UK/EU Investment Management Update (November 2025)

1. UK — Short Selling Regulation 
2. UK — IFPR 
3. UK — FCA Updates 
4. UK — Enforcement 
5. UK — Consumer Duty 
6. UK — MiFID 
7. UK — Markets (T+1 Settlement) 
8. UK — Fund Tokenisation 
9. UK — AI 
10. UK — ESG Ratings Providers 
11. EU — Investment Firms Directive and Regulation
12. EU — ESMA Updates 

1. UK — Short Selling Regulation

FCA consults on firm-facing requirements of the new UK short selling regime

On 28 October 2025, the FCA published a consultation paper (CP25/29) setting out proposed rules and guidance under the new UK Short Selling Regulations 2025 (the 2025 Regulations). The 2025 Regulations revoke the retained EU Short Selling Regulation (UK SSR) and empower the FCA to establish firm-facing requirements for short selling activities in the UK. For an overview of the 2025 Regulations, please see our February 2025 Update.

Key proposals in CP25/29:

• Net Short Position Reporting. The deadline for reporting changes in net short positions is proposed to be extended from 15:30 on T+1 to 23:59 T+1.
• Issued Share Capital. New guidance clarifies that firms may use readily accessible public information, such as Companies House filings or DTR 5.6.1R disclosures (where shares with voting rights comprise the company’s entire issued share capital), to determine a company’s issued share capital. The FCA also proposes provisions for waivers from reporting requirements in exceptional circumstances, such as systems outages.
• Reportable Shares List. The FCA proposes to broaden the factors it considers when assessing whether to exempt a share admitted to trading on a UK trading venue (admitted share) from reporting and covering requirements. In addition to determining where the share is principally traded, the FCA would also assess whether the admitted share is of significant importance to the UK market and, if not, whether the share is subject to similar short selling rules in any third countries in which it is admitted to trading.
• Recordkeeping. Persons entering into a short sale would be required to retain records of borrowing agreements or other covering arrangements for a minimum period of five years.
• Emergency Powers. A draft Statement of Policy sets out the circumstances and procedures under which the FCA may exercise its emergency powers to restrict or prohibit short selling, with the FCA confirming that it will continue to maintain a high threshold before exercising such powers.

The consultation closes on 16 December 2025.

The FCA is expected to publish its policy statement with final rules in April 2026, with a main commencement date for the rules expected to be in June 2026 (and a second commencement date for the remainder in December 2026).

2. UK — IFPR

FCA simplifies definition of regulatory capital

On 15 October 2025, the FCA published a policy statement (PS25/14) setting out final rules to simplify and consolidate the definition of regulatory capital (own funds) for firms subject to the UK IFPR.

The new rules, effective from 1 April 2026, remove all cross-references to the UK Capital Requirements Regulation (UK CRR) and establish a self-contained framework tailored to firms subject to the IFPR, such as FCA-authorised investment firms and their consolidating UK parent entities. The reforms do not alter the amount of capital firms must hold but are designed to clarify, streamline, and improve consistency in how capital is defined and recognised under the IFPR.

Key clarifications in PS25/24:

• Interim Profits. Firms will no longer be required to seek FCA approval before including verified interim profits in Common Equity Tier 1 (CET1) capital. Verified profits may be recognised as CET1 capital immediately following notification to the FCA.
• Partnership Profits. The FCA confirms that tax treatment does not determine whether partnership profits qualify as regulatory capital. For all partnership forms (general partnerships, limited partnerships, and limited liability partnerships), profits count as CET1 capital only where the partnership has an unconditional right to refuse to make them available to partners and can maintain that refusal indefinitely.
• Fully Paid-Up Capital. Shares must be fully paid up to qualify as CET1 capital. The FCA confirms that once shares are validly issued and paid for, their fully paid-up status is established and unaffected by subsequent arm’s-length transactions between group entities. Standard group treasury operations, including intercompany lending arrangements, do not impair this status; the original capital contribution remains valid regardless of how the group subsequently deploys its resources.

