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23 May 2025

Navigating a shifting regulatory landscape

As the financial services industry moves through a period of significant regulatory transformation, it’s critical for banks and alternative investment fund managers to stay ahead of the curve.

By Chris Doherty

6 minute read time

Key developments, such as the implementation of CRD VI and Basel 3.1, and evolving ESG regulations, are poised to reshape operational, capital, and strategic planning frameworks across the sector.

Financial services professionals and investment houses – especially those with cross-border operations – should be preparing for the changes now in order to seamlessly transition into the new landscape.

CRD VI and Basel 3.1: raising financial resilience

The Capital Requirements Directive VI (CRD VI) and the Basel 3.1 framework represent the next stages in the evolution of global banking regulations. Together, they aim to reinforce financial stability.

CRD VI, part of the broader EU Banking Package, is the legislative vehicle for adopting parts of Basel 3.1 into EU law. Basel 3.1 stems from reforms initiated by the Basel Committee on Banking Supervision in response to the 2008 global financial crisis. Its primary aim is to address shortcomings in the existing framework.

Key features of Basel 3.1 include:

Output floor: this seeks to limit the benefit banks can gain from using internal models by requiring risk-weighted assets (RWAs) to be at least 72.5% of those calculated using standardised approaches.
Revisions to credit risk and operational risk frameworks
New market-risk capital standards

CRD VI, on the other hand, extends regulatory scope to include environmental, social, and governance (ESG) risks, enhanced supervisory powers, and new third-country access rules.

For banks, the immediate implications of CRD VI will be on capital, pricing, and liquidity management. With increased capital requirements, particularly for those relying heavily on internal models, there could be a number of effects:

A potential tightening of lending capacity by some institutions, possibly affecting credit availability.
Higher pricing for riskier or unrated exposures, as banks seek to manage capital efficiency.
Increased interest in obtaining external ratings for facilities, especially in jurisdictions where unrated exposures will attract higher capital charges.

Daniela Klasen, Head of RBS International in Luxembourg, says CRD VI could require some non-European banks to establish branches to satisfy the new third-country access rules, update their booking policy, which may result in booking more assets in the European entities and increase capital allocations.

She says: “I anticipate there may be some operational adaptation and some more strategic decisions that asset managers will need to take. For instance, asset managers will need to review their banking partners and ensure that they are CRD VI compliant. This could have an impact on their current banking relationship and access to lending.

“The biggest challenge for the banks, especially if they don't have any presence in Europe, or maybe insufficient presence, is they will now need to establish themselves physically in the country they wish to operate in to comply with CRD VI and increase their local presence.”

There may be a need to re-paper some debt facilities in new jurisdictions, and Daniela advises fund managers to inquire about their banking partners' post-CRD VI plans to ensure continued service when the directive is implemented in national law, expected to be on 10th January 2026, with a grandfathering period until 11th July 2026.

In the immediate future there will be some disruption. However, she says that in her opinion the net result of CRD VI could lead to a more level playing field and increased competition in local European fund centres, such as Luxembourg, which in the long run should be beneficial to asset managers.

For those third country banks that already have presence in Europe and are readily compliant with the directive, CRD VI is an opportunity not only to keep their client base but also to expand their footprint in Europe.

Divergences between the EU and US

The pace of implementation varies significantly across regions. The EU committed to full implementation of Basel 3.1, including the output floor, by January 2025. However, it pushed a key section – the fundamental review of the trading book (FRTB) – back to January 2026.

In contrast to the EU, the US has proposed a modified approach that delays the output floor's full effect and emphasises a more tailored treatment of smaller institutions.

The Federal Reserve’s proposed “Basel Endgame” rules have drawn significant industry feedback, with concerns over competitiveness and credit contraction. Whether the US fully aligns with Basel remains to be seen.

Valuations under scrutiny

As allocations to private markets continue to rise, regulators are taking a closer look at valuation methodologies. In March 2025, the UK’s Financial Conduct Authority (FCA) published its findings of its multi-firm review of valuation processes for private market assets.

Parin Avari, Director of Institutional Banking at RBS International, says: “Overall the FCA’s findings were broadly positive. The review highlighted ‘many examples’ of good practice across firms’ valuation processes – ranging from clear and transparent investor reporting, well-documented valuation procedures alongside consistent application of valuation methodologies and the use of third-party valuation advisors to enhance independence and technical input.

“The FCA also noted that firms demonstrated appropriate consideration for investor protection, particularly given the inherent judgement and complexity involved in valuing private market assets.”

