Risk & Compliance Report 23 June 2025 – 27 June 2025

1. Executive Summary

This week's regulatory developments signal a significant strategic shift for financial institutions, with a pronounced focus on operationalising sustainability goals, the future structure of core markets such as mortgages, and a reevaluation of regulatory burdens. The most impactful developments demanding immediate board-level attention are:

• The UK Government's consultation on mandatory climate transition plans, which moves beyond disclosure to question how firms will actively align with net-zero targets, introduces profound strategic and legal risks.

• The EU's ongoing simplification of the CSRD and CSDDD, which provides relief for some, requires a strategic rethink of due diligence and reporting for those still in scope.

• A fundamental review of the UK mortgage market by the FCA, potentially reshaping responsible lending rules and product innovation for the entire sector.

• The formal integration of ESG risks into EU supervisory stress tests will directly connect sustainability performance to capital requirements for banks and insurers.

Firms must also address medium-impact changes, including the FCA's decommissioning of several data collections, which provides immediate cost relief, as well as a critical review of risk management frameworks within the UK payments sector. The report below prioritises these and other key developments to help firms navigate the evolving regulatory landscape.

2. High-Impact Considerations: Requiring Immediate Strategic Review

These developments have the potential to fundamentally alter business models, capital allocation, and legal liabilities.

A. UK & NGO Focus on Climate Transition Plan Implementation and Liability

• Source: UK Government Consultation on Climate Transition Plan Requirements (25-Jun); ClientEarth Legal Opinion on Climate Transition Plans (26-Jun).

• Summary: The UK government is consulting on moving beyond simple disclosure to potentially requiring large companies and financial institutions to develop, disclose, and implement transition plans aligned with the UK's net-zero goals. The consultation explores options up to and including mandatory implementation. Concurrently, a legal opinion published by ClientEarth concludes that mandatory transition plan disclosures are unlikely to increase director liability materially and that existing legal frameworks are sufficient, thereby negating the need for "safe harbours."

• Risk & Compliance Considerations:

  • Strategic Risk: A shift from "disclose if you have a plan" to "implement a net-zero aligned plan" is a paradigm shift. It moves climate strategy from a communications exercise to a core driver of capital expenditure, M&A, and business model viability.

  • Legal & Liability Risk: The consultation and legal opinion heighten the risk of litigation. A disclosed plan that is not credible or not acted upon could be used as evidence in claims against directors for breach of duty. The rejection of "safe harbours" indicates that directors will be held to a high standard.

  • Operational Risk: Firms will need to invest heavily in data, modelling, and governance frameworks to develop and execute credible, science-based transition plans that withstand regulatory and legal scrutiny.

• Prioritisation & Business Impact (HIGH): This is the most significant long-term development of the week. It has the potential to mandate strategic transformation for all in-scope firms (initially including FTSE 100 companies and financial institutions, but the scope may be extended). Action: Boards must immediately engage with this consultation. Firms should stress-test their current strategies against a mandatory 1.5°C alignment scenario and review director liability insurance and governance processes.

  
  

B. EU Proposes Further Simplification of CSRD and CSDDD Scope

• Source: Council of EU Negotiating Mandate on Omnibus I CSRD and CSDDD Simplification (24-Jun).

• Summary: The Council has proposed significant changes to reduce the burden of the Corporate Sustainability Reporting Directive (CSRD) and Due Diligence Directive (CSDDD). Key proposals include raising the CSDDD scope threshold to firms with over 5,000 employees and a turnover of €1.5 billion, as well as limiting due diligence obligations to direct "tier 1" business partners. The commitment to adopt climate transition plans would also be postponed by two years.

• Risk & Compliance Considerations:

  • Strategic & Compliance Risk: Firms near the proposed new thresholds must urgently determine if they will fall out of scope, which would dramatically alter their compliance roadmaps and resource allocation. For firms remaining in scope, the pivot to a "risk-based approach" focused on tier 1 partners for CSDDD requires a fundamental redesign of third-party risk management and due diligence programs.

  • Reputational Risk: Firms that fall out of scope may still face market and investor pressure to maintain high standards of sustainability reporting and due diligence, mainly if they operate in sensitive sectors or have public ESG commitments.

• Prioritisation & Business Impact (HIGH): This is a critical development for all large EU and non-EU companies operating in the Union. It creates uncertainty but also opportunity. Action: Firms must immediately reassess their position relative to the proposed new thresholds. Compliance teams should model the impact of a tier-1-focused due diligence program versus their current, more expansive approach.

  
  

C. FCA Launches Foundational Review of the UK Mortgage Market

• Source: FCA Discussion Paper on the Future of the Mortgage Market (25-Jun).

• Summary: The FCA has initiated a wide-ranging discussion on the future of the UK mortgage market. Key themes include updating responsible lending rules (including stress testing), preparing the market for increased demand in later-life lending, and potentially rebalancing the collective risk appetite to support growth and innovation.

• Risk & Compliance Considerations:

  • Business Model Impact: Any changes to MCOB affordability rules or stress tests could significantly alter the types and sizes of loans firms can offer, directly impacting lending volumes, profitability, and market share.

  • Product Development & Innovation: The focus on later-life lending signals a significant growth opportunity but also brings risks related to product complexity, customer vulnerability, and long-term funding.

