1. UK — Client Categorisation
2. UK — FCA General Updates
3. UK — Enforcement
4. UK — HMT and BoE Updates
5. UK — EMIR
6. UK — Cryptoassets
7. UK — ESG
8. EU — Capital Markets
9. EU — RIS
10. EU — Anti-Money Laundering
11. EU — EMIR
12. EU — MiFID II/MiFIR
13. EU — Securitisation
14. EU — ESMA General Updates
15. EU — ESG
16. EU — Crypotoassets/MiCA
17. International — Financial Stability Board
1. UK — Client Categorisation
FCA consults on changes to client categorisation and conflicts of interest rules
On 8 December 2025, the FCA published its long-expected consultation paper (CP25/36), setting out its proposals to amend its rules on professional and retail client categorisation. The FCA’s rules (as derived from Directive 2014/65/EU on Markets in Financial Instruments (MiFID II)) are currently set out in COBS 3 of the FCA Handbook. These proposed changes are expected to encourage firms to offer a greater variety of products to genuine professional clients with higher risk appetites and reduce regulatory complexity given criticisms of the limitations of existing categorisation rules, particularly as regards the “opt up” elective professional client regime.
CP25/36 includes the following key proposals focusing on the professional client and elective professional client concepts.
- Removal of the quantitative test. The FCA proposes to remove its existing quantitative test under COBS 3.5.3R(2) and replace it with an enhanced qualitative assessment (as described in the next bullet). This is intended to modernise the elective professional client criteria and prevent consumers from being inappropriately opted out of retail protections while allowing individuals with significant expertise or resources to access the most suitable products. These changes may be particularly welcomed by investors into private funds, for whom the current quantitative test is generally difficult to satisfy. However, we also note that qualitative tests can potentially open firms to risk, especially if a client retroactively complains an incorrect categorisation following subsequent investment losses.
- Enhanced qualitative assessment. Under the proposed changes, firms will be required to assess clients’ expertise, experience, and knowledge in a robust, holistic manner. Firms will need to take into account a set of relevant factors including clients’ professional experience (focusing more on individuals’ understanding rather than prescriptive employment history within sectors), trading history, financial resilience, and understanding of risk and objectives for opting out of retail client protections. The full proposed list of relevant factors is set out at the draft COBS 3.5.10R in CP25/36. An exception from the qualitative assessment will be introduced for certain wealthy clients (see next bullet).
- Exception — alternative assessment for wealthy individuals. Under an alternative “wealth-only” assessment, firms will be able to categorise certain individuals as elective professional clients where the individual has investable assets (i.e., a portfolio of designated investments and/or cash) of at least £10 million. As such, the enhanced qualitative test described in the bullet above will not apply to such individuals.
- Improved safeguards. Clients will be required to actively request to be categorised as an elective professional and give their informed signed consent for the recategorisation after being given sufficient clear information about the protections that they will lose. Firms are prohibited from incentivising, misleading, or pressuring clients to opt out of retail protections.
- Communications. Firms may proactively engage clients about the option to opt up to professional status only if they have a reasonable basis to believe the client is likely to meet the conditions of being a professional client.
- Simplification of per se professional client criteria. The FCA proposes to simplify the list of entity types that can be treated as per se professional clients. Under the proposals, any entity authorised or regulated in any country to operate in financial markets can be treated as a per se professional client (including special purpose vehicles controlled by such entities). The FCA notes that this may cause ambiguity so welcomes feedback on whether a list of specific types of per se professional client entity should be retained.
CP25/36 also covers proposed changes to harmonise various standards on conflicts of interest — however, no material changes to the standards are proposed in this respect.
The consultation closes on 2 February 2026. The FCA has not provided an indication of when the rules will be finalised.
Please see also item 9 (EU — Retail Investment Strategy) below to compare the FCA’s approach with what is being proposed in the EU.
2. UK — FCA General Updates
FCA publishes policy statement on final rules for CCIs
On 8 December 2025, the FCA published a policy statement (PS25/20) setting out final rules for its new CCI regime. As detailed in our January 2025 Update, the CCI regime will replace the UK’s current EU law-derived Packaged Retail Investment and Insurance Products (PRIIPs) regime and disclosure requirements for Undertakings for Collective Investment in Transferable Securities (UCITS).
Instead of the rigidly prescribed document templates under the PRIIPs and UCITS regimes, the FCA’s new rules set out a minimum set of standardised requirements allowing for more discretion for firms to add information. Under these requirements, firms must produce a consumer-friendly product summary that includes comparable key information about costs, risk and return, and past performance. Distributors must make this summary available to investors pre-sale and highlight key information for consumers and must provide the summary in a durable medium to investors post-sale.
The PRIIPs regime will be revoked on 6 April 2026, and the CCI regime will come into force on the same date. Firms will then have an 18-month implementation period during which they may begin switching to producing a product summary document and familiarise themselves with the new rules while making the necessary changes to their systems and procedures. Following this, the CCI regime comes fully into force on 8 June 2027.
Following this update, the Consumer Composite Investment (Designated Activities) (Amendment) Order 2025 (SI 2025/1347) (the CCI Order) was released and laid before Parliament on 18 December 2025, together with an explanatory memorandum. The CCI Order provides that the current treatment of PRIIPS key information documents will be maintained beyond the full FCA transitional period until 8 December 2027 to ensure a smooth transition.
