The Government's growth agenda and upcoming regulatory reform

(5 min read)

The Government has been looking at cutting red tape and burdensome regulations to kick start economic growth. The financial services sector plays a key role in advancing the Government's growth agenda. The Government has already taken steps by updating the remit of financial service regulators and there have been numerous correspondence from the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) in recent times setting out their proposed action plans for regulatory reform to support economic growth. Therefore, there are several in-flight plans and initiatives that are developing in the coming months for regulatory reform which will impact firms' businesses and their regulatory compliance. Read our insights below on some of these key reforms and milestones.

To note some of the key proposed changes in taking forward this agenda:

FCA will simplify its mortgage and advice rules to support greater home ownership. This will likely ease off some of the affordability rules for lenders, simplify the remortgage process, reduce borrowing costs, and ease the advice process for consumers.
FCA has removed the need for a Consumer Duty Board Champion now the Duty is in effect. This is aimed at giving firms greater flexibility on their ongoing governance arrangements.
FCA is progressing with its plans to simplify the retail conduct requirements in its handbook following the introduction of the Consumer Duty. This is aimed at addressing concerns about the length and complexity of FCA rules and guidance and reducing unnecessary regulatory burden on firms.
FCA will collaborate with the Financial Ombudsman Service to modernise and reform the redress framework.
FCA will support innovation in firms and utilising the possibilities of AI in financial services.
FCA will provide enhanced authorisation and supervisory support to early and high growth firms, to help them navigate the regulatory system and support their growth.

Therefore, there are several in-flight plans and initiatives that are developing in the coming months for regulatory reform which will impact firms' businesses and their regulatory compliance. In the section below we discuss some of these key reforms and milestones in detail.

How is the regulator leveraging Consumer Duty to propose reforms?

By setting general standards of conduct but giving firms scope to determine how best to deliver good outcomes for retail customers, the Duty aims to provide room for innovation and competition in consumers’ interests. The FCA sees the Duty as a bedrock for progressing its secondary international competitiveness and growth objective.

Recently the FCA has removed the expectation for a Consumer Duty Board champion. Now the Duty is in full effect it wants to give firms greater flexibility on their ongoing governance arrangements, but firms are free to retain the role should they wish to do so. On this basis the FCA's final non-handbook guidance on the consumer duty (FG22/5) relating to the board champion no longer applies. The FCA stated that it will update FG22/5 to reflect the new position in due course.

The FCA has also been looking at the prospects of utilising Consumer Duty to simplify its retail conduct requirements. Firms, particularly smaller firms, have longstanding concerns about the length and complexity of FCA rules and guidance and the FCA is seeking to understand whether, where and how it can simplify requirements, through greater reliance on high-level rules, while ensuring it continues to support and protect consumers. This is especially in the context of the introduction of Consumer Duty which provides the FCA with an opportunity to consider whether it could help small firms and new entrants and support innovation by removing detailed and prescriptive requirements that cover similar issues to the Duty, and where similar customer outcomes could be achieved with greater flexibility.

As part of this the FCA has recently announced an ambitious programme of action to simplify their requirements of firms. This consists of a four-part workplan which aims to achieve greater flexibility, predictability and efficiency.

The four elements are:

Reviewing the foundations: addressing how the FCA regulates and the scope of their rules. This workstream will include mortgage rule review and the publication of a consultation paper and discussion paper on mortgage changes in May and June 2025. The FCA also highlighted a number of relevant in-flight workstreams under this heading including the Advice Guidance Boundary Review and the Reform of the Consumer Credit Act 1974. Further there are proposals to review some core definitions in the handbook including definitions of retail customers and small and medium enterprises, which are complicated and differ across sectors and can lead to challenges for firms in applying the FCA rules consistently.
Future-proofing disclosure: allowing firms greater flexibility to tailor their customer-facing communications. The FCA will review the rules for advertising consumer credit and is planning to consult next year. The June 2025 mortgage rule review discussion paper above will also include discussion on consumer disclosure requirements within the mortgage sector. Further there are proposals to review retail banking disclosures and rules on the disclosure of Annual Percentage Rates (APRs).
Reducing the administrative burden: allowing firms to decide how to apply FCA requirements. The FCA plans to consult on simplifying the rules for insurance and funeral plans by summer 2025 and on amending record keeping & reconciliation requirements in its CASS sourcebook later this year. Further there are proposals to clarify the product governance rules and the application of the Consumer Duty through supply chains.
Streamlining requirements: removing and reviewing outdated requirements. The FCA plans to retire several pieces of outdated guidance later this year. This includes guidance in the mortgage and consumer finance sectors, as well as guidance related to the Treating Customers Fairly initiative. In addition, all Dear CEO letters and portfolio letters pre-dating the 2022-25 strategy will be reviewed and potentially withdrawn (subject to any exceptions). Lastly, the FCA plans to publish a smaller firm guide in 2025 to support these firms in implementing outcomes-focused regulation.

We are therefore expecting to see a series of proposed reforms in the retail conduct space by this summer. Further it appears from the paper that the FCA is committed to using an accelerated consultation process to act immediately on measures where there is a clear case for change. It is also planning an in-person summit this summer to discuss these proposals with stakeholders. Clearly a number of these changes will have a significant impact on firms' policies and procedures, and they should engage with the regulator early in the process to shape some of these reforms.

Supporting innovation in firms and utilising the possibilities of AI in financial services- how far have we progressed?