  • Credit Risk: A "rebalancing" of risk appetite could allow for higher-risk lending, but firms would need to ensure their credit risk models and underwriting standards are robust enough to manage this without increasing future defaults.

• Prioritisation & Business Impact (HIGH): This is of the highest importance for all UK mortgage lenders, building societies, and related intermediaries. The outcomes could reshape the competitive landscape for years. Action: Firms should actively participate in the consultation. Strategy and risk functions must begin scenario planning based on potential rule changes to model the impact on their loan book, profitability, and capital.

  
  

D. ESAs Consult on Integrating ESG Risks into Financial Stress Tests

• Source: Joint Committee of ESAs Consultation on ESG Risks in Financial Stress Tests (27-Jun).

• Summary: The ESAs are developing standard guidelines for integrating ESG risks (particularly climate) into the supervisory stress tests for EU banks and insurers under CRD and Solvency II. This will formalise the assessment of ESG risks on capital adequacy.

• Risk & Compliance Considerations:

  • Capital & Prudential Risk: This directly links ESG risk management to capital adequacy. Poor performance in an ESG stress test could eventually lead to higher capital requirements (Pillar 2 add-ons).

  • Data & Modelling: Firms will require sophisticated data and analytical capabilities to model the impact of physical and transition risks on their balance sheets under various adverse scenarios. This is a significant operational and technical challenge.

• Prioritisation & Business Impact (HIGH): This solidifies the transition of ESG from a reputational issue to a core prudential risk. Action: Risk and finance departments at in-scope banks and insurers must assess their current data and modelling capabilities against the proposals. This initiative should be integrated into existing ICAAP and ORSA processes.

  
  

3. Medium-Impact Considerations: Requiring Tactical Adjustments

These developments require specific procedural, reporting, or risk management changes.

• FCA Decommissions Data Collections (UK): The immediate removal of FSA039 (Client Money), RMAR Section F, and Form G reporting is a significant win, expected to save the industry £1.3 million annually. Impact: Positive financial and operational impact for ~16,000 firms. Firms should ensure internal processes are updated by 11 July 2025 to cease these reporting activities.

• FCA Finds Widespread Failings at E-money/Payment Firms (UK): The FCA's multi-firm review revealed inadequate risk management frameworks, immature liquidity risk management, and inoperable plans for wind-down. Impact: High for the payments and e-money sector. Firms in this space are on notice and must urgently review their enterprise risk, liquidity, and wind-down arrangements in light of the FCA's findings to pre-empt supervisory intervention.

• ESMA Proposes Restricting UCITS Investment Strategies (EU): ESMA's technical advice on the review of the Eligible Assets Directive (EAD) suggests a 90% look-through for asset eligibility and a potential 10% cap on indirect exposure to alternative assets. Impact: This could significantly constrain the investment flexibility of many UCITS funds, forcing portfolio rebalancing and a rethink of product design for asset managers who utilise alternative strategies.

• The Political Agreement on EU Bank Crisis Management (CMDI) (EU) provides an agreement on the use of Deposit Guarantee Schemes (DGS) in resolution and clarity on the Public Interest Assessment (PIA), offering more certainty for EU banks. Impact: Affects resolution planning, MREL calibration, and the strategic options available for mid-sized banks that fail. It is an essential evolution of the existing BRRD framework.

• UK Listing Rules Amended for Related Party Transactions (UK): The change to UKLR 11.5.5R, requiring the exclusion of related parties from voting on relevant transactions, is now in force—impact: A specific, procedural change for UK-listed companies. Corporate secretarial and governance teams must ensure this new voting exclusion is implemented immediately for any relevant transactions.

4. Horizon Scanning & Lower-Impact Updates

Firms should monitor these developments as part of their forward-planning activities.

• FATF Updates on Virtual Assets & Financial Inclusion (International): The FATF continues to push for global implementation of its standards, including the 'travel rule'. Progress remains uneven. The revised guidance on financial inclusion encourages a risk-based approach to AML/CTF. Impact: Relevant for VASPs/CASPs and firms operating in emerging markets. This is part of a long-term global trend rather than an acute, immediate change.

• ESMA Report on DLT Pilot Regime (EU): The report notes limited uptake but continued experimentation. ESMA recommends making the regime permanent and more flexible. Impact: Low immediate impact, but signals the direction of travel for the regulation of DLT-based market infrastructures.

• UK Modern Industrial Strategy & PRA Competitiveness Report (UK): Speeches and reports from UK authorities (FCA, PRA, HMT) continue to emphasise a shift in regulatory focus to support growth and international competitiveness. This includes a promised consultation on consolidating the PSR into the FCA. Impact: This signals a potential easing of the regulatory environment and a more collaborative approach, but concrete rule changes are still pending. Firms should monitor this evolving "regulatory philosophy."

• FCA Enforcement Actions (Upper Tribunal): The tribunal's decision to uphold the ban on Jes Staley for a lack of integrity in his communications with the regulator serves as a stark reminder for all senior managers (SMFs) of their accountability and duty of candour. The Donaldson case clarifies that publishing information known to be incorrect constitutes a breach of Listing Rules, even if it is not classified as inside information. Impact: Reinforces existing standards of conduct and governance for senior leadership and listed companies.