New iteration of the RIG
On 11 December 2025, the regulators of the Financial Services Regulatory Initiatives Forum, including the FCA, published the most recent iteration of the RIG. The RIG sets out the current regulatory pipeline for 2026 and provides a useful overview of expected regulatory updates in the next year. In particular, various initiatives are specifically addressed to the investment management sphere including the following:
- Repealing and replacing AIFMD. The FCA is working on a simplified regulatory framework to replace Directive 2011/61/EU on Alternative Investment Fund Managers (the AIFMD), in a manner tailored to UK markets. HMT published a consultation on the regulation of alternative investment fund (AIF) managers (AIFMs) in April 2025, alongside which the FCA published a Call for Input (as detailed in our May 2025 Update). HMT is now looking to consult on draft legislation alongside the FCA in early 2026.
- Fund tokenisation. The FCA has consulted on guidance relating to the blueprint tokenisation model and expects to publish its consultation proposals in October 2026 (as further detailed in our November 2025 Update).
- Liquidity risk management in funds. The FCA is working on implementing international guidance on fund liquidity management, with a consultation on AIFMs intended in H2 2026 (as detailed further below under FCA consults on enhancing fund liquidity management).
- Data collection review. The FCA is working on transforming its regulatory data model for asset managers and funds to collect accurate and comparable data. This will involve the introduction of new proportional, streamlined regulatory returns following industry consultation.
We note that this RIG features a 13% reduction in the total number of initiatives since the last edition, suggesting the FCA is committed to its stated intention of streamlining and reducing unnecessary regulation.
FCA’s guidance to tackle serious non-financial misconduct
On 12 December 2025, the FCA published guidance to support firms in tackling serious non-financial misconduct (NFM) such as bullying, harassment, and violence. The guidance relates to the new rules on NFM that the FCA published in July 2025 and that come into force from 1 September 2026 (as detailed in our July 2025 Update). The guidance covers how firms can apply the NFM rules on minimum behavioural standards for financial services employees, together with the factors firms should take into account when assessing whether an individual is fit and proper for their role.
For a discussion of the FCA guidance, see our recent Sidley Update UK Financial Conduct Authority Finalises Non-Financial Misconduct Framework: What Firms Need to Do Now.
FCA publishes engagement paper on market risk capital requirements
On 16 December 2025, the FCA published an engagement paper (the Engagement Paper), seeking views on a potential reform of the market risk capital requirements applicable to FCA-authorised MiFID investment firms that deal on own account and operate a trading book. The review focuses on firms’ continued use of market rules derived from the UK version of Regulation (EU) 575/2013 on Capital Requirements (the CRR) under the Investment Firms Prudential Regime (IFPR).
The FCA notes that while the IFPR sought to move away from bank-centric prudential standards, market risk capital (including the K-NPR requirement on net position risk) continues to reflect assumptions under international standards that may not be proportionate for specialised investment and trading firms. The Engagement Paper therefore explores a range of possible approaches, including targeted amendments to the existing standardised framework, greater reliance on margin-based methodologies, more proportionate internal model approaches, or alternative concepts such as net capital rules or liquidity-based measures. No preferred option is identified at this stage, and firms are required to continue applying existing rules. While no immediate changes arise, the FCA’s approach suggests that future reforms could reduce capital intensity for certain business models.
The FCA is accepting feedback until 10 February 2026 to inform an upcoming consultation paper in 2026. A new policy is expected in 2027.
FCA consults on enhancing fund liquidity management
On 9 December 2025, the FCA published a consultation paper (CP25/38) setting out its proposals on enhancing fund liquidity risk management by authorised fund managers. While the consultation paper mainly focuses on retail investment fund managers, the FCA confirms its plans to consult on liquidity rules under its consultation on proposed reforms to the AIFMD in 2026. The FCA confirmed that such changes will be limited but will include updating liquidity rules for AIFs. For example, the FCA intends to introduce a baseline of liquidity management rules for small AIFMs that are currently not subject to any liquidity management rules. At a minimum, this will involve a requirement of consistency between open-ended funds’ redemption policy and the liquidity of the funds’ portfolio.
FCA publishes update on the legal challenge against its appointment of a bond consolidated tape provider
On 3 December 2025, the FCA published a statement confirming that it has reached an agreement to lift a freeze on awarding its bond consolidated tape provider (CTP) contract. Following its application to the High Court to lift the suspension in November 2025, the FCA will be able to sign the contract with Etrading Software (ETS) once ordered by the High Court. The FCA aims to make a decision on ETS’s authorisation ahead of the launch of the tape in June 2026 and will also be able to continue engaging data contributors and users alongside ETS.
The FCA has stated that the consolidated tape will aim to provide a single and reliable view of the UK bond market and improve the UK’s market transparency and competitiveness. We note from an EU perspective that ESMA selected its first CTP for bonds in July 2025 (as covered in our August 2025 Update).
3. UK — Enforcement
FCA fines Nationwide £44 million for financial crime control failures
On 12 December 2025, the FCA announced that it has fined Nationwide Building Society (NBS) £44 million for having inadequate anti-financial crime systems and controls in place between October 2016 and July 2021.
The FCA stated that during this period NBS had inadequate systems for keeping up-to-date due diligence and risk assessments in place for its personal current account users and for monitoring transactions. The FCA also notes that NBS was aware of some customers using their personal accounts for business purposes but did not offer them business accounts, which resulted in NBS not having appropriate processes in place to manage financial crime risks arising from business activity.
The FCA points out one serious case in particular, where NBS missed opportunities to identify a personal current account customer that used the account to receive fraudulent Covid-19 furlough payments. The customer in question received £27.3 million over the period of 13 months, with approximately £26 million deposited over eight days.
4. UK — HMT and BoE Updates
HMT update on a provisional FCA authorisation regime
On 4 December 2025, HMT published a statement setting out the government’s intention to introduce a provisional FCA licensing regime for early-stage financial services firms. The introduction of the regime will require primary legislation followed by an FCA consultation so is not expected to be implemented in the near future.
