Understanding FCA and PRA Fee Blocks

What Are Fee Blocks?

Fee blocks are the regulatory mechanism by which the FCA and PRA allocate their annual funding requirements across authorised firms. In essence, both regulators group firms undertaking similar regulated activities into distinct fee blocks. Each firm then pays fees according to the blocks it occupies based on its permissions.

The FCA allocates its Annual Funding Requirement (AFR) across these fee blocks. Each block groups firms conducting broadly similar regulated activities. Consequently, fee blocks exist for deposit acceptors, insurers, fund managers, investment firms, mortgage intermediaries and numerous other categories. Meanwhile, the PRA operates a simpler structure with seven fee blocks covering deposit acceptors, insurers, Lloyd’s participants and designated investment firms.

FCA Fee Block Structure

The FCA’s fee block architecture comprises several main categories. Most notably, the A blocks cover most authorised firms. These include A.1 for deposit acceptors and A.3 and A.4 for general and life insurers respectively. Similarly, A.7 covers fund managers whilst A.10 relates to firms dealing as principal. Meanwhile, investment and home finance intermediaries occupy A.13, A.14 and A.18. General insurance distributors fall within A.19.

Importantly, firms can occupy multiple fee blocks simultaneously. For example, a wealth manager might appear in A.7 for fund management and A.13 for investment advice. In this way, each permission triggers allocation to the corresponding block.

Additional fee blocks serve specialist sectors. Specifically, the B blocks cover recognised investment exchanges and benchmark administrators. The C blocks relate to collective investment schemes. Consumer credit firms occupy either CC1 or CC2 depending on permission type. Finally, the G blocks capture payment services and e-money institutions.

PRA Fee Block Categories

The PRA maintains seven fee blocks. First, A0 represents the minimum fee block for smaller firms. Next, A1 covers deposit acceptors including banks and building societies. Fee blocks A3 and A4 apply to general and life insurers respectively. The Lloyd’s market occupies A5 for managing agents and A6 for the Society itself. Finally, designated investment firms dealing as principal fall within A10.

Notably, dual-regulated firms pay fees to both regulators. In these cases, the FCA charges £1,000 minimum for such firms whilst the PRA charges £600. This contrasts with the £2,000 minimum for FCA-only firms.

How Fee Allocation Works

Both regulators assess the supervisory costs for each fee block. They then allocate their total budget proportionally. Specifically, the FCA divides its Annual Funding Requirement based on anticipated regulatory activity within each sector.

Firms pay fees calculated using tariff data. This measures business scale through metrics like annual income, funds under management or mortgage numbers. In practice, the regulator divides the block’s allocation by total tariff data. This produces a rate per unit which then multiplies against each firm’s individual tariff.

Importantly, thresholds exist within most blocks. Firms below the threshold pay only minimum fees. Typically, FCA aims for around 35 to 45 per cent of firms to fall below these thresholds. This approach prevents smaller firms subsidising larger competitors.

Why Correct Fee Block Classification Matters

Incorrect fee block allocation creates multiple compliance risks. Most obviously, firms in wrong blocks pay incorrect fees. Under-allocation means potential regulatory action for underpayment. Conversely, over-allocation wastes money and distorts internal budgeting.

Furthermore, the regulators determine fee blocks from stated permissions. Permissions must accurately reflect actual business activities. Consequently, discrepancies trigger supervisory attention beyond just fees. Indeed, the FCA and PRA view permission accuracy as fundamental to proper regulation.

Additionally, wrong classifications affect more than current fees. They also influence Financial Services Compensation Scheme levies and Financial Ombudsman Service charges. Therefore, multiple levy calculations flow from fee block placement. As a result, errors compound across all charges.

Moreover, business changes necessitate permission reviews. Launching new products or services may require additional permissions. These then determine to which new fee blocks a firm is allocated.

Checking Your Fee Block Allocation

The Financial Services Register provides the starting point. This public register shows all firm permissions. Therefore, review your entry regularly. Then compare stated permissions against actual business activities.

Next, your annual fee invoice lists allocated fee blocks. The FCA issues invoices through its Online Invoicing System each Spring. The invoice details each block and corresponding tariff data. Accordingly, check these match your permissions and activities.

Additionally, the FCA Handbook contains definitive fee block definitions. Specifically, FEES 4 Annex 1A specifies which permissions trigger which blocks. Therefore, cross-reference your permissions against these rules. The Handbook also details tariff bases for each block.

Steps When Changes Are Needed

First, identify all required permission changes. Map current activities against current permissions. Then note discrepancies. Determine which permissions require variation, addition or removal.

Next, apply through Connect for FCA permission changes. The system handles Variation of Permission applications. Prepare supporting documentation explaining the business rationale. Bear in mind that applications adding fee blocks incur charges. Very roughly you can expect 50 per cent of relevant authorisation fees for new block entry.

Importantly, timing matters significantly. Applications must reach the FCA by 31 March to affect the following year’s fees. Meanwhile, the PRA deadline falls in February. Missing these dates means paying fees for the full coming year regardless.