However, she says, the FCA did highlight that there is additional work to be done. In particular, it emphasised the importance of:

Governance expectations, with proper record keeping being considered critical.
Conflicts of interest disclosures; while conflicts linked to fees and remuneration were generally well-recognised, the review found that other potential conflicts were often only partially identified and documented. These included conflicts arising from investor marketing, secured borrowing, asset transfers, redemptions and subscriptions –particularly for open-ended funds – as well as valuation uplifts and volatility.
Incorporating a defined process for ad hoc valuations, to reassess valuations during market fluctuations or asset-specific events

Parin adds: “I believe there is and should be a strong alignment of interest between sponsors and investors when it comes to valuation discipline.

“Overstating asset values may offer short-term optics or boost short-term performance, however it risks damaging a manager’s long term credibility and future fundraising prospects. In a challenging capital raising environment, which we have witnessed in recent years, sponsors recognise that transparent, defensible valuations through various market cycles are essential for preserving their ability to raise follow-on funds in an increasingly competitive market.”

Further regulatory guidance or supervisory expectations may emerge in both the UK and EU, and now that the FCA guidance has been published, it is expected that managers will be reviewing their policies against the recommendations.

Other jurisdictions may follow suit. In the US, the Securities and Exchange Commission (SEC) has already heightened disclosure requirements for private funds. Meanwhile, the EU's review of the Alternative Investment Fund Managers Directive (AIFMD) also includes valuation risk as a focal point.

Climate regulations recalibrated

The EU’s Omnibus Simplification Package on climate sustainability scales back the scope of its proposed ESG rules. Approximately 80% of previously in-scope companies have been de-scoped, indicating a regulatory pivot driven by implementation challenges, political shifts, and industry lobbying.

The first draft of the Omnibus Package was delivered in February 2025, but the final details are still being debated. An EU directive in April paused key components to allow EU companies legal certainty regarding their reporting and due diligence obligations. Under the rules, known as the “Stop-the-Clock Directive”:

The Corporate Sustainability Reporting Directive (CSRD) will be postponed for two years
The Corporate Sustainability Due Diligence Directive (CSDDD) will be postponed by one year

While these may ease short-term compliance burdens, they also introduce strategic uncertainty. Businesses must now decide whether to continue aligning with original ESG strategies or recalibrate based on the lighter regulatory footprint.

Tonia Plakhotniuk, Director, Sustainable Finance Advisory with NatWest, says: “The 2023-2025 period has been a transformative one for sustainable finance, with fund managers caught between accelerating regulatory requirements on one side and an ideological backlash on the other.

“Globally, the net effect has been a maturation of ESG investing, a ‘course correction’ as some call it, where exuberance and vague claims are being replaced by more concrete action, measurement, and differentiation of strategies.

“Fund managers have largely reaffirmed their commitment to integrating sustainability – not as a slogan, but as part of long-term risk management and opportunity seeking – while also learning to better substantiate the linkage between ESG and financial performance.

“The fact that sustainable funds collectively saw assets under management reach $3.5 trillion despite political headwinds, indicates that investor interest remains substantial.”

The future of ESG and sustainable finance

The future landscape for ESG and sustainable finance is being shaped as much by political sentiment as by regulatory frameworks. Looking ahead from 2025, several trends seem likely:

Convergence of standards: with the International Sustainability Standards Board (ISSB) standards and jurisdictions like the EU and UK mandating comprehensive ESG disclosures, fund managers will have a richer dataset to inform investments.
Continued US polarisation: the US political climate around ESG may continue to swing with election cycles. Fund managers will need a “two-track” approach to meet the expectations of ESG-conscious investors and regulators, and address concerns of more sceptical clients.
Innovation in products: we can expect more sophisticated sustainable finance products, like transition funds which invest in helping high-emitting companies lower their carbon footprints, and nature-based funds focusing on biodiversity.
Greater accountability: regulators and investors will demand proof of sustainability claims, and greenwashing enforcement will remain intense.
Role of stewardship: As large, passive asset managers give more voting power to end investors or adopt collective engagement platforms, companies might hear a clearer voice from asset owners themselves and slightly less from intermediary managers.

Tonia adds: “Sustainable finance is evolving from a niche or marketing exercise into an integral part of asset management. Fund managers globally are now looking to better position themselves to deliver on the twin goals of financial performance and sustainability impact.”

While the regulatory environment is growing more complex, it also presents an opportunity for differentiation. Institutions that plan ahead, invest in transparency, and stay informed could be best positioned to manage risk and seize opportunities.

Our specialists continue to monitor regulatory developments closely and are ready to support clients in assessing their implications. Contact your relationship team to discuss how these regulatory changes might affect your strategic planning.

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Navigating a shifting regulatory landscape

By Chris Doherty

6 minute read time

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