The provisional regime would aim to reduce barriers to authorisation for financial services firms by enabling the FCA to grant time-limited permissions of up to 18 months. This would allow firms to begin operating their business provisionally in a controlled environment with strong regulatory oversight while working towards obtaining full authorisation under the Financial Services and Markets Act 2000 (FSMA).
The threshold conditions under the new regime will include having appropriate financial and non-financial resources in place for the period of the provisional licence. The FCA will also require firms to demonstrate that they are able to wind down in an orderly manner at the end of the provisional period if necessary, minimising the risk of disruption and consumer detriment. The FCA’s assessments of applications against the threshold conditions will be proportionate, taking into account, for example, the firm’s stage of development and the fact that the firm is applying for only a time-limited authorisation. During the provisional period, the FCA would also be able to impose restrictions on the amount and type of business a firm can undertake and would have its full range of supervisory/enforcement powers available.
The regime would not be available for authorised firms seeking a variation of permission, firms seeking permission for activities that are being regulated for the first time, or firms subject to dual regulation.
HMT consultation on regulatory regimes for benchmarks and benchmark administrators
On 17 December 2025, HMT published a consultation proposing to repeal the UK version of Regulation (EU) 2016/1011 on Benchmarks (the Benchmarks Regulation) and replace it with a more targeted regime focused only on benchmarks and benchmark administrators that pose systemic risks to UK markets or consumers.
Under the proposed new Specified Authorised Benchmarks Regime, only benchmarks or administrators designated by HMT (on the FCA’s advice) would be regulated, based on qualitative criteria such as the effect of a benchmark’s cessation or loss of representativeness. Most benchmarks are expected to fall outside scope, with HMT estimating a reduction in regulated benchmarks and administrators of up to 80% to 90%. The consultation also proposes reforms to the regime for overseas benchmarks to preserve access to global benchmarks while simplifying existing access routes.
For benchmark users, the proposals would remove the requirement to use only benchmarks listed on the FCA’s registers. Firms would be free to use regulated and non-regulated benchmarks, subject to general FCA conduct expectations and appropriate risk management.
The consultation closes on 11 March 2026. While no immediate changes apply, the proposals signal a shift towards a more flexible, risk-based benchmarks framework, with potential implications for benchmark selection, governance, and fallback planning for investment managers.
BoE to stress test the private markets ecosystem
On 4 December 2025, the Bank of England (BoE) launched its second system-wide exploratory scenario exercise, focusing on how private markets would operate under financial stress and mapping the potential effects of stresses on the UK’s financial stability and real economy.
In particular, the BoE will look into risks concerning opacity, high leverage, weak underwriting standards, and the interconnections between the non-bank ecosystem and the banking system. The exercise will encompass two rounds and include key actors in private markets, including traditional and alternative asset managers, large banks, and institutional investors.
The BoE’s initiative comes after total assets under management in private market funds have reached approximately US$16 trillion globally, global private equity and private credit assets having increased from US$3 trillion to US$11 trillion over the past decade. The growth of the ecosystem has given rise to an increased interest from government and regulatory bodies in terms of how these markets would behave under stress.
5. UK — EMIR
BoE consultation on exempting post-trade risk reduction transactions from clearing
On 11 December 2025, the BoE published a consultation concerning the proposal to exempt post-trade risk-reduction (PTRR) transactions from the derivatives clearing obligation under Article 4 of the UK version of the European Market Infrastructure Regulation ((EU) 648/2012) (EMIR). PTRR involves reducing counterparty, operational, and basis risk in derivatives portfolios. Its proposed definition by the BoE is a service provided to two or more counterparties to derivatives transactions for the purpose of reducing non-market risks in derivatives portfolios.
Generally, over-the-counter (OTC) derivative contracts are required to be cleared by a central counterparty. However, under the Financial Services and Markets Act 2023, the BoE gained the power to exempt transactions relating to PTRR services from the clearing obligation where necessary or expedient for its objective of advancing financial stability. The BoE is now proposing to exercise this power to exempt transactions made under eligible agreements and considers that its proposals would unlock resources by reducing complexity and increasing the efficiency of PTRR services, thereby making PTRR accessible to a wider range of market participants.
The consultation is open until 11 March 2026.
6. UK — Cryptoassets
HMT publishes Draft Regulations on regulatory regime for cryptoassets
On 15 December 2025, HMT laid the Financial Services and Markets Act 2000 (Cryptoassets) Regulations 2025 (the Draft Regulations) before Parliament, accompanied by an explanatory memorandum. The Draft Regulations were first published in draft form as the Financial Services and Markets Act 2000 (Regulated Activities and Miscellaneous Provisions) (Cryptoassets) Order 2025 in April 2025 (as detailed in our May 2025 Update).
The updated Draft Regulations cover “qualifying cryptoassets” which include both qualifying stablecoins and specified investment cryptoassets. In relation to qualifying cryptoassets, certain activities will be classified as specified investments from October 2027, including stablecoin issuance, dealing in cryptoassets as principal or agent, operating a cryptoasset trading platform, arranging deals in cryptoassets, and staking. As such, cryptoasset firms will be regulated by the FCA in the same way as other providers of financial services and will require FSMA authorisation. This is intended to facilitate the detection of suspicious activity and enforcement of sanctions and hold firms accountable more effectively.
The Draft Regulations relate only to the new regulated activities to be created and their associated consequential amendments. Further provisions on, for instance, market abuse and disclosures will be published separately in due time, following the conclusion of separate FCA consultations (see below item, FCA publishes three consultation papers on cryptoasset regulations). In addition to these changes, consumer protection standards will be amended to match existing standards that apply to other FCA-regulated firms.