FCA publishes review of prudential consolidation under IFPR

On 31 October 2025, the FCA published the findings of its thematic review of consolidation in the financial advice and wealth management sectors. The review examined groups acquiring financial advisers and wealth management firms, focusing on how these groups manage risks, debt, governance, and integration during and after acquisitions. It does not introduce new rules but reinforces existing expectations under the IFPR.

Key findings:

• Scope of Prudential Consolidation. The FCA found that some consolidators had structured their groups (e.g., through offshore holding companies) to avoid or limit prudential consolidation. The FCA cautioned that such structures do not remove the underlying group risks that consolidation seeks to address and may undermine the financial resilience of regulated entities and impede effective supervision.
• Leverage. The FCA found consolidators often rely on debt, frequently short-term, to finance acquisitions, creating “double leverage” where holding company borrowings are serviced using cash extracted from regulated subsidiaries. The FCA highlighted heightened risk where regulated firms provide guarantees or security for parent-level debt, potentially compromising their solvency. Other concerns noted included insufficient stress testing or contingency planning for liquidity pressures.
• Governance. The FCA expects governance frameworks to evolve with group size and complexity. It found weaknesses in boards composed solely of executives or investor representatives with limited independent challenge and cases where material decisions affecting regulated firms were taken at parent level without due regard to regulatory obligations at the subsidiary level.

The FCA’s findings are consistent with themes highlighted in its recent IFPR newsletters and its 2023 review of firms’ Internal Capital Adequacy and Risk Assessment (ICARA) processes. That earlier review identified similar weaknesses in liquidity assessment, operational risk modelling, and the management of group interdependencies in wind-down planning. For an overview of the FCA’s review of firms’ ICARA processes, see our December 2023 Update.

3. UK — FCA Updates

FCA publishes high-level observations on client categorisation in corporate finance firms

On 20 October 2025, the FCA published high-level observations from its multi-firm review of client categorisation in corporate finance firms. The review examined how such firms comply with the client categorisation and certification requirements in COBS 3 and COBS 4. It assessed how firms categorise clients (including the opt-up of natural persons to elective professional status), how they classify corporate finance contacts for the purposes of the financial promotion regime, and how they certify retail investors as high-net-worth or self-certified sophisticated investors.

The FCA identified several weaknesses in firms’ approaches:

• Client Categorisation. While most firms carried out client categorisation, many adopted a superficial “tick-box” approach with limited supporting evidence. The FCA found that firms often lacked clear criteria, structured assessments, and proper records and that some failed to review whether clients opted-up to professional client status remained eligible over time.
• Corporate Finance Contacts. The FCA found that firms often relied on informal judgment when deciding how to categorise contacts for financial promotion purposes. It reminded firms that such contacts must be told clearly that they are not clients and do not benefit from client protections. The FCA cautioned that burying such statements in disclaimers may not satisfy regulatory obligations.
• Investor Certification. The review identified confusion among firms regarding the certification rules in COBS 4 and the exemptions under the Financial Promotion Order (FPO). Some firms wrongly purported to rely on FPO exemptions, such as Article 48 (high-net-worth individuals) or Article 50A (self-certified sophisticated investors) (which apply to promotions of investments in unlisted companies), to market securities listed or traded on AIM or overseas exchanges. Common compliance failures also included using outdated investor statements or templates that did not comply with COBS 4 or the FPO.

The FCA will consult shortly on proposed changes to the client categorisation regime, drawing on these findings and feedback received through the discussion chapter of CP24/24 on the modernisation of the COBS framework.

FCA publishes outcome of its review of financial crime controls in corporate finance firms

On 20 October 2025, the FCA published the results of its survey on financial crime controls in corporate finance firms, noting gaps in firms’ financial crime oversight and their exposure to money laundering risks. The FCA identified material deficiencies in several areas of firms’ control frameworks, including the following:

• Business-Wide Risk Assessment (BWRA). 11% of firms had no documented BWRA, despite it being a legal requirement. The FCA reminded firms to keep their BWRAs up to date and treat them as “live” documents capturing current risks and mitigating measures.
• Customer Due Diligence (CDD). 10% of firms did not keep records of CDD. The FCA cautioned that long-standing client relationships, while central to many corporate finance firms’ business models, cannot replace up-to-date written records of CDD and Enhanced Due Diligence, as required under the Money Laundering Regulations.

