Top themes for banking and capital markets in 2026

Motor finance redress

The FCA is moving forward with the motor finance redress scheme, but it isn’t as straightforward as the sector may have hoped, and the consultation has received significant feedback from across the sector on scope, assessment criteria, complexity and likely costs of implementation. As per the consultation (now closed) the final rules are due in early 2026 and firms’ initial implementation plans are due six weeks later. 

Covering agreements started between 6 April 2007 to 1 November 2024, the redress scope includes instances where the lender paid commission to brokers; with signs of an ‘unfair’ relationship between the lender and borrower. Establishing an ‘unfair relationship’ could prove challenging, and the FCA consultation proposes an assessment based on inadequate disclosure of disproportionately high commissions; discretionary commission arrangements; and tied arrangements between the lender and broker.

There are three remedies for redress based around: an adjusted annual percentage rate (APR); the commission paid; or a hybrid of the two. Of these, the APR remedy could prove the most challenging, particularly when factoring in mid-term events or early settlement. However, the FCA does allow firms to use informed assumptions, which will make a significant difference given the challenges around legacy data, which may have been expunged. 

Key takeaways for 2026

Once the FCA has confirmed the final details of the redress scheme, the programme is expected to move quickly, with an initial three-month window to contact complainants. So, firms need to carefully plan resources, recognising both the administrative and technical skills needed. That includes data specialists to identify and reconstruct customer information – which could include AI or machine learning tools to draw from structured and unstructured sources across the firm. Next, there’s the technical skillset needed to build the redress calculator, which could potentially be needed as early as spring. Finally, individual firms need to assess whether they can fund the necessary redress payments and the associated operational costs, factoring these into wider financial forecasts and strategic planning. 

Motor finance: How to approach redress calculations

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Basel 3.1/SDDT

The banking sector continues to implement Basel 3.1 or the Small Domestic Deposit Takers regime, depending on their size and business activities. For Basel 3.1 there have been a few additional tweaks since the second round of near-final rules, namely:

• the internal models approach under the Fundamental Review of the Trading book has been pushed back to 1 January 2028 to avoid international divergence
• a simplified approach to market risk (under the Leeds Reforms) – including more proportionate treatment of collective investment undertakings (CIUs), changes to residual risk add-ons, and reduced reporting requirements for the internal models approach
• the refined Pillar 2A methodology has been retired due to the revised standardised approach to credit risk (from 1 January 2027)
• clarifications to Pension Obligation Risk and Interest Rate Risk in the Banking Book (IRRBB) to improve standarisation and transparency (from 1 July 2026).

The near-final policy statement for SDDT has also been published (PS20/25), with a range of changes for capital calculations, Pillar 2 and reporting requirements.

Key takeaways for 2026

With greater clarity over the two capital regimes, smaller to mid-range banks and building societies are better placed to decide which categorisation is right for them. The deadline to consent (or note an intention to consent) to becoming an SDDT firm is 31 March 2026. Firms that don’t respond will automatically become a Basel 3.1 firm when both regimes go-live on 1 January 2027 (with some later staggered deadlines). 

For most firms, the key consideration will be capital requirements vs the cost of compliance. This could be a tricky balancing act, and any capital reductions under Basel 3.1 could be overwhelmed by the resources required to maintain the regime. 

Regardless of which route firms are taking, key activities for 2026 include:

• fully mapping, embedding and testing all underlying processes and models
• updating regulatory reporting templates, ensuring data consistency and integrity throughout
• ensuring adequate specialist resource during implementation and into business as usual
• reviewing governance, oversight and escalation processes to ensure a robust control environment.

Recovery and resolution

In 2026/27, the PRA is due to carry out its third resolvability assessment to gauge whether the UK’s largest banks can exit the market safely, without affecting the wider economy or relying on bailouts. It aims to assess whether firms:

• can continue critical services during resolution (including payments and lending)
• have adequate financial resources to absorb losses
• can execute restructuring plans to restore viability after a period of stress. 