Furthermore, dual-regulated firms coordinate with both regulators. PRA permission changes often require parallel FCA variations. Therefore, ensure consistency across both applications. Otherwise, misalignment creates complications.

Additionally, monitor fee implications during the process. New fee blocks mean additional charges. Calculate projected costs before applying. Then budget accordingly. Remember minimum fees apply per block in many cases.

Finally, update internal records once approved. Amend compliance manuals and procedures. Brief relevant staff on permission changes. Also ensure tariff data collection covers new activities. Ensure you submit accurate data when regulators request it.

Ongoing Monitoring Requirements

Review permissions annually as minimum practice. Business evolution often outpaces permission updates. Therefore, regular audits catch discrepancies early. Conduct reviews before tariff data submission deadlines each year.

Meanwhile, track regulatory developments affecting fee blocks. The FCA and PRA consult on fee changes annually. These consultations appear in Spring. Changes may affect block definitions or tariff bases. Accordingly, stay informed through policy statements.

Furthermore, document the review process thoroughly. Record permission assessments and conclusions. Maintain evidence of business activity verification. This documentation proves diligence if questions arise later.

Finally, consider external reviews periodically. As independent assessments provide fresh perspectives that internal teams can sometimes overlook. This is a service that the team at Leaman Crellin provides.

Conclusion

Fee block classification represents more than administrative housekeeping. Accuracy ensures proper regulatory funding whilst avoiding compliance breaches. Clearly, permissions must reflect reality. Regular reviews prevent drift between permissions and activities.

Fortunately, both regulators provide clear guidance on fee blocks and classifications. Use their handbooks and fee schedules. Proactive management prevents problems.

Moreover, the annual cycle provides natural review points. Tariff data submission and fee invoicing prompt permission checks. Therefore, build reviews into compliance calendars. Make verification routine rather than reactive.

Ultimately, correct fee block placement benefits everyone. Regulators receive appropriate funding for supervision. Firms pay fair shares based on actual activities. The system functions when participants maintain accuracy.

2026 Regulatory Priorities

As the new year approaches, compliance officers yet again face a year ahead of regulatory change. The convergence of technological innovation, operational resilience requirements, and enhanced accountability frameworks presents both challenges and opportunities. This article examines the critical regulatory priorities and provides practical guidance on preparing your firm for the year ahead.

Basel 3.1 Implementation

Time to Finalise Your Approach

The Prudential Regulation Authority (PRA) has confirmed Basel 3.1 standards implementation will commence on 1 January 2027, following a 12-month delay from the original 1 January 2026 date. This provides critical breathing space, but compliance officers must help their business heads to resist complacency and use this period strategically.

The PRA’s near-final rules enhance UK market competitiveness through reduced capital requirements for SME lending and infrastructure projects. Whilst the implementation date has moved, the nature of these changes demands immediate action.

Practical implications

The delay affects immediate data submission deadlines, which can also be treated as paused. However, firms should continue working through the potential capital impact of Basel 3.1 rather than standing still.

The Bank of England will conduct a Bank Capital Stress Test in 2025 involving the UK’s largest and most systemic institutions. Results will inform capital buffer settings at both firm and system-wide levels.

What to do now

Review your capital models against the near-final rules.
Identify where reduced SME and infrastructure capital requirements might benefit your portfolio strategy.
Ensure your data infrastructure can support the new reporting requirements when they activate in 2027.
Consider whether the delay creates opportunities to enhance your approach rather than simply postpone work already underway.

Operational Resilience and Third-Party Risk

Beyond Box-Ticking

March 2025 marked a watershed when firms were required to demonstrate their ability to remain within impact tolerances for all important business services during severe disruptions. The PRA emphasises that operational resilience must become a key board consideration for any business expansion, signalling a fundamental shift from tactical compliance to strategic risk management.

Third-party risk management continues to evolve rapidly. The PRA explicitly highlights concerns about the financial health of suppliers, requiring firms to be “mindful” and conduct robust ongoing diligence on material third parties. Critically, this extends to intra-group providers, challenging traditional assumptions about the safety of internal arrangements.

For many firms, the intersection of operational resilience with cybersecurity threats creates compound risks. Geopolitical uncertainty intensifies threats to operational resilience, particularly for firms operating across borders.

Practical implications

Your important business services framework should now be embedded in decision-making processes. When your firm considers new business lines, geographic expansion, or technology changes, operational resilience implications must feature in board papers. The days of operational resilience as a compliance project are over. It is now a strategic governance requirement.

On third-party risk, the PRA’s focus on supplier financial health requires more sophisticated monitoring. You cannot simply conduct annual reviews of service delivery quality. You need real-time awareness of your critical suppliers’ financial stability, particularly in the current economic environment.

What to do now

Audit your board papers from the past six months. Are operational resilience considerations explicitly addressed in expansion proposals? If not, work with your governance team to embed this requirement.

For third-party risk, identify your critical service providers and establish quarterly financial health monitoring. Consider credit ratings, financial statements, and market intelligence.

For intra-group arrangements, apply the same rigour you would to external providers. Corporate structures provide less protection than you might assume during stress events.