4. UK — Enforcement

FCA secures US$101m redress for BlueCrest investors

On 14 October 2025, the FCA announced that it had secured US$101 million in redress for UK and other non-U.S. investors in a fund sub-managed by BlueCrest Capital Management (UK) LLP (BCMUK).

Between 2011 and 2015, BCMUK provided portfolio management to both an external fund (open to professional investors) and an internal fund (open only to partners and employees). During this period, senior staff reallocated portfolio managers from the external fund to the internal fund while diverting significant capital from the external fund to a semi-automated system known as the Rates Management Trading system, which at times underperformed. The FCA found that BCMUK breached Principle 8 (conflicts of interest) by failing to manage these conflicts fairly and by providing inadequate and, in some cases, misleading disclosures to investors.

The FCA opted for a censure rather than a financial penalty, taking into account BCMUK’s voluntary agreement to compensate investors through a redress scheme. The FCA emphasised that market confidence relies on asset managers’ having robust systems and controls to identify and manage conflicts of interest effectively.

FCA bans and fines adviser for insider dealing

On 23 October 2025, the FCA announced that it had fined Neil Sedgwick Dwane £100,281 for deliberate insider dealing and banned him from working for UK financial services firms.

While employed as an adviser at ITM Power Plc, Dwane obtained and traded on inside information relating to an unscheduled market announcement concerning manufacturing and warranty issues. On 26 October 2022, the day before the announcement, he sold 125,000 shares held by himself and a family member and repurchased 180,000 shares after the company’s share price fell by approximately 37%, making a profit of £26,575.

The FCA found that Dwane’s actions breached Article 14(a) of the UK Market Abuse Regulation and were deliberate and dishonest. The FCA observed that as an experienced financial professional and a former Approved Person, Dwane would have known that his conduct amounted to insider dealing. The FCA concluded that Dwane was not a fit and proper person to perform any function in relation to regulated activities and imposed a prohibition order.

5. UK — Consumer Duty

FCA announces reform to the Consumer Duty

On 29 September 2025, the FCA published a letter from Nikhil Rathi, CEO of the FCA, to the Chancellor of the Exchequer outlining the FCA’s approach to addressing concerns about the application of the Consumer Duty (the Duty) to firms primarily engaged in wholesale activity. The letter follows the Chancellor’s request that the FCA review whether the Duty imposes disproportionate burdens on wholesale firms.

Rathi acknowledged that some firms, uncertain about supervisory expectations, have adopted an overly cautious approach to compliance. In some cases, this has created unnecessary cost and the perception that retail regulation is encroaching on the wholesale sector. In response, the FCA confirmed that it will amend the Duty’s rules to remove disproportionate burdens and provide clearer guidance to support proportionate application.

The FCA announced a four-point plan, with changes expected over the coming weeks and during the first half of 2026:

• Supervisory Expectations. In the coming weeks, the FCA will clarify how the Duty applies when firms collaborate to manufacture products for retail customers.
• Client Categorisation Reform. Later this year, the FCA will consult on updates to the client-categorisation framework, including a new high-threshold asset test designed to help identify clients who may be treated as professional clients and therefore fall outside the Duty’s scope. The FCA has also invited HM Treasury to review and modernise exemptions in the FPO and the Promotion of Collective Investment Schemes Order to align with this work.
• Distribution-Chain. In early 2026, the FCA will consult on how the Duty applies across distribution chains, including whether existing exemptions remain appropriate and whether clearer boundaries should be drawn for business-to-business activities.

6. UK — MiFID

FCA publishes policy statement on the MiFID organisational regulation

On 9 October 2025, the FCA published a policy statement (PS 25/13) finalising the transfer of the firm-facing provisions of the Markets in Financial Instruments Directive (MiFID) Organisational Regulation into the FCA Handbook (Handbook). PS25/13 forms part of the UK government’s wider initiative to replace assimilated EU law with domestic regulation.