The 2024 assessment focused on banks’ financial resources and didn’t identify any significant impediments to a safe resolution, noting progress from the first assessment in 2022. However, there were several key areas for improvement, including:

• the quality of management information, data and documentation to inform decision making processes
• more robust valuations processes with a greater understanding of capabilities, and greater scope for automated data processes and enhanced modelling
• clearer service catalogues to support a range of audiences during operational continuity in resolution (OCIR)
• a greater focus on restructuring planning, including interaction with other elements of the framework, and further work to identify and determine the best execution option.

In its next assessment, the Bank of England will review progress against its previous findings and carry out a detailed review of restructuring planning and how key dependencies, such as intergroup services, may affect capabilities. To prepare, banks must submit their resolvability reports to the PRA by October 2026. Public disclosures of summaries by major UK banks will be published by June 2027.

Key takeaways for 2026 

Firms have significant work ahead to address the Bank of England’s findings, with data quality, frequency and granularity being a key consideration throughout. To prepare, banks need to:

• consider how automation or AI could support timely MI
• ensure valuations processes and models are flexible enough to assess a wide range of scenarios
• review onboarding and data sharing processes to support an independent valuer
• carry out robust scenario analysis over OCIR arrangements, to ensure critical services can continue during multiple severe, but plausible, stressed events
• ensure critical service providers have resolution-specific clauses wherever possible, and that OCIR service catalogues are clear for all users
• enhancing data and processes for managing liquidity during resolution, and stress testing liquidity requirements.

SM&CR

The FCA is simplifying the Senior Managers and Certification Regime (SM&CR) to reduce the cost of compliance and help firms streamline operations. The programme will be delivered in two phases, with the first covering small amendments and the second addressing more impactful changes that require legislative updates. The key proposals to note include:

• replacing the Certification Regime – the regulator will develop a more proportionate approach, with interim improvements such as changes to the directory and simpler requirements for multiple post-holders 
• fewer senior management functions with simpler approval processes - some SMFs also won’t require approval, but firms will need to notify the FCA instead
• removing Statements of Responsibilities and Management Responsibilities Maps as a legislative requirement (giving the FCA more flexibility to amend their requirements) and simplifying submission processes
• changes to the 12-week rule to support changes in personnel – allowing individuals to hold an SMF for longer without approval
• amending prescribed responsibilities rules - including changes to SMF18 restrictions and clarifications over sharing responsibilities across multiple individuals
• updating threshold conditions in line with inflation, with new rules to review these regularly.

Key takeaways for 2026

The phase one consultation closed in October 2025, and the final rules are expected in mid-2026, The phase two consultation will likely follow soon after, bringing more clarity over the future SM&CR framework. With a range of iterative changes, firms will need to proactively monitor the FCA and HMT’s output to track the direction of travel and ensure all processes and practices continue to align. In the short term, a gap analysis can identify how these changes could affect the business, including impacts on financial or specialist resources, which can support strategic planning for the year ahead.

Payment services

The UK payments sector is a dynamic and rapidly evolving landscape, underpinned by digital innovation, regulatory reform and a robust government-led growth agenda.

Cash usage continues to decline amid the rise in digital and contactless payment methods, reflecting the increasing importance of payment service providers across the financial landscape. Consequently, banks will be under greater scrutiny to ensure their payments services meet all regulatory expectations around operational resilience, Consumer Duty and wind-down planning. Other considerations include:

• Payment Services Directive 3 (PSD3) and the EU Payment Services Regulation (PSR) compliance to promote interoperability with EU firms, including new capital and authorisation requirements
• ISO 20022 adoption with a deadline of November 2026, to replace legacy MT messaging formats with XML-based ones
• protecting consumers from APP fraud and managing the mandatory reimbursement scheme, which saw around £112 million returned to customers during the first months of operation. 