Digital Operational Resilience Act (DORA)

Preparing for Convergent Standards

Whilst DORA is an EU regulation, its influence extends beyond the European Union’s borders. ESMA has designated cyber risk and digital resilience as a Union Strategic Supervisory Priority for 2026, with enhanced coordination across EU supervisors on ICT risk management requirements.

UK firms with European operations must align their approaches with DORA requirements, which took effect in January 2025. Even purely UK-based institutions should monitor DORA implementation, as regulatory expectations around digital resilience are converging internationally. The Financial Conduct Authority’s (FCA) emphasis on operational resilience creates complementary pressures that elevate cyber and operational risk management to boardroom priorities.

Practical implications

If you operate in both UK and EU jurisdictions, you face dual regulatory expectations. The smart approach is to adopt the higher standard across your entire operation rather than maintaining separate frameworks. This reduces complexity and positions you well for future UK regulatory developments, which are likely to align with international standards.

What to do now

Map your current operational resilience framework against DORA requirements. Identify gaps, particularly around ICT third-party risk management, incident reporting, and digital operational resilience testing.

Even if DORA doesn’t directly apply to your firm, treating it as a benchmark ensures you’re ahead of UK regulatory evolution.

Liquidity Framework Review

Positioning for Regulatory Change

The PRA will review the liquidity supervisory framework in 2026, with consultations on regulatory reporting changes expected. This responds to lessons from the March 2023 banking stress and acknowledges the Bank of England’s evolving operating framework.

Compliance officers should prepare for potentially significant changes to liquidity monitoring and reporting obligations. International coordination through the Basel Committee on Banking Supervision suggests that any UK reforms will align with global developments in liquidity risk supervision.

Practical implications

The 2023 banking turmoil demonstrated that traditional liquidity metrics don’t always capture emerging risks, particularly around concentrated funding sources and rapid deposit outflows enabled by digital banking. The PRA’s review will likely result in enhanced reporting requirements and potentially new metrics focused on behavioural aspects of liquidity risk.

What to do now

Review your liquidity risk management framework with fresh eyes. Where are your funding concentrations? How quickly could you access contingent liquidity? What are your exposures to non-bank financial institutions, which the PRA has specifically flagged as a concern?

Don’t wait for the consultation to strengthen your frameworks. You can conduct reviews now based on the known weaknesses that emerged in 2023. When the consultation arrives, you’ll be responding from a position of strength rather than scrambling to comply with new requirements.

Artificial Intelligence Governance

Moving from Innovation to Accountability

The FCA and PRA are intensifying their focus on artificial intelligence and machine learning deployment within financial services. The PRA maintains a specialist Fintech Hub and has established an AI Consortium for public-private engagement, signalling the centrality of AI governance to 2026 priorities.

Many compliance officers are facing the challenge of enabling innovation whilst managing emerging risks. Key considerations include algorithmic decision-making transparency, ethical deployment of machine learning models, and bias detection and mitigation strategies.

Practical implications

The regulatory focus on AI represents a significant expansion of compliance remits into technology governance territory. You need frameworks for human oversight of algorithms, mechanisms to explain and audit algorithmic decisions, and clear governance structures for AI system deployment.

This isn’t about blocking innovation. It is about ensuring responsible innovation that aligns with regulatory expectations around customer protection and market integrity.

What to do now

Conduct an AI inventory across your firm. What AI or machine learning systems are currently deployed? Which are in development? For each system, document: the business purpose, the decision-making role (advisory versus determinative), the oversight mechanisms, and the bias testing approach.

Establish an AI governance committee if you don’t have one, with representation from compliance, risk, technology, and business functions.

Create approval frameworks for new AI deployments that ensure regulatory considerations feature from the design stage, not as an afterthought.

Consumer Duty

Wholesale Firms Cannot Assume Exemption

Whilst the Consumer Duty primarily targets retail customers, the FCA has clarified its application to wholesale firms. FCA CEO Nikhil Rathi’s letter to the Chancellor addressing the Consumer Duty’s application to wholesale markets underscores that compliance officers in wholesale firms cannot assume blanket exemption.

The FCA’s 2026 priorities include consultations on amendments addressing how the Duty applies across distribution chains and proposals to limit its application to business conducted with UK customers only. These developments require wholesale firms to maintain vigilant monitoring of Consumer Duty evolution.

Practical implications

The boundary between wholesale and retail is not always clear-cut, particularly in distribution chains. If your wholesale products ultimately reach retail customers through intermediaries, you may have Consumer Duty obligations even though you don’t directly serve retail clients.

The FCA’s emphasis on distribution chain responsibilities means you cannot assume that duties stop at the point of sale to a wholesale counterparty.

What to do now

Map your product distribution chains end-to-end. Where do your products or services ultimately end up? If there’s any retail customer exposure, even indirect, assess your Consumer Duty obligations.

For firms in distribution chains, establish clear communication channels with your counterparties about respective Consumer Duty responsibilities. Document how you’re ensuring good customer outcomes, even where you’re several steps removed from the end customer.

CASS 15 and Payments Safeguarding

The 7 May 2026 Deadline

The FCA’s new safeguarding rules under CASS 15 take effect on 7 May 2026 for payment service providers and e-money institutions. These introduce daily fund reconciliations (on each reconciliation day) and significantly enhanced transparency and governance requirements.

