The UK financial services sector is navigating transformation amid post-EU regulatory changes and the demands of a digital economy. Financial institutions are facing a unique challenge: how to remain compliant with increasingly complex and detailed regulation while also responding to the intense pressure to innovate, grow and remain competitive in a global marketplace.
Providers carry a heavy compliance burden, with many incumbent banks allocating up to 50% of their total IT and operational budgets specifically to regulatory compliance. Having served as a regulator and now advising firms navigating these challenges, I see the same dilemma play out time and again.
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Businesses are eager to pursue digital transformation strategies – to modernise systems, deploy artificial intelligence (AI) and explore the potential of new financial products. AI-related spending in UK banking is projected to exceed £15 billion by 2027, but there is often a level of hesitancy due to unclear regulatory expectations or fear of enforcement. This can stifle progress and allow less risk-averse competitors in other jurisdictions to gain an advantage.
As such, we need to change how we think about compliance: it must move beyond being viewed as a tick-box exercise or a bureaucratic burden. Instead, it should be seen as an integral part of strategic decision-making. The firms that are most successful in adapting to this new environment are those that align their compliance strategies with business objectives from the outset.
Innovation vs regulation
Compliance, when treated as a forward-looking capability, doesn’t slow innovation – it strengthens it by providing a clear, structured path through uncertainty. Technologies such as AI, machine learning, data analytics and digital assets are transforming the financial services landscape, offering the potential for more personalised experiences, streamlined operations and stronger risk management.
According to GlobalData, 70% of insiders believe that Generative AI (GenAI) will have a positive impact on the banking industry in the next three years. However, when looking specifically at UK insurance professionals, 24.4% identified a lack of internal expertise as the primary obstacle to AI adoption, highlighting a skills gap that impacts firms’ ability to innovate responsibly.
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By GlobalDataThis disconnect creates a significant regulatory dilemma. As new capabilities emerge faster than policies can adapt, firms are left navigating a grey zone of unclear expectations, particularly around explainability, data privacy, algorithmic bias and the ethical use of AI. Digital assets and decentralised finance only compound the challenge, introducing products and systems that often operate outside traditional frameworks.
The consequence is twofold. First, there is growing operational and reputational risk for firms moving ahead without adequate regulatory clarity. Second – and perhaps more troubling – is a steady slowdown of innovation. In its latest findings, GlobalData noted a 24% decline in mentions of “innovation” in financial services filings across 2023 – suggesting that uncertainty may be discouraging firms from exploring new ideas altogether.
To overcome this, regulation must become more agile, and firms need to invest in internal capabilities to operate responsibly in areas where rules are still catching up. In today’s environment, effective risk management must extend beyond compliance to embrace principles, culture and sound judgment.
Is the UK losing its edge?
There is growing concern that the UK is losing ground as a global financial hub. While London remains a major player, the competitive gap is narrowing, with cities like Singapore, New York and Dubai actively reshaping their regulatory and business environments to attract financial innovation.
In the UK, firms still struggle with lengthy approvals, fragmented oversight and inconsistent messaging. Initiatives from the Financial Conduct Authority (FCA) – such as the Innovation Hub and Digital Sandbox – are a step in the right direction, but their impact on broader economic competitiveness has yet to be fully realised.
The government has made it clear that growth is at the heart of its agenda, encouraging both the Prudential Regulation Authority (PRA) and FCA to support innovation and competitiveness. As such, compliance functions will need to play a key role in enabling the changes businesses may pursue in response to this evolving regulatory tone.
Ultimately, what’s needed is a bolder, more coordinated effort to make the UK an easier place to build, test and scale financial innovation. That means clearer policy signals, more responsive regulatory engagement and investment in the infrastructure that supports fintech growth.
If we fail to address these challenges, we risk falling behind. The UK has long prided itself on having a robust but proportionate regulatory regime – one that supports integrity without stifling innovation. That balance is under threat and to restore it, we must refresh our national approach to financial regulation, with a sharper focus on outcomes, agility and collaboration.
Rethinking regulation
One of the most effective ways to bridge the gap between compliance and innovation is through proactive engagement with regulators. Too often, firms treat regulators as the final checkpoint – brought in only when a product is ready to launch or an issue has escalated.
But in today’s fast-moving environment, that approach is no longer viable. Early, open and continuous dialogue can significantly reduce uncertainty and help firms design controls that are both effective and proportionate. In my experience, regulators are increasingly open to collaboration – especially when firms come forward with transparency, a clear rationale and a demonstrated commitment to doing the right thing.
By engaging early, businesses can help shape regulatory expectations, clarify how existing rules apply to new technologies and avoid costly missteps. It’s not about asking for permission; it’s about building regulatory thinking into the design process from the start. This shift in mindset, toward collaboration and shared accountability, can be transformative.
The importance of culture
Technology and processes can only go so far. In a world of increasingly complex and dynamic risk, culture is the ultimate line of defence. When the rules are unclear or incomplete – as they often are in emerging areas like AI or crypto – what guides decisions is not regulation, but values.
Firms with strong ethical cultures are better able to navigate grey areas, respond to unexpected challenges, and maintain trust with regulators and customers alike. Building such a culture takes time and consistency, requiring genuine leadership, clear expectations and reinforcement at every level of the organisation.
Importantly, it must evolve alongside innovation. As firms adopt new technologies and enter new markets, they must ensure that their values keep pace. That might mean rethinking incentive structures, redesigning controls, or investing in behavioural analytics. But the goal remains the same: to create an environment where doing the right thing is the default, even when no one is watching.
The future of the industry
Despite the challenges, the financial services industry has the talent, infrastructure and institutional strength to lead in the next generation of global finance.
But we must act with intention. Compliance and innovation are not incompatible – they are interdependent. The firms that succeed will be those that integrate risk management into their growth strategies, work collaboratively with regulators and lead with integrity.
The world is watching to see how the UK responds to this moment. Will we become a hub for responsible innovation, or retreat into regulatory rigidity?
The answer will depend on our ability to see compliance not as a cost, but as an investment in the future. If we get it right, we can shape a financial system that is both competitive and principled – fit for the digital age and trusted for generations to come.
David Kenmir is advisory board chair at Skillcast
