Investment Firms Newsletter – January 2026.

PS25/23 contains the FCA’s final guidance on non-financial misconduct in financial services which is designed to make it easier for firms to interpret and consistently apply its rules; specifically, how non-financial misconduct can be a breach of the conduct rules and forms part of the Fit and Proper test for employees and senior personnel. The new guidance will come into force on 1 September 2026. 

In December the FCA published CP25/38, setting out proposals to strengthen liquidity risk management for authorised funds. CP25/38 focuses on ensuring authorised fund managers have effective tools and governance to manage liquidity, particularly where funds invest in less liquid assets. The proposals include clearer expectations around anti-dilution mechanisms and the alignment of redemption terms with underlying asset liquidity. The changes are intended to reduce the risk of investor harm during periods of market stress and reinforce confidence in fund structures. 

CP25/36 discusses reforms to client categorisation rules, aiming to reset how firms distinguish between retail and professional clients. The proposals move away from rigid quantitative tests and place greater emphasis on qualitative assessments and informed client choice. Alongside this, the FCA is reviewing the conflicts of interest framework to simplify and clarify firms’ obligations, making the rules more proportionate and easier to apply in practice. 

The FCA has set out proposals to regulate ESG ratings providers, following the government’s decision to bring these firms within the regulatory perimeter. The proposals aim to improve transparency, governance and the management of conflicts of interest, enabling users to better understand and compare ESG ratings.  

The FCA has launched a new AI testing initiative, allowing firms to trial AI tools in a controlled environment with regulatory support. The initiative is designed to help firms develop and deploy AI responsibly, while enabling the FCA to better understand emerging risks and benefits. Initial use cases focus on retail financial services, including customer support, decision-making tools and operational efficiency. 

The FCA fined Nationwide Building Society £44m for serious weaknesses in its financial crime systems and controls between October 2016 and July 2021. The FCA found that Nationwide failed to properly monitor and assess risks associated with customers using personal accounts for business purposes, limiting its ability to detect potential money laundering and fraud, including missed opportunities to identify suspicious Covid furlough payments. The FCA said that although improvements have since been made, the firm did not act quickly enough to address known issues, highlighting the importance of strong financial crime controls. 

The FCA continues to clarify its expectations under the Consumer Duty, particularly for firms manufacturing products or services. Recent guidance highlights how responsibilities should be allocated where firms work together to manufacture products, and confirms that firms may reasonably rely on each other where roles are clearly defined. Each firm remains accountable for the outcomes it controls. 

Final rules have been published for Consumer Composite Investments, replacing previous prescriptive disclosure regimes with a more flexible approach. Firms will be required to provide clear, consumer-focused product summaries covering key information such as risk, costs and performance. The new framework is designed to support informed decision-making while giving firms greater flexibility in how information is presented. 

The FCA is seeking views on how its rules can better support consumers to take informed investment risks with confidence. DP25/3 covers whether existing requirements remain appropriate as markets and products evolve, and how disclosures and distribution rules could be improved to encourage participation while maintaining consumer protections. 

CP25/35 proposes a number of reporting changes and simplifications, including:  

– Reducing the frequency of the FIN073 return for most firms; 

– Lowering the late return administrative fee to £100;  

– Simplifying aspects of the new security listings regime; and 

– Extending the transitional period for amendments to COLL 5.2.29R(3), giving firms additional time to adapt to revised fund concentration requirements. 

BFSA (a UK Switzerland framework) became effective from 1 January 2026 and the notification services is enabled. This framework enables eligible financial firms to provide certain cross-border services between the two countries based on mutual recognition of regulatory standards. It simplifies market access for approved firms serving wholesale and sophisticated clients, while maintaining regulatory oversight through cooperation between the FCA, PRA and Switzerland’s FINMA. 

The FCA’s Regulatory Initiatives Grid sets out the UK financial services regulatory pipeline over the next 24 months, showing planned consultations, rule changes and key milestones that firms need to prepare for as part of the Financial Services Regulatory Initiatives Forum’s coordinated agenda. For 2026, the key priorities for investment firms and AIFMs include:  

– Financial stability reforms such as Basel 3.1 and the Wholesale Markets Review;

– Investment management initiatives covering fund liquidity risk management and the advice and Guidance Boundary Review;

– Increased focus on ESG and sustainability disclosures;

– Innovation measures including stablecoin and payments reforms.

The Grid supports strategic compliance planning by helping firms anticipate regulatory change, assess operational impacts and align internal resources accordingly.

The FCA’s December 2025 letter to the Prime Minister sets out progress on its pro-growth agenda and key 2026 priorities for investment firms and AIFMs, which include:  

– Reform rules for venture capital and AIFMs; 

– Consult on changes to the pension charge cap to support investment 

– Finalise the UK’s digital asset and stablecoin framework; and  

– Continue capital markets and regulatory burden reforms to improve competitiveness and capital allocation.  

The letter confirms that supporting growth, innovation and efficient markets will remain a central FCA objective through 2030. 

The FCA has announced a package of measures aimed at strengthening the UK’s investment culture. The proposals seek to make investment information more engaging and meaningful for consumers, while ensuring firms can serve genuinely experienced investors under a proportionate regulatory framework. The overall objective is to support long-term investing and economic growth without weakening standards. 

Market risk capital requirements help a firm absorb a potential loss if its price expectations are not met. When applied across the system, these requirements help promote safety, soundness and integrity of the financial markets. 

In a speech on 8 October 2024, FCA chief executive, Nikhil Rathi, said that they now had the opportunity to introduce reform in this area. The UK Government then took up the idea of formally reviewing the market risk capital requirements for specialised investment firms as part of its Financial Services Growth and Competitiveness Strategy published in July 2025. This engagement paper introduces that review. 

The review aims to consider how different approaches to setting market risk capital requirements in the pursuit of market integrity could encourage wholesale trading, improve market liquidity, and in turn reduce barriers to entry for specialised trading firms. It will focus primarily on the current requirements in our Prudential sourcebook for MiFID Investment Firms.  

This review is most relevant to FCA solo regulated investment firms with dealing in investments as principal permissions, where managing a trading book is a part of their regulated activities. 

The government has set out its intention to create a provisional licences authorisation regime for early-stage financial services firms. The proposed regime would allow eligible firms to undertake limited regulated activity for a time-limited period, under close FCA supervision, while they build their systems and capabilities ahead of full authorisation. This initiative is intended to support innovation while maintaining appropriate regulatory safeguards. 

The SEC has issued a risk alert focussed on compliance with its Marketing Rule. The alert highlights examiners’ focus on deficiencies in areas such as the use of testimonials and endorsements. The examiners continue to identify weaknesses in how firms present and monitor testimonial and endorsement use. Incomplete, unclear or insufficient disclosures were identified. The examiners also found failings in the carrying out of sufficient diligence ahead of the use of third-party ratings, such as failing to ensure questionnaires used to create ratings were unbiased. Some firms were also found to have omitted, obscured or inadequately explained required disclosures in their marketing materials. 

The SEC has pushed back the compliance date for Rule 13F-2 and the associated Form SHO reporting by two years, with the first required filings now falling due in February 2028. The Rule will require monthly short selling reporting from qualifying investment managers.