This represents the most significant change to client money protection in the payments sector for many years. The shift from monthly to daily reconciliations fundamentally changes operational requirements and creates new pressure points in firms’ processes.

Practical implications

Daily reconciliations demand robust automated processes. Manual reconciliation approaches that suffice for monthly cycles will not scale to daily requirements without creating unsustainable operational burdens and error risks. Firms must also prepare comprehensive resolution packs, which are effectively wind-down plans that enable rapid customer fund returns in insolvency scenarios.

Beyond the technical requirements, CASS 15 introduces a new governance framework. Firms need a CASS oversight function, clear escalation procedures, and board-level accountability for safeguarding.

The annual audit requirement means your CASS arrangements will face independent scrutiny.

What to do now

If you’re in scope for CASS 15, you should be in implementation mode already. As 7 May 2026 is imminent in regulatory terms.

Conduct a gap analysis against the final rules published by the FCA. Focus particularly on: your reconciliation processes and whether they can scale to daily frequency; your segregation arrangements and whether they meet the enhanced requirements; your resolution pack and whether it contains all required information; and your governance framework and whether you have clear CASS oversight accountability.

If you’re behind schedule, engage with the FCA proactively. They would rather know about implementation challenges in advance than discover non-compliance in May 2026.

SMCR Streamlining

Efficiency With Continued Accountability

The FCA and PRA are streamlining the Senior Managers and Certification Regime (SMCR). making it more efficient and outcomes-focused whilst reducing administrative burdens.

The PRA plans to finalise revised rules for banks on streamlining material risk-takers’ remuneration requirements, including reducing bonus deferral periods.

The FCA continues to refine certification requirements and is reviewing client categorisation rules to ensure greater alignment across its Handbook.

Practical implications

The streamlining creates opportunities to eliminate unnecessary processes whilst maintaining robust governance frameworks.

However, the fundamentals of individual accountability remain unchanged. The regime’s core principle that senior individuals should be clearly accountable for their areas of responsibility is not being diluted.

What to do now

Review your SMCR processes for unnecessary complexity. Are you collecting information that adds little value? Are your handbooks and statements of responsibilities clearer than they need to be, or have they accumulated layers of belt-and-braces drafting?

The regulatory streamlining gives you permission to simplify. So take advantage of it. However, ensure that simplification doesn’t compromise the quality of your accountability frameworks. Documentation, attestations, and fitness and propriety assessments remain fundamental to demonstrating compliance.

Transaction Reporting

Preparing for Regime Changes

The FCA has published proposals to improve the UK transaction reporting regime, aiming to remove unnecessary burdens for firms whilst maintaining high regulatory standards. ESMA has launched parallel consultations on streamlining transaction reporting requirements across EU markets.

For firms operating across multiple jurisdictions, the divergence between UK and EU approaches requires careful monitoring. The UK is pursuing reforms tailored to its market structure, whilst the EU focuses on harmonisation across member states. These differing priorities may result in materially different reporting requirements.

Practical implications

Transaction reporting changes affect your data infrastructure and reporting systems.

Unlike rule changes that affect front-office behaviour, reporting changes require technology builds. These often have long lead times, particularly if you’re dependent on vendor solutions that need to be updated across multiple clients.

What to do now

Monitor the FCA’s transaction reporting proposals and assess the likely impact on your systems.

Engage with your technology and data teams early. Don’t wait for final rules.

If you use third-party reporting vendors, open dialogue with them about their implementation timelines.

For firms with both UK and EU operations, map the diverging requirements and consider whether you’ll need dual reporting systems or whether you can find a common approach that satisfies both regimes.

2026 Regulatory priorities

Regulatory priorities in 2026 demands that compliance officers adopt strategic perspectives extending beyond technical rule-following. Firms that embed regulatory requirements into business strategy, treating compliance as a competitive differentiator rather than a cost centre, will continue to thrive in this environment.

The convergence of operational resilience requirements, technological innovation governance, and enhanced accountability frameworks creates opportunities for compliance functions to drive business value. Proactive engagement with regulatory developments, robust governance frameworks, and strategic resource allocation will separate leaders from laggards.

As regulatory complexity intensifies, the role of specialist compliance advisors becomes increasingly valuable. Firms should assess whether their internal capabilities require augmentation through expert consultancy support, particularly for transformational projects like Basel 3.1 implementation, operational resilience framework enhancement, or CASS 15 preparation.

The regulatory priorities for 2026 are clear. Success depends on moving beyond awareness to action. Conducting gap analyses, strengthening frameworks, and embedding regulatory requirements into strategic decision-making. The firms that act decisively now will navigate 2026’s regulatory challenges with confidence.

Leaman Crellin provides regulatory compliance consulting services to financial services businesses, helping clients navigate UK and international regulatory requirements. Our team of former regulators and industry professionals delivers practical, business-focused compliance solutions tailored to your organisation’s needs, including SMCR, transaction reporting, third-party risk management frameworks, operational resilience planning, and CASS compliance advisory. Get in touch with us today.

