework to evaluate specifically whether products and services offer value as well as utility. This has already had an impact on the products and services offered by firms and their associated charges. Other regulators are expected to follow suit.

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Product governance

Although product governance rules have existed for UK and EU firms since 2018, there is growing evidence that they are not being implemented or supervised effectively. Consultations on enhancements to and/or reinforcement of rules will result in firms needing to develop or embed their existing process and procedures further.

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Growing capital markets

Growing capital markets

Developing/
Implementing
7.5
Growing capital markets

The capital markets in both the EU and the UK continue to undergo significant change.

The EU is now finalising mandatory reviews of the mass of regulation that was implemented post-financial crisis, such as MiFID II/MiFIR, and the UK is amending on-shored EU regulation to adapt it to the UK market. Both jurisdictions are looking to increase their attractiveness as destinations to raise capital for new and growing companies. New fund structures have also been introduced, and existing structures adjusted, as European jurisdictions compete for share of market growth and cater for investment in long-term assets. This is aimed at aiding economic recovery and growing national capital markets, although in some cases industry uptake has been slow.

Work to analyse potential financial stability vulnerabilities and develop policy solutions across the non-bank sector has resulted in new international guidelines and recommendations on liquidity management in open-ended funds. Regulators’ attention is now turning to potential risks associated with private assets and leverage.

The movement to T+1 settlement is adding to the initiatives testing how wholesale market participants can use technology to bring efficiencies and resilience to post-trade market infrastructure.

The small increase in regulatory impact score in this edition is a result of various factors. Whilst developments in listing regulation seek to streamline the existing requirements, the volume of changes relating to secondary markets, such as the move to T+1, are creating more pressure. In addition, the prospect of increased supervisory scrutiny and new requirements relating to private assets, and the finalisation of new fund liquidity risk management rules (e.g. within AIFMD II), mean that on balance the score has increased.

Developing/
Implementing
7.5
Growing capital markets

Primary public markets

In the EU and the UK, policymakers and market participants continue to be concerned about the size and strength of their capital markets. Measures are being put in place to reduce the regulatory burden of raising capital in the primary markets. Alongside these changes, initiatives are also being considered to increase the capital available to invest and the ease of access to information available on public companies.

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Secondary Markets

When MiFID II/MIFIR came into force in 2018, it represented a comprehensive and profound reshaping of regulation for EU financial markets, products and services, and necessitated large regulatory change management projects within firms. Changes emerging from the EU MiFIR review and the UK Wholesale Markets review will not trigger such large-scale changes, but firms operating in both jurisdictions will need to manage any divergence carefully. Regulators have not relaxed their focus on market conduct.

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Private markets

While policymakers and regulators are trying to encourage use of public markets and increase choice for retail investors, they are also monitoring the growth of private markets and considering ways to ensure its expansion encourages economic growth and does not impact financial stability.

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Fund liquidity management

International regulatory bodies have published new guidelines and revised recommendations on open-ended funds. Meanwhile, supervisory work has been completed by national regulators and policy changes are now being finalised, such as through revisions to the EU’s AIFMD and UCITS frameworks. On money market funds, the FSB has taken stock of its members’ progress with implementing reforms. Whilst the European Commission concluded that no legislative changes are currently necessary in the EU, the UK authorities have consulted on potential amendments.

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Market Infrastructure

The financial market infrastructure supporting post-trade processes is complex and interconnected. Regulators continue to focus on the operational and financial resilience of market infrastructure as well as examining whether technology could bring efficiencies and reduce risk.

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“Regulators have clarified expectations from Boards in terms of monitoring and reporting of effectiveness of internal controls and wider aspects of governance. Whilst the softening of ESG and D&I proposals in the new UK Corporate Governance Code could be inferred to mean boards should dedicate less focus to those matters, the introduction of the board's declaration over all material controls means the onus is on the board to consider what is most material to its investors – and that is likely to vary from firm to firm.”

Sarah Ward

Partner, Risk and Regulation,
KPMG in the UK

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“With under a year now until DORA must be implemented, in-scope entities will have their work cut out to digest the detailed technical standards issued by the European Supervisory Authorities and ensure that they can meet expectations for all their key business services. Entities likely to be designated as critical to the financial services industry should be ensuring that they are ready to be brought within the FS regulatory perimeter.”

Ashley Harris

Partner,
KPMG in the UK

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“On Consumer Duty, focus for firms will be on embedding the Duty into its target operating model so that it operates seamlessly, efficiently and effectively - principally by embracing technology and tooling. Beyond this, firms are also starting to explore the strategic opportunities that the Duty presents. Are you clear on your priorities – ensuring you can evidence alignment to regulatory expectations, embed the Duty and be poised to take advantage of the commercial upsides?”

Mita Dave

Partner, Risk and Regulation,
KPMG in the UK


Accessing markets

Accessing markets

Implementing
5.6
Accessing markets

Continued regulatory developments since the UK left the EU underline the need for firms working across all jurisdictions to monitor regulatory change and market access arrangements to pre-empt any potential disruption to their business and identify opportunities.

The first meeting of the Regulatory Forum between HMT and the European Commission took place in October 2023, signalling further progress in rebuilding the UK/EU relationship. More broadly, the UK Financial Services and Markets Act allowed the establishment of mutual recognition agreements (MRAs), resulting in the signing of a unique MRA between the UK and Switzerland.

