Weekend Reading: What to Expect in 2025
By: Cameron Lawrence , Director of Research at Starling
Happy New Year!?
As we leave behind a year which can be most charitably described as "eventful," 2025 promises to bring about widespread disruption and upheaval across industries and polities.
In our writings in recent months, we have observed that new political realities are shifting the financial sector regulatory agenda globally, upending the priorities that have been emphasized for the past 15 years. In the wake of the Global Financial Crisis, regulators understandably prioritized "safety and soundness," and this agenda persisted throughout the Covid-era disruptions. But, even as regulators seek to put the final pieces in place and to conclude the "Basel III Accords," political priorities have shifted — sharply.
Over the course of 2024, as many economies stagnated and economic outcomes worsened (whether real or?perceived), voters issued a mandate for change. As the Financial Times observed in November, throughout the biggest election year in history, every incumbent governing party facing election in a developed country lost vote share.
Hoping to turn headwinds into tailwinds, political leaders are now asserting new policy narratives and establishing new socio-economic "cultural configurations." As such, we have argued, the post-Financial Crisis mantra of "safety and soundness" has been overshadowed by today's demands for "growth and competitiveness."
There remain, of course, open questions as to how regulators can promote competitiveness and growth without sacrificing hard-won gains in financial sector integrity. We have argued that squaring this circle demands a determined reexamination of culture risk governance and supervision. This, in turn, requires overcoming a number of existing cultural barriers to innovation and technology.
These forces are unlikely to relent in 2025, and they create an entirely new set of challenges and responsibilities for regulators and firms. It is surely tempting for some regulators to cling on to safety and stability as their primary mandate. But doing so will not change political realities, and those who fail to adapt to such will almost certainly find themselves increasingly marginalized.
With all of that being said, in this, our first Weekend Reading of the year, I'd like to highlight several key trends that we believe will drive global regulatory, risk management, and audit sector priorities over the coming year.
1. Softening Regulation and Dismantling Bureaucracy
In their quest to promote economic growth and competitiveness, politicians are increasingly setting their sights on regulation. Regulators are being encouraged — or, in some cases compelled — to analyze proposed and existing regulations and remove undue burdens on industry activity.
Such pressures have arisen in every major jurisdiction. In a speech delivered at Mansion House in November 2024, UK Chancellor of the Exchequer Rachel Reeves said that the key test for regulation under the administration would be "whether it will make [the] economy more dynamic and more competitive."
"It was right that successive governments made regulatory changes after the Global Financial Crisis to ensure that regulation kept pace with the global economy of the time, but it is important that we learn the lessons of the past," she argued. "These changes have resulted in a system which sought to eliminate risk taking."
In the US, President-Elect Donald Trump has also made clear that softening regulations to support industry competitiveness will be a priority for his administration when he takes office in late January. In the lead-up to the election, Trump vowed to undertake the "most aggressive regulatory reduction" in history.
More generally, there is also a growing appetite for dismantling bureaucracy, or what has been called the "administrative state," as a means to reduce government spending along with regulatory burden. This is seen in the forthcoming Department of Government Efficiency (DOGE) in the US, which will provide "advice and guidance" on how the Trump administration can reduce government spending, bureaucracy, and regulations.
Tesla Founder & CEO Elon Musk, who has been selected to lead the DOGE alongside former Republican Presidential Candidate Vivek Ramaswamy, has called the US Federal Reserve "absurdly overstaffed" and argued that the Consumer Financial Protection Bureau should be abolished entirely.
Even in jurisdictions like the EU, where discussion of "deregulation" remains a non-starter due to residual Financial Crisis traumas, politicians have pushed regulators to promote competitiveness and growth.
As regulation is forced to take a back seat, supervision will be an even more essential aspect of regulators' efforts to maintain obligatory levels of safety and stability. However, regulators also cannot be seen as seeking to enact "regulation by enforcement" and supervisory activities, evading mechanisms of transparency and accountability and/or upending political pressures.
In an In Focus contribution to Starling's 2024 Compendium, Miki Bowman , a Governor on the US Federal Reserve Board, argued that banking sector overseers should hold themselves to the same high standards of conduct they encourage in the industry when conducting supervision. Doing so, she contended, requires operating in a manner independent of political pressure and mindful of public transparency and accountability.
"Accountability is no less important for bank regulators than it is for banks," she wrote. "Bank regulators serve an important public function, and as we have seen in the past year, the stakes are high. Bank failures and stress in the banking system pose significant risks, not only to the bank customers, depositors, and creditors of a failed bank, but also to the broader financial system, the U.S. economy, and U.S. taxpayers."