ESMA 2026 Work Programme: What Regulated Firms Need to Know

ESMA has published its 2026 Annual Work Programme, setting out its regulatory priorities for the year ahead. Here’s what matters for your firm’s planning, with UK comparisons where relevant for cross-border operations.

Three Major Consultations Already Launched

ESMA has launched three consultations it describes as “landmark” reforms. These consultations are already open:

Integrated Funds Reporting

ESMA plans to consolidate multiple reporting requirements for investment funds. If you manage UCITS or AIFs, review these proposals carefully. The FCA is pursuing similar simplification through its retail fund regime reforms, but timelines and scope differ.

Transaction Reporting Streamlining

ESMA intends to reduce burdens in transaction reporting while maintaining market oversight standards. UK firms should note the FCA is also reviewing its transaction reporting regime, though approaches may diverge.

Investor Journey Simplification

ESMA will streamline disclosure requirements across the investor journey. Compare this with the FCA’s Consumer Duty requirements, which take a principles-based approach to similar outcomes.

Action: Respond to these consultations if they affect your business. Check whether you need different approaches for UK versus EU operations.

New Supervisory Responsibilities Taking Effect

Consolidated Tape Providers

ESMA will authorise and supervise CTPs in 2026. If you’re considering becoming a CTP, engagement with ESMA should begin now. The UK has similar proposals for bond and equity consolidated tapes but on different timelines.

ESG Rating Providers

ESG ratings regulation takes effect from July 2026. If you provide ESG ratings or rely on them for investment decisions, build compliance frameworks now. The FCA plans to consult on ESG ratings rules but has not yet set implementation dates.

Action: ESG rating providers need authorisation applications ready. Users of ESG ratings should assess how regulatory oversight affects your due diligence processes.

European Green Bond External Reviewers

ESMA will oversee external reviewers under the EuGB framework. If you provide these services, prepare for ESMA supervision.

DORA Critical Third-Party Oversight

ESMA will jointly supervise critical ICT third-party service providers with other ESAs. If you’re an ICT provider to financial services firms, assess whether you meet criticality thresholds.

Action: ICT service providers should review DORA designation criteria. Financial firms should confirm their critical providers are preparing for ESMA oversight.

Digital Assets and Technology Focus

ESMA’s programme prioritises the ESMA Data Platform rollout and AI-powered supervisory tools. ESMA will develop frameworks for digital assets.

Compare with UK: The FCA is consulting on cryptoasset regulation during 2025, with policy statements expected in 2026. UK timelines may move faster than EU frameworks. The FCA’s AI Lab offers testing opportunities not currently available through ESMA.

Action: Firms developing digital asset services should track both ESMA’s framework development and the FCA’s crypto consultations. Consider UK market entry if faster regulatory clarity suits your business model.

Sustainable Finance Intensifies

ESMA’s 2026 programme includes substantial sustainable finance work:

Consultation on ESG ratings provider rules
ISSB standards implementation
Continued greenwashing supervision focus

The FCA maintains sustainable finance commitments but with less prescriptive frameworks post-Brexit.

Action: Fund managers should strengthen greenwashing risk assessments. ESMA’s supervisory focus on sustainable investment funds continues to intensify. Don’t assume existing disclosures remain adequate.

Data Collection Integration

ESMA plans to integrate supervisory data collection under AIFMD and UCITS. This affects how you submit regulatory data.

Compare with UK: The FCA is discontinuing three regular data returns affecting 16,000 firms. Summer 2025 consultations will propose further reductions. UK and EU data obligations are diverging.

Action: Investment managers operating cross-border should prepare for different data collection systems. ESMA’s integration may require system changes even as FCA reduces reporting burdens.

Capital Markets Reforms

Savings and Investments Union

ESMA supports the EU’s shift from Capital Markets Union to Savings and Investments Union. This represents structural change to European capital markets.

Compare with UK: The FCA focuses on targeted reforms—new prospectus regimes, PISCES for private company markets, and wholesale markets review. UK maintains structural continuity while enhancing specific market segments.

Action: Assess whether the EU’s broader structural reforms create opportunities your firm should pursue, or whether UK targeted reforms better suit your business model.

Supervisory Approach Evolution

ESMA plans to harmonise supervisory practices across member states and enhance risk-based supervision.

Compare with UK: The FCA is reforming its supervision model to focus on fewer priorities with greater depth. The FCA will take more flexible approaches for firms demonstrably doing the right thing.

Action: EU-supervised firms should expect more consistent treatment across member states. UK-supervised firms may see relationship-based supervision if they demonstrate strong compliance cultures.

Timing Considerations for 2025/26

Q2 2025: ESMA consultation responses due for integrated reporting, transaction reporting, and investor journey reforms

July 2026: ESG ratings regulation takes effect

Throughout 2026: CTP authorisations, DORA critical third-party oversight implementation, green bond reviewer supervision begins

UK Timeline Differences: FCA crypto consultations (2025), policy statements (2026), authorisation gateway opening (likely 2026-27). Advice Guidance Boundary Review reforms including “targeted support” (2025-26).