Key takeaways for 2026

The FCA is increasing its scrutiny over payment service providers with 52 receiving s166s from January 2020 to October 2024. So, it’s essential to maintain regulatory compliance, ensuring an effective control environment to monitor and prevent breaches or fraudulent activity. This relies on proactive horizon scanning, good governance and effective ongoing training to stay up to date with emerging requirements.

It’s also important to recognise that the future payments landscape will be influenced by new and evolving technology. As such, financial institutions must invest in scalable and reliable systems to maintain performance, security, and customer trust.

Top themes for the payments sector in 2026

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Digital Assets

Digital assets are growing in institutional interest and experiencing a significant shift towards mainstream acceptance. Notably, the US political landscape continues to be supportive of the crypto industry and Europe is moving forward with its landmark Markets in Crypto Assets Regulation (MiCA). Moving at a slower pace, but with equal purpose, the UK will shape its own regulatory regime during 2026 as cryptoassets are brought into the perimeter. As part of this roll-out (outlined in the FCA’s crypto roadmap), the UK government and regulators have already implemented a range of changes including:

• lifting the ban on retail investors access to exchange traded notes (ETNs) to support UK growth and competitiveness
• expanding money laundering regulations to custodian wallet providers and exchanges
• extending financial promotion rules to cover most cryptoassets.

Ongoing work covers trading platforms, stablecoin issuance, custody rules, and a prudential regime for cryptoassets. Further work is also due on admissions and disclosures, market abuse and activity specific rules on a range of topics.

Key takeaways for 2026

The FCA intends to publish all final rules and policy statements by the end of 2026, so banks will need to track all related regulatory developments and map them to their digital assets roadmap. In addition, firms will need to consider a broad range of related opportunities and challenges including:

• tokenisation as a transformative process for improved liquidity, speed of transactions and transparency
• effective risk management across UK and international operations, while navigating a fragmented global regulatory landscape incorporating digital assets into global financial crime and anti-money laundering frameworks.

Trading controls

Transaction execution has become increasingly automated, highlighting the importance of effective, real-time oversight across the front-to-back transaction lifecycle. These concerns have been brought to the fore due to the FCA’s multi-firm review of algorithmic trading controls, which found weaknesses in governance, testing frameworks, surveillance and oversight over complex booking models.

The PRA also updated SS5/21 which called for greater oversight and governance over booking models. The regulator discouraged 100% remote booking into the UK, highlighting the need for greater scrutiny and robust controls where unavoidable. Split desks should also be the exception, with a consolidated risk function for greater transparency.

Firms should also note evolving expectations around transaction reporting. Alongside calls for more timely and accurate MiFID II transaction reporting (in Market Watch 81 and 82), the FCA’s also put forward plans in CP25/32 to simplify MiFIR reporting requirements including changes to scope, data fields, and changes to the transmission of order framework. 

Key takeaways for 2026

With greater regulatory scrutiny, banks need to assess their trading control frameworks to ensure its robust and remains fit for purpose. Key considerations include:

• trader mandates including authorisation and market access risk limits
• booking models including transactions entries, legal entity splits and cross-border/remote booking requirements
• product governance such as product specification, target market and new product approvals
• pre-trade perimeter and post-trade transaction controls
• effective management information for continuous assessment of control effectiveness and to uphold the regulatory requirements to ‘connect-the-data’
• ensuring all trading and data processes can support new transaction reporting requirements, which may require systems updates or amendments to align with the FCA’s updated FIRDS structure.

Banks must be able to demonstrate a unified view of trading operations, with proactive controls to mitigate risks and swift actions in the event of a breach.

Significant risk transfers

Significant risk transfers (SRTs), a type of synthetic securitisation, could be under greater regulatory scrutiny in 2026. As an evolution of regulatory capital relief trades from the 1990s, SRTs improve capital efficiency by transferring junior tranche risks to third party investors while keeping the reference pool on the balance sheet. This allows firms to reduce their capital requirements, but regulators are keen to ensure the risk has been transferred in practice rather than just in name.

