Your guide to this week in regulation

This week, we see regulators moving in a clear direction to embrace risk‑based oversight, stronger market infrastructure and closer scrutiny of consumer outcomes. Latest signals from the Prudential Regulation Authority (PRA), Financial Conduct Authority (FCA) and European Central Bank (ECB) reinforce this, with firms expected to evidence control, whilst adapting at pace and acting on sources of key risk. Contextually, latest FCA data shows fewer Skilled Persons reports during 2025/26 Q4, but their targeted use remains aligned to these risks.

We lead with the PRA’s Pillar 2A reforms, which set a 1 January 2027 implementation date and move towards more targeted, firm‑specific capital requirements, with less prescription and lower reporting burden. Meanwhile, UK Parliament’s inquiry into the insurance market focuses on Consumer Duty outcomes, claims handling and access for vulnerable groups. Elsewhere, the FCA signals a step change in payments through the launch of the UK Payments Initiative, pointing to the potential for open banking and wider data‑sharing.

Our next item focuses on a FCA report on progress on sanctions controls that highlights gaps in due diligence, screening and asset handling. Finally this week, the ECB has highlighted market fragmentation as a constraint on EU banks, despite more risk‑based supervision.

PRA finalises Pillar 2A changes

The PRA has published its Phase 1 reforms to Pillar 2A, confirming a broad shift towards greater transparency, proportionality and risk sensitivity in capital setting.

Key takeaways for firms:

• Implementation date set for 1 January 2027, aligning all elements and simplifying planning
• Removal of credit risk benchmarking in favour of more targeted methodologies, reflecting Basel 3.1 improvements in risk capture
• Greater flexibility in assessing idiosyncratic credit risk, reducing prescriptive scenario requirements and supporting firm-owned ICAAP assessments
• Reduced reporting burden, including streamlined templates and exemptions for well-funded pension schemes
• More clarity on operational and market risk methodologies, without major changes to underlying approaches

Overall, the PRA expects limited aggregate impact on total capital but more targeted add-ons at firm level based on risk profiles.

Read more on PS15/26 – Pillar 2A review

Parliament seeks insurance market views

The House of Lords Financial Services Regulation Committee has launched an inquiry into the regulation of the consumer insurance market, focusing on home and travel insurance. It is seeking evidence on how firms sell products, handle claims and resolve disputes, alongside the effectiveness of FCA enforcement.

Key areas of interest for firms include:

• Impact of the Consumer Duty on customer outcomes and behaviour
• Whether distribution and pricing tools, including comparison sites, support suitable product choice
• Claims handling and outsourcing oversight, including fairness of outcomes and use of cash settlements
• Gaps in regulation, including readiness for AI adoption in insurance

The Committee is also examining access issues for vulnerable groups and the role of the Financial Ombudsman Service in dispute resolution. Firms should assess how their frameworks align with these themes and consider submitting evidence. The deadline for responses is 26 June 2026.

Read more on the HoL FSRC call for evidence

Open banking scheme moves forward

The FCA has signalled a step change in Open Banking with the launch of the UK Payments Initiative (UKPI), an industry-led scheme designed to drive competition and innovation in payments.

Key points for firms:

• UKPI will support commercial variable recurring payments, giving customers more choice over how and when they pay for recurring services
• The FCA expects the first scheme to act as a catalyst for further competing open banking solutions
• The regulator is backing the creation of an independent standards body to support the next phase of development

The FCA has also set out a broader direction of travel. It plans to consult on a long-term regulatory framework by the end of 2026, subject to new powers, alongside publishing its open finance roadmap to expand data-sharing and improve customer outcomes.

Read more on open banking takes next step forward with launch of UK Payments Initiative scheme

Sanctions controls: progress made but gaps remain

The FCA reports that firms have improved sanctions controls but still face clear weaknesses. Since February 2022, the regulator has assessed over 150 firms and notes stronger detection, including prevention of breaches before they occur. Around £37bn of assets were frozen in the UK last year.

Key findings for firms:

• Weak due diligence, alert handling and screening drive most breaches
• Challenges remain in managing frozen assets and complying with licences
• Trade sanctions controls vary widely and are harder to operate than financial sanctions controls
• Exposure is still led by Russia, with rising activity linked to Iran and North Korea

The FCA has also signed a new MoU with the Office of Trade Sanctions Implementation to improve intelligence sharing, adding to existing arrangements with OFSI.

Read more on how firms have improved but must do more to prevent sanctions breaches

Fragmented markets constrain EU banks

An ECB Senior Supervisory official warns that market fragmentation, not prudential rules, is the main constraint on EU bank competitiveness. The interview highlights that supervision has become more risk-based and forward-looking, but structural barriers across the Single Market limit scale and efficiency.

Key points for firms:

• Fragmentation persists: most lending remains domestic and cross-border activity is limited, reducing economies of scale
• Supervisory simplification is underway: faster approvals and streamlined processes aim to reduce burden while maintaining resilience
• Operational resilience is critical: cyber threats and emerging AI tools increase the urgency to strengthen controls
• Private credit exposures are under scrutiny: supervisors expect stronger risk management and stress testing

The ECB calls for deeper integration, including progress on deposit insurance and freer movement of capital and liquidity within banking groups.

Read more on the ECB interview