What This Means for Your Compliance Planning

If you operate EU-only: Focus on ESMA’s three consultations, ESG ratings compliance, and data integration changes. Budget for system updates to accommodate new reporting frameworks.

If you operate UK-only: ESMA’s programme still matters if you have EU clients or counterparties. Your service providers may face ESMA oversight under DORA.

If you operate cross-border: Plan for regulatory divergence. ESMA pursues harmonised, prescriptive frameworks. The FCA favours principles-based regulation. You’ll need dual compliance approaches in several areas, particularly sustainable finance, crypto assets, and fund regulation.

For all firms: Respond to relevant consultations. Regulatory frameworks are being reshaped now. Input during consultation stages is more effective than adapting to final rules.

Three Priority Actions

Review the three ESMA consultations – integrated reporting, transaction reporting, investor journey. Respond if they affect your business.
Assess ESG ratings exposure – whether as provider or user. July 2026 deadline approaches quickly.
Map cross-border differences – particularly for crypto assets, sustainable finance, and fund management. UK and EU timelines and approaches are diverging.

Leaman Crellin provides expert regulatory compliance consulting services to financial services firms. We help clients navigate UK and international regulatory requirements. Our team of former industry leaders and regulatory professionals delivers practical, business-focused compliance solutions. We tailor these to your organisation’s needs. Contact us to discuss how we can support your regulatory compliance strategy.

Top Tips for Strengthening Your Market Abuse Risk Assessment

Why firms must be ready for rapid regulatory scrutiny

Regulators are asking for market abuse risk assessments more frequently and with less notice. Firms that cannot produce a clear, current, and defensible assessment risk uncomfortable questions about governance, culture, and control effectiveness. Below we outline the themes that matter most today and what regulators increasingly expect to see.

Cover the full risk landscape

A credible assessment must reflect the real breadth of risk across your business. Market manipulation and insider dealing remain central, but today’s regulators look much more widely.

Your assessment should consider governance, employee competence, training frequency, personal account dealing controls, and how new products or clients change your risk profile.

Scenario analysis remains valuable. Enforcement actions and court judgments continue to be useful sources of emerging behaviours.

Ensure information walls still work in a digital environment

Information walls are now predominantly electronic. Regulators increasingly expect firms to treat information walls as a specific risk area with clear oversight.

Reviews should cover access controls, removal of permissions, identification of wall crossers, and physical access checks.

Refresh anti collusion and communication controls

Collusion risk continues to evolve across digital communication channels. Strong frameworks include reviews of chat room access, closure of unused rooms, controlled creation of new groups and alignment with e comms surveillance.

Keep your assessment dynamic and action oriented

A static annual risk assessment is no longer sufficient. Regulators expect a document that evolves with your business and tracks real change.

Committees should receive regular updates and minutes should evidence senior challenge and clear ownership of actions.

Demonstrate how you identify and investigate issues

Surveillance should avoid de minimis thresholds, capture near misses, evidence follow up with individuals and show meaningful analysis rather than automated closure.

Go beyond mitigation and consider risk avoidance

Policies should specify when repeated STORs on a client become unacceptable, set escalation criteria and define when to exit a client relationship.

Draw clear boundaries between market abuse and financial crime

Staff must understand the difference between STORs and SARs, and teams should communicate where relevant to avoid risk blind spots.

Final thought

A market abuse risk assessment is a living document that must remain current and defensible. Investing in it now ensures readiness for short-notice regulatory requests.

Explore our resources at the links below:

Pre–Hedging and The IOSCO Paper: What dealers and clients need to know

What is Pre-Hedging?

We will assume a bit of knowledge here. Broadly speaking pre-hedging is when a dealer, who is in receipt of an order or RFQ (Request For Quote) from a client or counterparty, deals in the market for those instruments (or one very similar) before firmly accepting the client order or agreeing a quote.

Many of the markets work on a RFQ basis. These RFQs are usually a 2-Way RFQ where the client asks for a buy and sell price. Or 1-Way RFQ where the client asks for only a buy or sell price. These RFQs can be just to one dealer. Although it is not unusual to ask multiple dealers at the same time.

IOSCO’s Definition of Pre-Hedging

IOSCO in their final paper has defined pre-hedging as trading undertaken by a dealer where:

the dealer is dealing on its own account in a principal capacity; and
the trades are executed in the same, or related, instruments. After the receipt of information about one or more anticipated client transactions. And before the client has agreed on the terms of the transaction(s) and/or irrevocably accepted the executable quote(s); and
the trades are executed to manage the risk related to the anticipated client transaction(s); and
the trades are executed with the intention of benefiting the client

Industry Debate Surrounding Pre-Hedging

The topic of Pre-Hedging has certainly not gone away. It remains an area of strenuous debate in parts of the industry. Particularly the more wholesale and dealer lead OTC products such as FX, Rates, Credit and Commodities.

This was a difficult topic when the FX Global Code was first drafted in 2016-17. It has remained, to some degree, unresolved since then largely due to opposing views. One side feels pre-hedging risks crossing over to front running (an offence under MAR and many equivalent regimes). Or that it might impact the market to the disadvantage of the clients with the order or RFQ. The other side sees pre-hedging as an important part of price formation and risk management in dealer markets like these. And overall beneficial to clients by enabling dealers to better understand liquidity and prevailing prices in these OTC markets.

