On 29 January 2025, senior executives gathered at Aqua Shard, London, for fscom’s ‘2025 Capital Markets Regulatory Outlook’. This exclusive roundtable event provided a platform for industry leaders to discuss key regulatory developments and priorities for the year ahead.
The session, hosted by fscom’s Head of Capital Markets, David Coolegem, featured insights from fscom experts Stacey Copper, Susana Eddy, and Heather O’Gorman. The team provided a regulatory horizon summary and led discussions on the heightened focus areas for the PRA and FCA, covering critical themes, including client assets, digital assets, and prudential regulation. This offered valuable insights into the challenges and opportunities firms face in navigating the evolving regulatory landscape. A summary of the discussion points and opinions of attendees at the roundtable can be found below:
Prudential regulation: ICARA and balancing proportionality
Despite being in place for several years, the ICARA (Internal Capital and Risk Assessment) process has not simplified capital and liquidity calculations or strengthened risk management as intended. Instead, it has increased the regulatory burden on firms, many of which continue to operate in silos, lacking a cohesive risk framework. As a result, ICARA reporting often becomes a fragmented exercise, rather than the fully integrated first, second, and third-line approach that regulators envisioned.
One of the key challenges is the rigidity of K-factors, which do not adequately reflect the diverse risk profiles of different business models. The calculation methodology is often viewed as inflexible, leading to an inaccurate representation of a firm’s actual risk exposure. Many firms also lack the resources to optimise their K-factor calculations effectively, leaving them at a regulatory disadvantage.
Additionally, there is growing concern that prudential regulation is disproportionately burdensome, particularly for smaller firms with simpler structures. The capital requirements and liquidity buffers imposed by ICARA can be excessive, forcing firms to tie up liquidity that could otherwise be used to support growth and operations.
Wind-down plans, while intended as a safeguard, are frequently seen as a tick-box exercise rather than a meaningful risk mitigation tool. Firms often find themselves holding excessive liquidity to meet regulatory expectations, rather than structuring their wind-down planning in a way that aligns with their actual business risks.
CASS compliance: persistent challenges
CASS continues to be a challenge for firms, particularly as the requirements are difficult to fully satisfy. Even the regulators acknowledge this, yet firms are obligated to report on areas that remain incomplete. Many small and mid-sized firms still perceive CASS as relatively new. Reporting remains largely manual, especially when breaches occur.
We found many firms are eager to know if there has been increased consistency in how firms approach CASS compliance.
The discussion on CASS 15 highlighted a mixture of readiness and hesitation. Firms that already hold both payments and CASS permissions believed they could manage the transition due to their existing frameworks, though they recognised that significant effort would be needed to implement the changes. Unsurprisingly, non-payments firms had not yet considered the implications of CASS 15 on CASS firm’s operations outside of payments. However, there was a realisation that they too would need to update their risk frameworks and assess third party vendors due to the increased focus.
Some feared that smaller PSPs and e-money firms would struggle to comply, leading to market exits and a consolidation of larger firms occupying a dominant share. Despite these concerns, there was consensus that regulating firms with poor compliance practices was necessary, although some believed the current regulations were already sufficient.
The rising costs of CASS compliance resulting from CASS 15 were also noted. This included the mandatory CASS audit and the difficulty of hiring professionals with CASS expertise. The limited availability of skilled specialists further escalates hiring expenses. Small e-money firms, who lack the budget to meet the demands of the new regime, face increased compliance risks and financial strain.
Digital assets and blockchain: divergent views and future potential
Discussions on digital assets revealed divided opinions. While interest in the crypto sector is growing, there was considerable disagreement on its utility, particularly regarding stablecoins. While some believe they hold a crucial place in the crypto-based future, others see them as limited tools with little real use. The general consensus was that cryptocurrencies will become relevant in about a decade when they are expected to be adopted for transactions like real estate purchases using the native attributes associated with smart contracts. Firms expressed a need for more data on crypto asset trading compared to traditional assets to allow them to better benchmark the significance of the future of cryptocurrencies in the financial ecosystem.
There was a notable distinction made between regulating crypto and blockchain, with many firms seeing greater value in regulating blockchain technology, as it could revolutionise transaction processing and potentially render traditional CASS requirements obsolete by ensuring instant transactions. Despite these discussions, most firms are not currently taking steps to trade cryptoassets, believing that the market is not yet ready.
The consensus was that regulatory frameworks would make trading cryptoassets more attractive to traditional financial institutions, as banks, investment firms, and payments firms would be more willing to engage with the industry if it were regulated
Conclusion: adapting to an evolving regulatory landscape
Overall, the roundtable discussions highlighted a disconnect between regulatory intent and practical implementation. While CASS and prudential regulations aim to enhance financial stability and client asset protection, firms continue to struggle with their complexity and cost. Moving forward, firms should focus on strengthening regulatory risk frameworks, optimising K-factor monitoring, engaging with CASS experts early, and evaluating strategic opportunities in the evolving digital assets space. As the regulatory landscape evolves, staying informed and adaptable will be crucial for firms aiming to thrive in an increasingly complex financial environment.
If you would like to discuss any of the key themes above, please get in touch to book a free consultation with one of our experts.
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This post contains a general summary of advice and is not a complete or definitive statement of the law. Specific advice should be obtained where appropriate.
