Horizon Scanning Q2 2025 Report – Evolving risks and regulations for the financial services sector
· Posted on: August 6th 2025 · read
Welcome to the Q2 2025/26 edition of the MHA Horizon Scanning bulletin, your essential guide to the evolving regulatory and risk landscape impacting the UK financial services sector over the next 18 months.
You can download the report via the link below and in the meantime, these are some of the headline points discussed:
Strategic regulatory and operational priorities
Firms face critical assurance areas over the next 18 months, including:
- Solvent exit planning (requirements in force from 1 October 2025).
- Basel 3.1 implementation (reforms from 1 January 2027).
- Stress testing and model risk management (SS1/23).
- Operational resilience (SS2/21), with maturity gaps highlighted by the 2024 cyber stress test.
- Liquidity reviews, including MREL changes (effective 1 January 2026).
- Reporting simplification, DORA compliance, and AML/CFT transition (AMLA regulation from 1 July 2025).
Increased scrutiny from stakeholders is evident through a rise in regulatory and management-initiated reviews.
UK financial stability: Insights from FPC and MPC meetings
Financial Policy Committee (FPC) highlights:
- Geopolitical tensions elevate risks to UK financial stability.
- UK bank capital levels are deemed broadly appropriate, but reassessment is ongoing.
- The 15 per cent limit on high loan-to-income mortgages remains.
- The Countercyclical Capital Buffer (CCyB) rate is unchanged at 2%.
- Plans to publish aggregated NBFI leverage data are in progress.
- A risk-based regulatory approach for stablecoins is endorsed.
- Cyber resilience needs improved sector coordination.
Monetary Policy Committee (MPC) highlights:
- The policy rate was maintained at 4.25%.
- UK economic growth saw Q1 GDP growth but fell in April.
- Persistent inflation (CPI was 3.4% in May) is largely due to regulated prices and energy.
- Global trade uncertainty poses downside risks to demand and inflation.
- Wage growth is moderating, and the labour market is loosening.
UK and EU regulatory horizons
Chancellor’s Leeds Reforms: These reforms aim to modernise UK financial services, enhance competitiveness, and accelerate consumer innovation, focusing on:
- A 10-year growth plan for the UK financial services sector.
- Faster approvals for financial firms and prudential reforms (reviewing ring-fencing rules).
- Easier capital raising (new listing rules from 2026).
- Stronger consumer protection.
- Digital finance initiatives (AI, blockchain, stablecoins).
- Modern payments infrastructure.
- Support for market access and homeownership.
PRA Developments: The PRA is refining market risk rules and updating Solvency II and MREL expectations, while integrating CRR into its Rulebook. Key developments include:
- Updates to the market risk framework under Basel 3.1, with FRTB Internal Model Approach delayed to 1 January 2028.
- Restatement of UK CRR into the PRA Rulebook (final rules from 1 January 2026).
- New expectations for identifying connected clients (effective 1 January 2026).
- The Bank Resolution (Recapitalisation) Act 2025 introduces a new recapitalisation option.
- Consultations on MREL reporting and disclosure.
- Review of the Loan to Income (LTI) flow limit rule.
- Finalisation of the capital buffers framework (effective from 31 July 2025).
- Reviews of Pillar 2A to align with Basel 3.1 and enhance proportionality.
- New rules on identification and management of step-in risk for CRR firms.
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