FCA publishes three consultation papers on cryptoasset regulations
On 16 December 2025, the FCA published three consultation papers setting out its proposed rules and guidance related to the Draft Regulations on the new regulatory regime for cryptoassets. The consultation papers focus on different aspects of the new regime as set out below.
- CP25/40 sets out proposals for the following cryptoasset activities:
o Operating cryptoasset trading platforms (CATPs) — The FCA sets out rules on the location, incorporation, and authorisation of operators of UK-authorised CATPs. Firms will be required to have a UK presence and to ensure fair, orderly, and transparent markets. CATP operators would be required to apply non-discriminatory access and trading rules, manage conflicts of interest (including where platforms engage in proprietary trading or admit their own tokens), and implement systems and controls to support market integrity. Additional obligations would apply in respect of transparency, record-keeping, and settlement arrangements.
o Cryptoasset intermediaries — Cryptoasset intermediaries (including firms dealing as principal or agent or arranging deals) would be subject to conduct standards broadly analogous to those applicable to investment firms, adapted for cryptoasset markets. These include “best execution” style obligations, client order handling rules, and enhanced disclosure requirements.
o Lending and borrowing — The FCA proposes to regulate cryptoasset lending and borrowing as a form of dealing as principal. Firms offering lending or borrowing services would be required to meet record-keeping requirements, provide clear disclosures to clients, and put in place appropriate arrangements to manage credit, liquidity, and operational risks.
o Staking — The proposals introduce a regulatory framework for firms providing cryptoasset staking services, which would be subject to requirements aimed at improving transparency for clients, clarifying ownership and control of staked assets, obtaining clients’ consent, and managing operational and governance risks.
o Decentralised finance (DeFi) — The consultation focuses on identifying where DeFi activities may fall within the regulatory perimeter, particularly where there is a degree of centralised control or identifiable persons exercising influence. The FCA will continue to monitor developments in DeFi and may refine its approach over time as business models evolve and risks become clearer.
- CP25/41 follows the publication of discussion paper DP24/4 (which we covered in more detail in our January 2025 Update) regarding the implementation and operation of the cryptoassets admissions & disclosures (A&D) regime and the market abuse regime for cryptoassets (MARC).
o The A&D proposals outline the information firms must provide to investors. Under the proposals, CATPs would carry responsibility for conducting due diligence on cryptoassets, preventing the admission of qualifying cryptoassets detrimental to investors’ interests, requiring the production and publication of a qualifying cryptoasset disclosure document, and record-keeping.
o The MARC proposals would introduce prohibitions on insider dealing, unlawful disclosure of inside information, and market manipulation for qualifying cryptoassets admitted to trading. The FCA emphasises that the regime is intended as a pragmatic “day one” market abuse framework that can be recalibrated over time (recognising that cryptoasset markets differ materially from traditional securities markets).
- CP25/42 sets out the FCA’s proposed prudential framework for firms carrying on newly regulated cryptoasset activities, in the form of an integrated prudential sourcebook, the Core Prudential sourcebook. The consultation seeks to establish baseline own funds and risk assessment requirements, proportionate to the risks posed by different cryptoasset business models, with requirements calibrated by reference to the nature, scale, and complexity of a firm’s activities. Higher standards would apply to firms that hold client assets, operate trading platforms, or engage in activities that could generate systemic risk.
The deadline for responses to each of the proposals is 12 February 2026, following which the FCA expects to publish respective policy statements in 2026.
Property (Digital Assets etc) Act receives royal assent
On 2 December 2025, the Property (Digital Assets etc) Bill received royal assent and came into force as the Property (Digital Assets etc) Act 2025 (the PDAA). The PDAA aims to provide greater certainty and legal protection for those who own and transact with digital assets.
The PDAA confirms that digital assets can carry property rights despite not falling within one of the two existing legal categories of property (i.e., a ‘chose in possession’ or a ‘chose in action’). As such, the PDAA enables English courts to provide proprietary rights and remedies for owners of digital assets within the framework of English common law. This will be especially relevant to disputes regarding ownership or interference with digital holdings.
7. UK — ESG
FCA publishes proposals outlining regulatory framework for ESG rating providers
On 1 December 2025, the FCA published consultation paper CP25/34 on its proposals for the regulation of ESG ratings providers. The proposals are designed to improve transparency and trust in ESG ratings following recent legislation that brings ESG ratings under FCA oversight. For further details, see our Sidley Update UK ESG Ratings Providers — Near Final Legislation.
In designing the new regime, the FCA plans to apply many existing baseline rules that already apply to most other FCA-regulated firms for consistency. In addition, it would introduce tailored rules to address the gaps in existing requirements, focusing on the key areas listed below:
- Transparency. Tailored rules will include minimum public disclosure requirements for methodologies, data sources, and objectives for users to better understand the rating processes, boosting transparency and clarity.
- Governance/systems and controls. There will be a focus on ensuring ESG rating providers have robust governance and systems/controls arrangements in place, proportionate to firms’ size and complexity. This includes ensuring that firms retain operational responsibility of the ratings process to ensure oversight and compliance as well as arrangements to safeguard the integrity of the ratings process including quality control, data validation, and methodology reviews.
- Conflicts of interest. New rules will require firms to take appropriate steps to identify, prevent, manage, and disclose conflicts of interest at both an organisational and personnel level.
- Stakeholder engagement. Under the new rules, there should be procedures and appropriate avenues in place for stakeholders to provide feedback, correct factual errors, and raise complaints.
CP25/34 is open until 31 March 2026, and the FCA expects to publish final rules in Q4 2026, with the new regime coming into effect in June 2028.