The FCA confirmed that it intends to preserve the substance and scope of the existing requirements, with most amendments being stylistic or clarificatory in nature. The new rules, together with HM Treasury’s revocation of the MiFID Org Reg, took effect on 23 October 2025. As the requirements remain substantively unchanged, firms may continue operating as before but should update their compliance documentation to reflect the new Handbook references. 

7. UK — Markets (T+1 Settlement)

FCA urges firms to accelerate preparations for T+1 settlement

On 10 October 2025, the FCA published a blog post by Jamie Bell, Head of Capital Markets, urging firms to accelerate preparations for the UK’s move to a T+1 settlement cycle. The change, due to take effect on 11 October 2027, will require certain trades to settle one business day after execution and is intended to improve market efficiency, reduce settlement risk, and align the UK with international standards.

The FCA stressed that firms should now be assessing and adapting their operational processes to support T+1 settlement. In particular, effective preparation should include:

• reviewing end-to-end settlement arrangements to ensure they can support T+1 settlement;
• increasing automation, where appropriate, to reduce operational risk and improve efficiency; and
• engaging proactively with clients and counterparties to confirm their readiness, including identifying clients still relying on manual processes and monitoring settlement performance, particularly among overseas and smaller clients.

The FCA expects market participants to be able to explain their T+1 implementation plans and demonstrate how they are addressing existing settlement challenges. For further information on the UK’s move to T+1 settlement, see our April 2025 Update.

8. UK — Fund Tokenisation

FCA consults on rule changes to accelerate fund tokenisation for authorised funds

On 14 October 2025, the FCA published a consultation paper (CP25/28) setting out proposed rules and guidance to support the adoption of fund tokenisation and direct-to-fund dealing.

CP25/28 includes rules and guidance for operating a tokenised fund under the existing Blueprint model, which uses a DLT-based unitholder register, together with a roadmap to advance fund tokenisation. It also discusses potential future models, including tokenised assets, tokenised cash flows, and large-scale retail portfolio management and how regulation may evolve over time.

The FCA is seeking feedback on its proposed rules (which will apply to UK UCITS management companies and UK AIFMs managing authorised funds) until 21 November 2025 and on its future tokenisation models until 12 December 2025. A policy statement setting out final regulatory requirements is expected in the first half of 2026.

9. UK — AI

G7 Cyber Expert Group publishes statement on AI and cybersecurity

On 6 October 2025, the G7 Cyber Expert Group (CEG) issued a statement on AI and cybersecurity, highlighting AI’s potential impact on the resilience of the financial system. The CEG, which advises G7 Finance Ministers and Central Bank Governors, noted that AI can enhance cybersecurity by improving fraud detection, predicting system failures, and accelerating incident response but warned that AI may also be exploited by malicious actors to conduct more targeted and scalable attacks, including realistic phishing and advanced malware capable of evading detection.

The CEG further cautioned that AI systems themselves may be vulnerable to threats such as data poisoning, model manipulation, and information leakage. It encouraged financial institutions and supervisory authorities to assess whether their governance, risk management, and monitoring frameworks adequately address these emerging risks.

Bank of England outlines approach to governing AI, DLT, and quantum computing

On 15 October 2025, the Bank of England (BoE) published an outline of its strategic approach to innovation across AI, DLT, and quantum computing.

The BoE’s strategy focuses on developing both hard infrastructure (such as interfaces within the renewed Real-Time Gross Settlement system to connect with external DLT ledgers) and soft infrastructure (including rules, standards, and guidance) supported by active engagement with industry and other regulators. Key focus areas:

• AI. The BoE is developing supervisory tools to identify emerging systemic risks from AI adoption and may consider issuing AI-specific guidance for firms.
• DLT. Through the Digital Securities Sandbox, jointly operated with the FCA, the BoE is exploring DLT’s potential in securities issuance, trading, and settlement. It has also published its consultation on the proposed regime for systemic stablecoins.
• Quantum computing. The BoE identifies quantum computing as a potentially transformative technology but warns that future quantum capabilities could undermine existing cryptographic systems that secure financial transactions and sensitive information. The BoE highlights the risk of “harvest now, decrypt later” attacks, in which malicious actors intercept and store encrypted data today with the aim of decrypting it in the future once powerful quantum computers become available.