Alignment with Industry Codes and Standards

The IOSCO paper recognises the sterling work done by the FX Global Code, Global Precious Metals Code, and the FMSB Large Trades Standard. As such many of the recommendations in the final report are consistent with these codes and standard.

It is also worth saying the IOSCO report serves as advisory guidance and suggests best practice. Implementation of any changes will require action from national regulators. Those with operations in the EU should be aware that this has previously been an area on which ESMA has consulted.

What should dealing firms do now?

Firstly, recognise the IOSCO paper is out there and will have gravitas coming IOSCO. So firms should review it and consider if they have fundamental disagreements. If so, take those up with their local regulators directly or via trade bodies. More importantly, it is a good chance to reflect on current approaches and how they comply with existing regulations, codes, and client disclosures.

However, there are some recommendations in IOSCOs final report that we think are worth highlighting and discussing further.

Additional controls

Dealers should document and implement appropriate policies, procedures, and controls for pre-hedging

Whilst many firms who have signed up to these codes or standard might feel this has been covered, it would be worth reviewing if the risks around pre-hedging are covered directly enough and with sufficient granularity. Firms that only have in place generic policies should consider expanding these. All firms should think about when they last did training on this and refresh it if appropriate.

Additional disclosures

Dealers should provide clear disclosure to clients of the dealer’s pre-hedging practices

Many firms do this off the back of codes. But there is still a debate (as noted by IOSCO) as to whether these should be done case by base, more generically at onboarding, or through some hybrid situation. You will need to think what is most appropriate for your business and client base. But try to avoid this being buried in a long term of business document, being upfront will help you here. In terms of what we mean by hybrid this is where more BAU / flow transactions are covered by general disclosures e.g. on your website. And larger more complex transaction are dealt with using a case-by-case disclosure when discussing execution approaches with your client. In our experience many banks take this hybrid approach.

Obligations on Dealers

Dealers should:

Seek to receive prior consent to pre-hedge from the client at the outset of the relationship, and
Give the client a clear process to modify or revoke that consent at any time with reasonable notice.

Compliance and Supervision

Dealers should have appropriate compliance and supervisory arrangements that also cover pre-hedging, including:

Supervisory systems and reviews and
Trade and communications monitoring and surveillance.

confidential information and conflictS

adequate records

Dealers should maintain adequate records including for pre-hedging, to facilitate supervisory oversight, monitoring, and surveillance. This should look like something that is very established and de rigueur across the sell side. Where there might be a challenge is if regulatory or client expectations move to having specific records of Pre-Hedging activity. Helpfully IOSCO say they think existing record keeping should be enough but an area to remain alert to.

Remember, this is not just about regulatory risk as clients can also take legal action where they consider their order or RFQ has been improperly dealt with. Being in line with industry best practice and making clear disclosures should help to mitigate this risk.

There can also be a difference of opinion between the sell side and the buy side so there is definitely a client angle to this. A good example is Colin Lambert’s recent article in The Full FX which covers a survey of European Asset Manager by Acuiti. This is worth a read (as the Full FX always is!) and paints a picture of some disquiet about pre-hedging from this client base.

What should client and counterparties of dealers do now?

This is broadly wholesale market activity so proactive client engagement with their dealers is expected and ultimately beneficial for everyone. The suggestions below from IOSCO are helpful and we have tried to add some practical colour to them.

risk of price slippage

Clients could consider how to minimise the potential risk of price slippage. For example, this can include sending out two-way RFQs (non-directional).

Experience suggests practice from the buy side is still mixed here. Whilst some firms are quite consistent on this, others still send one-way RFQs. Firms should consider whether their dealers should normally ask for a two-way RFQ.

Benefits of internal controls

Clients could consider implementing internal controls. This may include to monitor market pricing, execution outcome, market activity and assess the quality of execution where a dealer has used pre-hedging. There is a more general point here about monitoring for execution quality, not just where your counterparty has said they might Pre-Hedge, for example a counterparty might not Pre-Hedge but quote a wide bid offer spread. Where possible it is worth considering tools like Transaction Cost Analysis (TCA) to better understand the quality of execution across the counterparts you use and the various styles of execution.

Clients could educate themselves

About pre-hedging practices and the potential impact of pre-hedging, including asking the dealer about the intended pre-hedging strategy and the potential impact of pre-hedging. This is crucial and requires conversations at the right level of experience for both firms. Have a think about what you want to find out, prepare your questions in advance, and probably give the sell side firm time to consider your questions before you discuss. Also bear in mind this process might take a while with back and forward and multiple conversations.

Handling requests not to pre-hedge

If a client does not want pre-hedging to be used the client should inform the dealer.

This sounds obvious but it rarely happens. As with recommendations above, this might well require conversations with the buy side firms you deal with. So you can understand if they are able to offer you alternatives and for you to consider if those alternatives work for you.