8. EU — Capital Markets
European Commission adopts legislative proposals on integration of EU capital markets
On 4 December 2025, the European Commission (the Commission) published a market integration and supervision proposal (the MISP) to other EU institutions regarding its plans to further develop capital market integration and supervision within its savings and investments union (SIU) package. The MISP principally involves a Regulation and a Directive amending various key pieces of EU financial services legislation.
The MISP is focused on improving EU capital markets’ scale, efficiency, and competitiveness while reducing cross-border compliance complexity and removing barriers that may fragment the SIU (for further background and details, see our May 2025 Update). It also aims to reduce differences in regulatory approaches that have arisen from discretion by EU member states in transposing and interpreting EU Directives and that can unnecessarily complicate cross-border business. As such, the changes seek to:
- transition certain provisions from Directives to Regulations in order to streamline and simplify regulatory requirements;
- eliminate the possibility of member states imposing “gold-plating” measures at national level;
- refine Level 2 provisions;
- streamline supervisory arrangements that are currently costly, inefficient, or overlapping; and
- remove general barriers in EU and national frameworks for market operators and investors, including barriers (i) for those operating cross-border who face duplicative or insufficiently harmonised rules, (ii) to passporting, (iii) to interconnection by harmonising rules relating to trading venues, central securities depositories, and asset managers, and (iv) to distributed ledger technology (DLT) innovation and uptake.
The proposed legislation involves the following:
o The amendments are relevant to a wide range of EU Regulations including EMIR, Regulation 600/2014 on Markets in Financial Instruments (MiFIR), Regulation (EU) 2015/2365 on Securities Financing Transactions, Regulation (EU) 2023/1114 on Markets in Crypto-Assets (MiCA), Regulation (EU) 1095/2010 establishing ESMA, and Regulation (EU) 2017/2402 laying down a general framework for securitisation (the Securitisation Regulation), among others.
o The MISP Regulation seeks to strengthen ESMA’s role significantly, giving it direct supervisory powers over significant market infrastructures including certain central counterparties (CCPs) and trading venues. ESMA will also be responsible for supervising large asset managers, investment funds, and cryptoasset service providers.
o The proposals will substantially reform the cross-border distribution regime for UCITS and AIFs (which are currently mainly governed by Directives). The MISP Regulation aims to boost marketing and management of passporting by harmonising marketing rules, reducing host-state discretion, and introducing immediate single market access upon authorisation.
o The MISP Regulation intends to modernise post-trading rules to facilitate the uptake and use of DLT by expanding and recalibrating the DLT Pilot Regime (including higher thresholds and a simplified regime for smaller operators).
- Proposal 2025/0382 (the MISP Directive) amends the AIFMD, MiFID II, and Directive 2009/65/EC on UCITS and is intended to complement the MISP Regulation through further harmonisation. In particular, the MISP Directive aims to eliminate national discretions, streamline authorisation/passporting procedures, and enable more efficient group-level operations for EU asset managers.
o The MISP Directive recognises the concept of an ‘EU asset management group’, aiming to ensure that intra-group arrangements within the EU are no longer treated in the same way as third-party delegation. In effect, UCITS management companies and AIFMs will be able to rely on the resources of other EU group entities without triggering full delegation requirements (provided that the authorised entity remains responsible for oversight). This could reduce operational friction for cross-border groups.
o ESMA will be mandated to develop regulatory technical standards (RTS) specifying the information, templates, and procedures for authorising UCITS management companies and AIFMs, thereby eliminating divergent national practices. Management passport timelines will also be shortened, and host member states will be prohibited from imposing additional requirements on inbound management companies, in order to reinforce pan-EU freedom to provide services.
o The proposals introduce an EU-wide depositary passport permitting UCITS and AIFs to appoint as depositaries authorised credit institutions or investment firms with existing EU passports in other member states.
o The MISP Directive also removes a number of national discretions for UCITS and AIFs, harmonising conduct of business and prudential rules applicable to UCITS management companies and AIFMs.
o Disclosure obligations are simplified in certain areas, with the obligation for UCITS management companies to produce a standalone key investor information document notably removed.
o Building on the MISP Regulation, the MISP Directive further strengthens ESMA’s supervisory role. ESMA will be empowered to conduct coordinated annual reviews in cooperation with national competent authorities, to identify and address divergent or duplicative supervisory practices that hinder cross-border operations. ESMA would also have enhanced escalation and intervention powers where national authorities fail to apply EU rules consistently.
o The proposals align MiFID II with the revised MiFIR framework by transferring most rules governing the authorisation and operation of trading venues from MiFID II to MiFIR.
- Proposal 2025/0381 proposes to repeal the Settlement Finality Directive (98/26/EC) and replace it with a Regulation and amend the Financial Collateral Arrangements Directive (2002/47/EC). This is aimed at modernising and harmonising protections for cross-border settlement systems and collateral arrangements.
The MISP has been submitted to the Council of the EU (Council) and European Parliament (EP) for approval, pursuant to the EU’s ordinary legislative procedure. Once finalised, the new rules will represent significant divergence between the UK and EU regulatory frameworks in several respects.
9. EU — RIS
Council and Parliament reach agreement on RIS proposals
On 18 December 2025, the Council announced that it had reached a provisional political agreement with the EP on an updated RIS. The agreement is subject to approval by both the Council and the EP, prior to going through the formal adoption procedure.