However, cross-border access between the UK and the EU looks unlikely to improve in the short term and firms need to continue to ensure that they have sufficient substance and remain compliant with local access arrangements. To this end, the EU authorities have set out expectations regarding third country insurance branches, proposed changes to the requirements for banks and finalised new rules on delegation of portfolio management in the asset management sector.

Although the exact detail has yet to emerge, the provisional political agreement on EMIR 3.0 seems to require a smaller proportion of EU clearing to take place in EU CCPs than was first proposed by the European Commission.

Wider cross-border services remain under scrutiny, for example the EU’s focus on reinsurance arrangements. The PRA’s approach is one of ‘responsible openness’, and the UK review of Solvency II will benefit overseas insurers wishing to access the UK market. In the UK, the Temporary Permissions Regime for firms closed at the end of 2023. The Government and FCA have made significant progress on the Overseas Funds Regime and it should commence shortly.

The small decrease in regulatory pressure score over the last six months can be attributed to positive developments regarding the OFR, the agreement of the UK-Switzerland MRA and less onerous revisions to the EMIR clearing regime than had been expected.

Implementing
5.6
Accessing markets

Delegation of portfolio management

Following significant debate, the EU has agreed to enhance its rules for delegation under the UCITS Directive and the AIFMD and to introduce new reporting requirements. Asset managers should ensure their approach to delegation and ‘substance’ aligns with existing supervisory expectations and begin to prepare for the incoming changes.

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Third country branches

Banks’, insurers’ and insurance brokers’ post-Brexit organisational structures continue to be scrutinised by supervisors in the EU, as they review the governance and substance of third country branches. In contrast, the UK is pursuing a more open approach, in line with the PRA and FCA’s new ‘competitiveness’ objective – but not without its own caveats.

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Fund marketing and distribution

Significant progress has been made on cross-border market access for funds. The UK government has deemed the EEA UCITS regime as equivalent for the purposes of its Overseas Funds Regime (OFR), and the FCA has consulted on the details needed to operationalise it in practice. The OFR is therefore expected to commence after the FCA’s final rules are published in the first half of this year, and the government’s statutory instrument is finalised.

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Regulated markets and clearing

The framework for cross-border clearing continues to evolve post the UK leaving the EU. A milestone has been reached with provisional political agreement on EMIR 3.0, which when finalised, will clarify the amount of clearing that EU firms will be required to do through EU CCPs. Meanwhile, the BoE has started to advise on CCP equivalence decisions and to recognise non-UK CCPs.

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Cross-border provision of services

Cross-border services between the UK and the EU remain under regulatory scrutiny. In the insurance sector, this includes reinsurance, intra-group and other cross-border risk transfer arrangements. Whilst the UK-EU MoU, agreed in 2023 represented a positive step forward, improved market access between the two jurisdictions appears unlikely in the short term. On a positive note, the UK and Switzerland concluded negotiations on an MRA in December 2023 – it will now need to be ratified by both countries before it takes effect.

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Reinforcing governance expectations

Reinforcing governance expectations

Mature
6.9
Reinforcing governance expectations

Supervisors continue to reinforce the need for good corporate governance in response to specific regulatory failings within firms, failures of banks in the US and Europe in 2023, and broader sectoral issues. Governance arrangements also tend to come under heightened scrutiny during times of economic difficulty and market volatility.

Expectations on governance are woven throughout policy and regulatory files and are often placed at both executive and board level. A general pattern is emerging in the UK, of setting out granular, blanket expectations for boards, as seen in recent revisions to the UK Corporate Governance Code, which can start to blur the line between executive responsibility and board stewardship.

The UK Consumer Duty is intended to create a cultural shift in how firms think about and behave towards retail customers. Regulators are calling out pay gaps and lack of diversity across firms’ boards and senior management, and strengthening enforcement action for non-financial misconduct. They are also focused on helping firms recognise the interconnectedness of accountability, culture, DEI and the transformative effect that effective corporate governance can have.

Reforms across the board, including ESG, Solvency UK, Consumer Duty and Funded Reinsurance, are requiring firms to designate clear accountability across all three lines of defence. Finally, focus on firms’ implementation of AML controls continues to grow with measures taken to harmonise and strengthen regulation.

Although most regulatory frameworks for governance are well established, the significant uptick in regulatory pressure score is due to an increase in expectations and expansion of remits in some cases coupled with increasing supervisory focus across all jurisdictions. There is also increasing potential for enforcement actions.

Mature
6.9
Reinforcing governance expectations

Culture

There is growing recognition of the powerful role that culture can play in a firm. Regulators have identified that, in many instances of poor conduct, deep-set cultural issues have been present and that firms with healthy cultures are less prone to misconduct. They also note that diversity and inclusion can contribute to a positive culture. An assessment of culture, coupled with other regulatory initiatives can provide deeper insights into whether firms operate and are governed in line with regulatory and wider societal expectations.

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Accountability, governance and controls

The original accountability regimes have now been in force for over eight years and their effectiveness is being reviewed. They are now expanding in scope across financial services and being introduced in more jurisdictions. Oversight of a firm’s business and regulated activities by its board and senior management remains a key regulatory theme, particularly given the volatile markets and difficult economic conditions of the last year.

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AML/CFT

As supervision and regulation in this area continues to be strengthened, firms need to ensure adequate oversight of AML controls. They must also effectively implement the growing number of sanctions. The current challenge is the need to balance increasingly complex global regulation with a drive to deliver better customer experience, including faster payments, as well as reducing costs given economic environment.

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Glossary