Get the details

Clients could consider asking the dealer for information on how pre-hedging was undertaken for their transaction(s).

Whilst this could be done as a standalone exercise it might well work better done in conjunction with recommendation C3 so you can agree with your counterparty what information could be made available and how often it could be shared.

Conclusion

As we said earlier this is certainly not going away and the IOSCO paper acts as a bit of a call to arms for the sell side and buy side to engage more with each other and get into the detail of what is workable and fair.

For sell side firms who have not looked at this for some time it is a good point to reflect on your polices, process and controls to decide if they are still adequate in light of this IOSCO paper and any of the codes you have signed up to. What follows on from this is training you provide to staff who might have missed this previously or partially forgotten some of the detail.

Front line and controls teams including compliance should also consider what monitoring and testing is needed to give you assurance that practice on the grounds is consistent with what you are telling regulators and clients.

Leaman Crellin have lots of experience in this area and are happy to help you out with a risk assessment, policy review. training or an assurance review. Please reach out to us if you would like to discuss.

client categorisation: beware the tick box, follow the facts

Here we re-examine the risks of opting up retail clients after Linear Investments v FOS.

Clients have differing levels of knowledge, sophistication, and risk appetite. Rules in many jurisdictions allow for this by having different categories. For investment business in the UK this is covered by the Conduct of Business Rules (COBS). In particular COBS 3.

The vast majority of clients in the UK and globally are not sophisticated. They are hence given higher levels of protection, in the UK (and EU). These are called Retail Clients.

Regulatory Framework: COBS 3 Overview

Regulators recognise that there are individuals and companies who are sophisticated and the retail client’s requirements can be somewhat burdensome. To accommodate this the COBS 3 rules, allow firms and clients the opportunity for a Retail Client to ‘opt up’ to be an Elective Professional Client, or a Per Se Professional Client. The latter category is more aimed at larger companies with sufficient balance sheet and turnover. It is not the focus here. We are instead looking at the individuals and small companies that might opt up to Elective Professional Client(‘EPC’) status.

Linear Investments v Financial Ombudsman Service

Let’s start by looking at the recent case of Linear Investments Ltd (‘Linear’) v Financial Ombudsman Service Ltd (‘FOS’). The Court of Appeal in England and Wales heard the case.

Whilst Linear had a partial victory regarding how the FOS should have taken more account of the client’s role in the issue. On the other two grounds, and in particular client classification the Court found in favour of the FOS and hence the client.

The background to the case is that Linear had sold Professor Leslie Willcocks (‘Willcocks’) a high risk and leveraged CFD portfolio built around a computer-generated trading strategy. In turn Willcocks lost money in these investments. Crucial to this case is that Linear had classified Willcocks as an EPC before embarking on this investment strategy with him. And they relied on this in their defence of his complaint.

The Court looked at the process that Linear followed in opting up Willcocks to an EPC and the facts they relied upon.

COBS 3 requires that qualitative and quantitative tests must be followed to opt up a client to EPC. These quantitative criteria require clients to satisfy 2 of the 3 following qualifications:

(a) the client has carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters.

(b) the size of the client‘s financial instrument portfolio, defined as including cash deposits and financial, exceeds EUR 500,000; or

(c) the client works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged.

Key Findings from the Court of Appeal

Whilst the evidence presented suggests Willcocks had an investment portfolio of in the region of GBP 800,000 (approximately EUR 900,000) and hence comfortable to meet point (b), Linear also relied on his trading experience in point (a).

Here the Court found against Linear for process and evidence reasons. In particular, Willcocks had ticked a box saying he had experience of CFDs (40 plus CFD trades per year and 20 lots per trade). Yet he then made a potentially contradictory statement around having invested in ‘Blue Chip Stocks’. The opt up form used by Linear also required evidence of trading experience to be attached. Which was not done in the case of the opt up for Willcocks. These were flags that Linear ought to have spotted and investigated further as part of the onboarding process. As such they were key in the findings of the Court in favour of the FOS and ultimately Wilcocks.

Lessons for Firms: Avoiding Common Pitfalls

So, what can firms learn from this and do differently to avoid these types of extremely expensive situations?

Understand that opting Retail Clients up to EPC is the highest risk action that firms can take under the client classification rules. Create a sufficiently robust process to govern and oversee such opt ups.
Seriously consider having a check and sign off process involving a business senior manager (i.e. SMF or business MRT) and possibly an experienced compliance officer.
Provide data to a senior governance meeting (e.g. a Risk meeting) of the number of clients opted up. Along with trends in these numbers and other relevant data such as complaints from these EPCs.
Compliance or Internal Audit to undertake assurance reviews of opt ups to check the quality and completeness.

Recommendations for Robust EPC Procedures

As we infer, the gap between the protections given to Retail Clients and Professional Clients such as EPCs is easily the biggest gap between classifications and hence where the biggest risks lie. This is effectively the boundary between Retail and Wholesale.

Next Steps: Health Check and Contact Information

We have extensive experience at Leaman Crellin of operating and reviewing client classification processes at banks, brokers, and wealth managers. We have also seen examples of where this has gone wrong.

Hedge Funds & Institutional Asset Managers