As discussed in our August 2025 Update, a key proposal under the RIS involves adjusting current EU client categorisation rules by lowering the threshold at which a client can “opt up” from retail to professional client status. The updated framework will allow more retail investors to be treated as professional clients, through individuals fulfilling at least two out of the following three criteria:
- carrying out either 15 significant transactions over the past three years, 30 transactions over the previous year, or 10 transactions over €30,000 in unlisted companies over the past five years (the existing criterion currently stipulates carrying out 10 transactions per quarter over the previous four quarters);
- a portfolio size exceeding €250,000 on average over the past three years (currently €500,000 at the moment of the individual’s request); and
- working and carrying out related activities in the financial sector for at least one year or providing proof of education or training in these activities and an ability to evaluate risk (currently, this criterion requires one year in a professional position in the financial sector).
See also item 1 (UK — Client Categorisation) above to compare the EU approach with what is being proposed in the UK by the FCA.
10. EU — Anti-Money Laundering
On 4 December 2025, the Commission updated its list of high-risk jurisdictions, which contains jurisdictions that present strategic deficiencies in their national anti-money laundering and counter-terrorist financing regimes. EU entities subject to the anti-money laundering framework are required to apply enhanced measures in transactions involving listed jurisdictions.
The amendments include both additions (including the British Virgin Islands (BVI)) and removals (including South Africa and Nigeria). Due to the addition of the BVI to the list, from April 2026 (when AIFMD 2.0 becomes law in EU member states), BVI AIFs (and AIFs managed by BVI AIFMs) will not be able to be marketed into the EU (for further details, see our external paper, A U.S. Fund Sponsor’s Perspective on AIFMD 2.0).
11. EU — EMIR
ESMA’s statement on EMIR 3 reporting obligations
On 11 December 2025, ESMA published a statement on the upcoming reporting obligations that are to be introduced by amendments to EMIR under Regulation (EU) 2024/2987 (EMIR 3) (as discussed in further detail in our December 2024 Update).
Specifically, ESMA clarifies its approach to the Active Account Requirement (AAR), which entered into force in June 2025 under EMIR 3. The AAR requires EU counterparties to maintain at least one active clearing account with an EU-authorised CCP and use it to clear a representative portion of their trades. The Commission adopted a Delegated Regulation in October 2025 containing RTS specifying conditions relating to the AAR, including reporting requirements. ESMA expects that entities subject to the AAR should make their first reporting submission by July 2026, including any backlog data to demonstrate compliance with the AAR looking back to June 2025.
In addition, counterparties subject to the new reporting obligation in relation to their clearing obligation at a recognised third-country CCP are expected to report to their supervising authorities annually. ESMA recognises that until the related RTS and implementing technical standards are published, there could be inconsistencies in reporting practices. As such, the first reporting cycle is expected to take place only after the publication of such standards, in 2026.
12. EU — MiFID II/MiFIR
Commission consults on MiFID II research provisions amendments
On 4 December 2025, the Commission published a consultation on a Delegated Directive amending the MiFID II Delegated Directive (EU) 2017/593 regarding the conditions for the provision of third-party execution and research services to investment firms providing portfolio management or other investment/ancillary services.
The amendments require firms to inform clients about how firms pay for execution services and research, and they seek to offer firms more flexibility in the way they organise payment for such services. For example, the amendments aim to remove restrictive requirements to bundle payments for research and execution services relating to small and medium-sized enterprises (SMEs), by introducing flexibility on payment methods and removing the requirement to separate payments where it is too cumbersome.
The consultation closed on 1 January 2026.
ESMA publishes manual on pre- and post-trade transparency under MiFID II/MiFIR
On 19 December 2025, ESMA published its updated manual (the Manual) on post-trade transparency under MiFID II and MiFIR. The Manual replaces ESMA’s previous manual on post-trade transparency and follows ESMA’s 2025 review of the RTS under MiFID II and MiFIR RTS. It functions as Level 3 guidance to clarify the practical implementation of obligations relating to post-trade transparency rules and promote common practices.
Key new sections in the Manual deal with (i) pre-trade transparency for equity instruments and (ii) input/output data reported to or transmitted by CTPs.
ESMA releases final report on equity transparency requirements for derivatives
On 15 December 2025, ESMA published its final report on three RTS relating to transparency for derivatives, package orders, and input and output data for the OTC derivatives consolidated tape under amendments to MiFIR made by Regulation (EU) 2024/791 (the MiFIR Review).
ESMA’s report sets out final draft RTS relating to the following:
- Transparency requirements for derivatives. These RTS amend Commission Delegated Regulation (EU) 2017/583 (RTS 2) and cover the new transparency and deferral regime for exchange-traded derivatives and OTC derivatives under the MiFIR Review.
- Treatment of package orders. These RTS set out amendments to the RTS pertaining to the treatment of package orders, reflecting the new scope of derivatives and the liquidity determination.
- Input and output data. These RTS amend RTS 2 as regards CTPs’ input and output data, reflecting ESMA’s new mandate to develop draft RTS that prescribe data quality requirements for prospective CTPs.
The final draft RTS are now under the consideration of the Commission to determine whether they are to be adopted.
13. EU — Securitisation
Council and EP adopt negotiation mandate for the securitisation framework
On 12 December 2025, the Council published the texts of two compromise proposals, following the EP’s publication on 11 December 2025 of draft reports on corresponding topics, each in response to the Commission’s proposals in relation to securitisation:
- Council Proposal 16740/25 on the Commission’s proposal to amend the Securitisation Regulation as regards creating a specific framework for simple, transparent, and standardised (STS) securitisation (following the EP’s corresponding draft report 2025/0826).
- Council Proposal 16741/25 on the Commission’s proposal to amend the CRR as regards prudential requirements for credit institutions relating to requirements for securitisation exposures (following the EP’s corresponding draft report 2025/0825).