These issues have come to the fore due to two high-profile bankruptcies, which resulted in significant losses for several firms in the financial sector. The losses weren't caused by SRTs, but the financial tools involved shared similar features, namely private investment with the assets staying on the firm's balance sheet. As such, firms will need to evidence good compliance, oversight and governance processes over complex financing transactions and underwriting standards.

Key takeaways for 2026

The PRA has reiterated its expectations in the updated SS9/13 noting the importance of a demonstrable and material transfer of risk, and firms need to ensure SRTs align throughout the transaction lifecycle. This includes the ‘substance over form’ test to ensure the reduction in RWA align with the transfer of risk. 

Key considerations include:

• data quality and clear lineage across all underlying loan pools to appropriately identify exposures, and calculate risk
• the quality of underwriting, including hidden correlation risks and concentrated exposures
• monitoring consolidated exposures, particularly for multiple exposures to the same sponsor.

Getting to grips with significant risk transfers

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Remote access in the EU: Article 21c

Article 21c of CRD VI is fundamentally reshaping how third-country banking groups operate in the EU, with significant implications for booking models. Currently, these organisations can offer remote, core banking services to customers in EU member states. However, from 11 January 2027, banks must set up either:

• a branch in each EU state they operate in, or
• a subsidiary with passporting rights across other EU states. 

There are five key exemptions, namely: reverse solicitation, ancillary services related to MiFID, legacy contracts, interbank transactions to EU credit institutions, and intra-group services. But many firms are unclear on the extent of these exemptions, leading to some confusion over which products and services are in scope. There are also questions over how each member state will transpose the regulation in early 2026, which could lead to regulatory uncertainty and further compliance challenges.  

Key takeaways for 2026

While the regulation aims to harmonise and strengthen supervision across the EU, banks face significant operational challenges and key considerations include:

• business model changes, including booking practices, client engagement and repapering, transfer pricing, taxes and financial forecasts, among others
• licensing and relicensing, which may be costly, time consuming and resource heavy
• reporting requirements, which may be inconsistent across different member states
• capital planning, legal considerations and lending strategies.

As a key starting point, an impact assessment and cost-benefit analysis will inform next steps. Key options may include drawing on exemptions, creating (or making use of existing) EU subsidiaries or branches, or moving some services to out-of-scope EU entities. In some instances, banks may choose to exit specific territories or re-design their product lines.

M&A activity

After a prolonged period of subdued dealmaking, UK banking M&A is re-emerging as a strategic lever. While headline transactions remain selective, underlying conditions are increasingly supportive of consolidation – particularly where scale, digital capability and capital efficiency intersect. Deal flow dominated in specialist lending, mortgage platforms, wealth management, and fintech-enabled banking. The successful listing of a private equity backed challenger bank in 2025 has provided an important valuation reference point for specialist banks, reinforcing the attractiveness of scalable, focused lending platforms and supporting renewed confidence across the sector.

Key takeaways for 2026

In 2026, UK banking M&A is expected to accelerate modestly, driven by the need for scale, capital efficiency and operational resilience. As earnings visibility improve and funding conditions stabilise, consolidation is expected to gather momentum, particularly among mid-tier and specialist lenders where scale and cost efficiency are critical to sustaining returns. Public market benchmarks, are likely to influence both buyer discipline and seller expectations, while continued valuation dislocation should create opportunities for strategic acquirers with clear synergy cases. Regulatory scrutiny and integration execution will remain key gating factors, but overall, M&A is set to play a more proactive role in shaping the UK banking landscape as institutions position for the next phase of growth.

When developing new technologies or centralising operations post-merger, firms should consider the impact of the new research and development (R&D) tax rules. These allow firms to claim back up to 15% of the cost of certain R&D programmes over the previous two years, helping to boost innovation and streamline operations. 

For further insight and guidance, contact Chris Laverty, Supriya Manchanda and Kantilal Pithia.

UK Regulatory Handbook 2025

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