In the Government's remit and recommendations letters issued to the regulators last November, the Chancellor urged the regulators to seek ways to boost innovation within the financial services sector and, specifically for the FCA, to empower consumers to make educated decisions, even when opting for higher-risk options. One of the key outcomes expected of the regulators is the encouragement of innovative startups and the facilitation for existing companies to embrace and invest in new technologies such as Artificial Intelligence (AI).

On 25 March 2025, the FCA published its Strategy for 2025-2030, setting out its vision and priorities for the next 5 years. One of the priorities specifically relates to supporting growth and as part of that the FCA has committed to take an increasingly tech-positive approach. It confirms that it will continue its partnership with firms through its innovation services to help firms test AI and machine learning (ML) technology services. FCA also confirms that where possible, they will rely on existing standards, focusing on outcomes, rather than imposing prescriptive, new rules.

We have seen some recent publications including from the FCA on exploring the risks and opportunities of AI in financial services:

1. FCA research note on role of AI in credit decisions

On 24 February 2025, the FCA published a research note on AI's role in credit decisions. The document is aimed at fostering debate around AI in financial regulation. It focuses on the issue of transparency in AI and ML systems and its potential impact on consumer outcomes.

The note emphasises that AI and ML systems can be susceptible to mistakes and, where the decisions made by these systems have financial implications, the mistakes could be costly and have adverse impacts on consumers. It suggests a proposed solution is AI explainability which refers to the concept of making AI systems understandable and explores how different explanation genres can impact consumer outcomes such as the ability to identify errors in algorithmic decisions.

The research employed four explanation genres and tested them in the context of creditworthiness. These genres ranged from data-centric explanations, which provide an overview of all data available to the algorithm, as well as features-based explanations and combinations. The study found that the method of explaining algorithm-assisted decisions significantly influenced participants' ability to accurately judge these decisions. The impact of explanation genres varied depending on the nature of the error in the algorithm's decision-making, suggesting that no single approach to explainability is universally superior.

The findings of the research raise important considerations for the transparency and explainability of AI in financial services. Despite the potential for AI to enhance decision accuracy and innovation, the study highlights a complex relationship between the amount and type of information provided to consumers and their ability to challenge erroneous decisions. The document concludes with a call for further research into AI explainability across different financial services contexts, emphasising the need to balance information provision with the actual improvement of consumer decision-making abilities.

2. FCA and ICO letter on supporting AI, innovation and growth in financial services

On 10 March 2025, the FCA published a letter it has sent jointly with the Information Commissioner's Office (ICO) (collectively the regulators) to trade association chairs and CEOs of financial services firms.

The letter highlights the growing opportunities for AI deployment within the financial services sector and the regulators' recognition of the need for regulatory clarity and certainty to support responsible innovation and public benefits. A recent FCA and Bank of England survey indicated that data protection and consumer duty are among the top regulatory constraints to AI deployment in financial services. The survey results suggest a lack of confidence among firms in developing and adopting AI technology and potential uncertainty regarding the interaction between FCA and ICO regulatory regimes.

To address these issues and improve their understanding of the challenges firms face, the letter confirms that the regulators plan to host a roundtable with industry leaders in London on 9 May 2025. The roundtable aims to discuss regulatory uncertainties, challenges in AI adoption, ways the ICO and FCA can collaborate with the industry to provide greater regulatory certainty, and specific areas where firms need more support in data protection and financial regulation to innovate and adopt new technologies. Firms are being encouraged to attend the roundtable and contribute to the discussions.

3. Treasury Committee inquiry into AI in financial services

On 3 February 2025, the House of Commons Treasury Committee launched an inquiry into AI in financial services and published a related call for evidence.

The purpose of the inquiry is to explore how UK financial services can maximise opportunities in AI whilst simultaneously mitigating threats to financial stability and safeguarding financial consumers.

The Treasury Committee is calling for evidence in the following areas:

How is AI currently used in different sectors of financial services and how is this likely to change over the next ten years?
To what extent can AI improve productivity in financial services?
What are the risks to financial stability arising from AI and how can they be mitigated?
What are the benefits and risks to consumers arising from AI, particularly for vulnerable consumers?
How can Government and financial regulators strike the right balance between seizing the opportunities of AI but at the same time protecting consumers and mitigating against any threats to financial stability?

The Committee is currently accepting evidence and welcoming submissions from stakeholders until 11 April 2025.

Concluding remarks

The European Union adopted the EU AI Act in August 2024 and the UK has set out a parallel approach in a 2023 AI Regulation White Paper. The White Paper and relevant responses support a "principles-based framework" for AI regulation in the UK, i.e., instead of a horizontal AI regulation existing sector-specific regulators to interpret and apply to the development and use of AI within their domains. The UK Government's AI Action Plan, published on 13 January 2025, provides some further detail but it has not yet fulfilled its intention to legislate for AI. We have also seen the Artificial Intelligence (Regulation) Private Members' Bill being re-introduced into the House of Lords last month after failing to become law under the previous government. The Bill provides for the creation of an "AI Authority" – a new regulatory body whose functions would include ensuring relevant regulators take account of AI and the alignment of approach across relevant regulators in respect of AI.

Despite some progress being made in this area, the pace of AI adoption and integration within the UK financial services sector is considerably slower compared to many of our international counterparts. There is an urgent need for clear guidance from both the Government and regulatory bodies to accelerate this process.