The review of the EU framework is being undertaken with the view to amend the prudential and regulatory rules affecting the securitisation market to help the market to reach its potential and contribute to the EU’s competitiveness. In particular, it is intended to help funnel investment into a broader range of real-economy activities, such as SMEs and infrastructure projects.
Securitisation Regulation
Both the Council and the EP broadly support recalibrating the EU securitisation framework to revive issuance and investor participation given the contraction of the European securitisation market following the 2008 financial crisis. They agree on introducing a more proportionate and risk-sensitive regime for STS securitisations, including easing due diligence requirements for repeat transactions and streamlining disclosure obligations, particularly for private securitisations.
The EP also proposes a narrower definition of “public securitisation,” tied primarily to the prospectus regime, and pushes for more meaningful relief for institutional investors, including simplified due diligence for repeat issuances and greater reliance on third-party verification of STS transactions. It also seeks to limit the supervisory burden on competent authorities and soften the sanctioning regime for buy-side due diligence breaches. The Council compromise suggests stronger supervisory oversight at transaction level and a more conservative approach to enforcement and transparency, reflecting member state concerns about systemic risk and supervisory capacity.
CRR
Both institutions agree on the need to recalibrate securitisation capital requirements to improve risk sensitivity and address long-standing concerns that EU securitisations are over-penalised relative to their historical performance. There is broad alignment on lowering risk-weight floors for senior tranches and simplifying the framework for recognising significant risk transfer, including replacing rigid mechanical tests with a more principles-based approach.
The EP proposes deeper reductions and additional caps on risk-weight floors, seeks to avoid differential treatment between originators and investors, and favours earlier and more stable classification of senior tranches to limit capital volatility over the life of a transaction. The Council mandate is more cautious, preserving higher minimum floors, maintaining distinctions between transaction types and investor roles, and embedding greater discretion for supervisors.
Please refer to our December 2025 Update for the European Central Bank’s opinions on the Commission’s proposed amendments.
In addition, please see our Sidley Update Proposed Reform of EU Securitization Regulation — Implications for U.S. Securitizations for further background.
14. EU — ESMA General Updates
ESMA revises guidelines on liquidity management tools under AIFMD and UCITS
On 18 December 2025, ESMA published its final report on amended guidelines on liquidity management tools (LMTs) applicable to EU UCITS management companies and AIFMs of open-ended AIFs. The amendments update ESMA’s existing LMT guidelines to reflect changes introduced by the revised AIFMD and UCITS frameworks, with the aim of strengthening supervisory convergence and enhancing fund liquidity risk management across the EU.
The amended guidelines clarify ESMA’s expectations on the design, calibration, activation, and governance of LMTs, in particular how fund managers should select LMTs in light of their investment strategies. They do not introduce binding new rules but are likely to influence supervisory scrutiny and set a higher benchmark for governance, documentation, and operational readiness. Investment managers may wish to review their liquidity risk frameworks, fund documentation, and internal escalation processes to ensure alignment with ESMA’s clarified expectations, especially where funds are exposed to liquidity stress or market volatility.
ESMA selects EuroCTP to be the first CTP for shares and exchange-traded funds
On 19 December 2025, ESMA announced that it has selected EuroCTP as the first CTP for shares and exchange-traded funds in the EU, following a successful assessment under MiFIR. Once authorised, EuroCTP (a Netherlands-based joint venture owned by 15 European exchange groups) will operate the equity CTP for five years under ESMA’s direct supervision. ESMA has described this as a step to enhance post-trade transparency and the attractiveness of EU equity markets.
15. EU — ESG
EU institutions reach provisional agreement on CSRD and CS3D simplification
On 9 December 2025, the Council and the EP reached a provisional political agreement on the Commission’s Omnibus proposal to reduce the scope of Directive (EU) 2022/2464 on Corporate Sustainability Reporting (CSRD) and Directive (EU) 2024/1760 on Corporate Sustainability Due Diligence (CS3D). For further background, see our Sidley Update EU Omnibus Package: EU Adopts “Stop-the-Clock” Directive and Begins ESRS Simplification Process.
The provisional agreement covers the following:
- CSRD. Under the provisional agreement, the scope of the CSRD will be reduced. Listed SMEs and financial holding undertakings will be removed from scope, with the EU company employee threshold raised to 1,000 and a new €450 million net annual turnover threshold being introduced. ‘Wave one’ companies that would be required to comply from FY 2024 can benefit from a transitional exemption if they fall out of scope of the CSRD for 2025 and 2026.
- CS3D. The threshold requirements for CS3D to apply to EU companies are increased to over 5,000 employees and a net annual turnover of more than €1.5 billion. Additionally, identification of potential and actual adverse impacts in due diligence will be limited to a general scoping exercise, requiring companies to focus on impacts that are the most likely to occur (or that involve direct business partners). Companies should use “reasonably available information” in the process to shift the burden of receiving requests from smaller companies. There will also be no requirement for companies to adopt a transition plan for climate change mitigation and no EU-wide civil liability mechanism, whilst fines will be capped at 3% of global turnover. Transposition has also been postponed to 2028, meaning companies will have to comply with the new measures by July 2029.
On 16 December 2025, the EP formally adopted its first reading position on the Commission’s proposals. The Council must formally adopt the Directive before it can be published in the Official Journal of the EU.
ESMA releases research on guidelines on ESG or sustainability-related fund names
On 17 December 2025, ESMA released its risk analysis research assessing the impact of the fund-naming guidelines on ESG and sustainability-related terms (the Guidelines) that it published in May 2024 (see our June 2024 Update for further details). Overall, ESMA notes that the Guidelines have improved consistency in the use of ESG terms and enhanced investor protection by reducing greenwashing risk.