10. UK — ESG Ratings Providers

UK government publishes updated draft legislation on the regulation of ESG ratings providers

On 29 October 2025, the UK government published an updated draft Statutory Instrument on the regulation of ESG ratings providers, the Financial Services and Markets Act 2000 (Regulated Activities) (ESG Ratings) Order 2025 (the Draft Order). The FCA has also announced that, once the UK government finalises this legislation, it intends to consult on proposals for the future regulatory regime before the end of 2025. For an overview of the Draft Order, see our Sidley Update: UK ESG Ratings Providers — Near Final Legislation (November 2025).

11. EU — Investment Firms Directive and Regulation

ESMA and EBA publish final report on the review of the EU Investment Firms Prudential framework

On 15 October 2025, ESMA and the EBA published a joint final report containing 49 recommendations in response to the European Commission’s Call for Advice on the review of the IFR and IFD.

The report concludes that the existing framework broadly meets its objectives by providing a proportionate and risk-sensitive prudential regime for EU investment firms but recommends several targeted amendments, including:

• K-COH (Client Orders Handled). There is a lack of consistent interpretation across Member States regarding which MiFID services fall within this K-factor. Clarification is needed, as divergent national approaches exist for activities such as placing of financial instruments without firm commitment, name give-up transactions, and market-making activities, increasing the risk of regulatory arbitrage.
• K-AUM (Assets Under Management and Ongoing Advice). The principal concern here is the unclear definition of “ongoing advice,” particularly around the concept of recurring investment advice. A narrow reading could unduly restrict the scope of the K-AUM measure and heighten client risk. To address this, ESMA and the EBA propose defining “ongoing advice” as advice provided through continuous or periodic assessment under a contractual arrangement. They also propose excluding assets under advice when the advice is provided to a “financial entity” to support its performance of portfolio management services.
• Prudential Consolidation. Greater alignment between consolidation regimes for investment firms and credit institutions is recommended to ensure consistency and a level playing field. The current IFR/IFD framework does not impose horizontal consolidation as set out in Article 18 of the EU CRR.
• MiCA. The current K-factor framework is considered adequate for capturing crypto-asset services provided under MiFID licences, but it is recommended that the EBA develop technical standards clarifying how existing K-factors (such as K-COH and K-AUM) should apply to these activities. Crypto-asset exposures held in the Non-Trading Book by non-trading firms should be capitalised under Pillar 1 using the K-NPR (commodity risk) methodology.

12. EU — ESMA Updates

ESMA publishes Q&As clarifying EMIR reporting; MiCA crypto-asset services

On 17 October 2025, ESMA published new Q&As providing clarification on certain aspects of the EMIR and the MiCA.

EMIR Reporting

ESMA confirms that for exchange-traded derivatives, a single consolidated Errors or Omissions Notification may be submitted for multiple Entities Responsible for Reporting (ERRs) where those ERRs correspond to sub-funds or entities managed by the same management company or AIFM.

MiCA Services

ESMA clarifies how to distinguish between the MiCA crypto-asset services of (i) “exchange of crypto-assets for funds,” (ii) “exchange of crypto-assets for other crypto-assets,” (iii) “execution of orders for crypto-assets on behalf of clients,” and (iv) “reception and transmission of orders for crypto-assets on behalf of clients.”

ESMA notes that National Competent Authorities must determine the true nature of a crypto-asset service provider’s (CASP) activities by analysing the order flow and the CASP’s role in execution, specifically, whether the CASP acts as an agent, a counterparty, or an intermediary:

• Execution services apply where a CASP acts as an agent of a client, concluding a transaction on the client’s behalf.
• Reception and transmission services apply where a CASP merely transmits the client’s order to a third party for execution.
• Exchange services apply where the CASP acts as the client’s counterparty by using proprietary capital to conclude purchase or sale contracts.

ESMA further clarified that a CASP may perform both exchange and execution services simultaneously. In case of doubt, particularly where retail clients are involved, a presumption should be made that the CASP acts as an agent and therefore provides execution services.