What will 2025 have in store for financial services?

As we look ahead to the new year, Hugh Fairclough, financial services audit partner, RSM UK gives his take on what may be on the horizon for the financial services industry, including:

• Clarity on discretionary commission arrangements
• FCA crackdown on financial crime and ‘finfluencers’
• Rise of crypto payments and blockchain technology
• Evolution of open banking
• More AI automation
• Private equity investment

Hugh Fairclough, financial services audit partner, RSM UK said: “As the FCA orders motor finance companies to compensate consumers affected by discretionary commission arrangements, this raises questions around the transparency of commission arrangements more widely. We may therefore see the FCA examining commission arrangements on other financial products in 2025, in line with 2021 rule changes, which required major creditors to disclose the nature of their commissions.

“The UK market for non-bank lending, where finance is embedded in the sale of a product, is likely to grow in line with the US market, and as we see more of this type of financing here in the UK, questions around transparency for consumers will need to be addressed.

“Having seen some banks fined by the FCA last year for failings in their financial crime prevention controls, we are likely to see the FCA stepping up scrutiny of financial services and payment providers’ anti-fraud and anti-money laundering measures to ensure consumers are adequately protected. This is already evident from the letter the FCA sent to CEOs of retail banks in October, which stated: ‘Managing financial crime risks will be especially important and challenging for banks in the context of their offerings of, or participations in, 'banking as a service’ or ‘embedded finance’.

“We are also likely to see greater scrutiny of social media ‘finfluencers’ from the FCA in 2025, as it seeks to put a halt to those offering unqualified advice and spurious claims regarding risky investments and scams, including crypto investments.

“As the value of crypto surges following the Trump election win, we will continue to see increasing institutional interest in cryptocurrencies in the UK, both as an investment opportunity and as a viable form of payment. We may start to see an increase in retailers and service providers accepting payment for goods in Bitcoin, and possibly some other major cryptocurrencies too, such as Ethereum. Expect to see a rapid increase in FCA authorisations for blockchain and digital asset-based infrastructure businesses, as this technology starts to replace and enhance traditional financial services infrastructure. This new technology will vastly increase processing speeds and efficiency.

“Enhancements in open banking will allow third-party companies to use and process a huge array of accumulated data using machine-learning technologies. Some banks and payment service providers already gather data on spending habits from customers, but we should expect to see this move to the next level, with the introduction of predictive capabilities to promote tailored financial services solutions based on saving and spending habits of consumers. We should also see more financial education and wellbeing recommendations built from this same data, allowing customers to budget and see the consequences of their spending patterns.

“AI is growing exponentially, and we will certainly see greater use of it in financial services throughout 2025 and beyond. AI is transforming how institutions manage risk, intercept fraud or crimes, personalise customer experiences, improve efficiencies across their operations, make investment decisions, and many more uses which are still being developed. Rather than implementing a single, overarching regulatory framework for AI, the UK Government white paper on AI regulation proposes that existing sectoral regulators (such as those in finance) take the lead in applying a principals-based approach within their respective domains.

“The industry will face challenges in its AI adoption including, AI biases, high development costs, cyber security, and compliance issues. AI isn’t yet a substitute for a qualified human financial adviser though, and clients with complex financial needs will still need a human advisor for the foreseeable future, particularly when it comes to servicing vulnerable customers.

“Private equity investors with significant capital view wealth management, insurance, specialised lending, and fintech sectors as attractive due to resilient markets and scalability through consolidation and operational improvements. We expect to see further consolidation by large trade acquirers and PE investors to strengthen their portfolios and capitalise on the opportunities created by technology and regulatory changes.

“Deal activity will continue to pick up, driven by greater political certainty in the UK and US, anticipated lower interest rates (albeit slower than initially predicted) and narrowing price expectation gaps between buyers and sellers. Additionally, there is a need for PE to return capital to investors, with a backlog of portfolio companies that are overdue their disposal.

With limited room for banks to grow their lending revenues as we move into a declining rates environment, we are likely to see more private credit lenders funding deals.”