ESMA’s research material comprised nearly 1,000 shareholder notifications in reaction to the Guidelines from the 25 largest EU-based asset managers. The study found that 64% of the funds mentioned in the notifications changed their name, most often to avoid using ESG terminology, and 56% updated their investment policies to strengthen their sustainability focus. The research found that funds with higher fossil fuel exposures were more likely to remove ESG terms from their names. ESMA also found that funds with ESG terms in their names reduced their portfolio shares of fossil fuel holdings more than other funds.
Commission publishes Notice on application of sustainable finance framework and CS3D to defence sector
On 30 December 2025, the Commission published Commission Notice C/2025/4950 (the Notice) providing guidance on the application of the EU sustainable finance framework to the defence sector. This follows the Commission’s announcement in March 2025 of a plan to boost EU defence capabilities in response to escalating international security threats.
The Notice is intended to address perceived uncertainty in the market and discourage the blanket exclusion of defence-related investments on sustainability grounds, clarifying that the EU sustainable finance framework neither prohibits investment in the defence sector nor imposes any general financing restrictions. Defence investments, like those in any other sector, must be assessed on a case-by-case basis.
The Notice covers various parts of the EU sustainable finance framework, including CS3D, CSRD, MiFID II sustainability preferences, Regulation (EU) 2019/2088 on sustainability-related disclosures in financial services (the SFDR), and Regulation (EU) 2020/852 establishing a framework to facilitate sustainable investment (the EU Taxonomy):
- SFDR. From an SFDR perspective, the Commission highlights that investments in defence companies are not presumed to have adverse sustainability impacts solely due to their sectoral classification. Financial market participants should assess relevant principal adverse impact (PAI) indicators (particularly those relating to human rights compliance and exposure to controversial weapons) by reference to applicable export controls, international humanitarian law, and companies’ internal compliance/due diligence frameworks. For example, as narrowly defined under Commission Delegated Regulation (EU) 2022/1288 supplementing SFDR, the scope of “controversial weapons” is limited to anti-personnel mines, cluster munitions, and chemical and biological weapons.
- EU Taxonomy. In relation to the EU Taxonomy, the Notice confirms that defence companies may claim alignment for eligible horizontal activities (such as energy efficiency, clean transport, or infrastructure investments), provided that minimum safeguards are met. The absence to date of defence-specific activities from the EU Taxonomy does not negate the sector’s environmental or social sustainability performance.
- MiFID II. The Commission also clarifies the sector’s interaction with MiFID II sustainability preferences, noting that investment products with exposure to defence companies should not be excluded from distribution to clients with sustainability preferences solely on that basis. Rather, firms must consider minimum safeguards, “do no significant harm” principles, and relevant PAIs.
- CS3D. The Notice confirms that defence companies fall within the scope of the CS3D on the same basis as other sectors, subject to a targeted exclusion for downstream activities relating to military or dual-use products once export authorisation has been granted. The Commission reiterates that the defence sector may, following careful assessment, contribute to social sustainability objectives including peace and security and should not be treated as a de facto non-sustainable sector under EU sustainable finance rules.
16. EU — Crypotoassets/MiCA
Consortium of major European banks to launch new euro-pegged stablecoin in H2 2026
On 2 December 2025, a consortium of 10 major European banks announced the formation of a Netherlands-registered company, Qivalis, to launch a stablecoin pegged to the euro in H2 2026. This is intended to counter U.S. dominance in digital payments. Qivalis is distinguished from existing euro-pegged stablecoins by being an institutionally anchored option, unlike its predecessors’ fintech consortium origins. As of the date of this Update, Qivalis is in the process of applying for an Electronic Money Institution licence from the Dutch central bank.
ESRB Secretariat highlights the challenges digital assets pose to the EU financial system
On 3 December 2025, the Head of the European Systemic Risk Board (ESRB) Secretariat, Francesco Mazzaferro, gave a speech on the risk that digital assets pose to the competitiveness and integrity of the EU financial system. Drawing attention to an urgent recommendation by the ESRB focusing on third-country multi-issuer stablecoin schemes, he warned that allowing stablecoins issued outside the EU to be freely fungible with those issued in the EU could lead to severe liquidity and systemic-risk problems if many holders were to simultaneously redeem the tokens they hold. Mazzaferro also discussed tokenisation, highlighting its potential to bring efficiency and lower costs through standardised interoperable systems while ensuring that the concentration of multiple market functions into a single intermediary risks creating conflicts of interest and deepening system vulnerability.
ESMA updates list of MiCA grandfathering periods
On 1 December 2025, ESMA published an updated list of grandfathering periods for each member state under Article 143 of MiCA. The grandfathering periods allow firms currently compliant with national pre-MiCA cryptoasset regimes to continue providing cryptoasset services pending full MiCA authorisation. Spain was the only Member State to extend its grandfathering period from 12 to 18 months (i.e., until 30 June 2026), significantly mitigating the cliff edge risk potentially affecting firms operating in Spain that were not yet MiCA-compliant at the end of 2025.
17. International — Financial Stability Board
FSB report on the growth of the non-bank sector
On 16 December 2025, the Financial Stability Board (FSB) released its annual report noting that the non-bank sector (including investment funds, trust companies, hedge funds, and money market funds) grew at double the pace of the banking sector, reaching US$256.8 trillion in total global financial assets. In particular, the FSB notes that the section of non-bank financial institutions involved in credit intermediation activities that pose bank-like financial stability risks increased by 12% to US$76.3 trillion, whilst vulnerability metrics (including credit intermediation, maturity/liquidity transformation, and leverage) remained broadly stable.
However, the report highlights the limitations in data for private credit. As such, the FSB will focus on assessing the potential impact of private credit on financial stability in the year ahead.