In the US, banks have expressed an increasing readiness to challenge their regulators in court if they are seen to be engaging in this sort of conduct. Indeed, US firms filed a suit against the Fed on Christmas Eve, "to preserve legal rights" as the industry pushes back on stress testing practices. As such, supervisors must ensure that their activities are backed by objective metrics and abide by a clear framework.
2. Accelerated Innovation and Technology Adoption
Another theme that is sure to continue in the new year is the global mandate to adopt innovative approaches to regulation. This applies particularly to the adoption of new technologies, especially AI and blockchain.
In recent years, bank investment in new technology has increased substantially, as AI tools promise to transform organizational functions and business lines. In his annual letter to shareholders in April 2024, Jamie Dimon, Chairman and CEO of JPMorgan Chase, argued that AI has the potential to be as transformational as the "printing press, the steam engine, electricity, computing and the Internet."
It has already begun to transform JPMorgan's own practices. "We have been actively using predictive AI and ML for years — and now have over 400 use cases in production in areas such as marketing, fraud and risk — and they are increasingly driving real business value across our businesses and functions," Dimon wrote. The firm is also exploring the value that Generative AI can unlock, which may allow it to "reimagine entire business workflows" in the future.
While JPMorgan has emerged as a leader in the adoption of AI in the financial sector, it is not alone in recognizing its strategic importance. In August, for instance, Lloyds appointed a former AWS executive as its first Group Director of AI and Advanced Analytics. Overall, AI is expected to add $170 billion to banks' profits by the end of 2028, according to a June 2024 report produced by Citi.
Blockchain technologies and cryptocurrencies are also likely to grow in adoption in 2025. Regulators in the US and UK have historically regarded these technologies with suspicion. However, President-Elect Trump has promised to make the US the "crypto capital of the planet." Late last year, he announced that he would appoint crypto advocate Paul Atkins to lead the Securities and Exchange Commission and former PayPal COO David Sacks as the White House AI & Crypto Czar.
These technologies present both opportunities for growth and potentially systemic risks. Some have pointed out that if firms adopt similar AI tools, rely upon the same datasets, and employ similar strategies, these factors could lead to herding behavior and ultimately worsen market disruptions. And the systemic risks associated with cryptocurrencies and related financial institutions are largely unknown and troublesome to assess.
Often overlooked in these calls for caution are questions regarding the harms that may follow should these technologies not be adopted. When traditional approaches to regulation and supervision end up delaying or even preventing market innovations that serve consumers and the broader economy, this too should be seen as a risk — and will surely be taken as such amidst political pressures championing 'growth and competitiveness.'
If regulators are to keep up with industry innovation, and establish effective oversight mechanisms thereof, they must invest in innovation within their own organizations. There have been efforts in this direction. The Bank for International Settlements Innovation Hub, for instance, has led a number of projects aimed at bringing new tools to challenges faced by central banks.?
Despite this, there remain cultural barriers to innovation in regulatory agencies. "When cultural norms operate such that individuals are reluctant to risk innovation, for fear of personal failure, as a group, they unwittingly make failure their likely shared outcome," Starling Founder & CEO Stephen J. Scott wrote in a Weekend Reading article last month. "When regulators fail to innovate, it undermines their raison d'être, whether that is taken to be in service of 'safety and soundness' or as a critical support for 'growth and competitiveness.'"
3. Auditor Scrutiny?
Historically, our coverage has largely focused on financial sector participants and regulators. However, as we have argued in recent past years, many of the same culture and conduct risk governance concerns that have long plagued the financial industry are now being recognized as troubling firms in the audit sector.
These culture problems have led to a wide range of adverse outcomes. Audit firms globally have struggled with exam cheating among their employees, highlighting the contagious nature of misconduct. In April 2024, the US Public Company Accounting Oversight Board (PCAOB) levied its largest ever fine, $25 million, on KPMG Netherlands for a related scandal.
Culture is also seen as driving poor audit quality across firms and jurisdictions. Last month, the PCAOB issued a staff report exploring this relationship, offering advice as to how audit firms can ensure that their culture is supportive of high-quality audits.
In October last year, Starling CEO Stephen Scott was invited to provide a keynote speech at the PCAOB's International Institute on Audit Regulation, in Washington, DC. Through his talk and a related subsequent panel discussion, Stephen explained what audit regulators should learn from the efforts of banking sector regulators to address the cultural root causes of behavior.
As audit sector regulators follow their banking sector peers in recognizing culture as "a thing," he argued, they have an opportunity to avoid the pitfalls that have slowed banking sector efforts:
In March last year, the Association of Chartered Certified Accountants (ACCA) ?issued a report finding that a third of its members doubt that their organization's risk culture matches its public commitments for such. Most recently, US accounting firms have sought to?block new efforts?by regulators to compel the disclosure of metrics regarding audit quality assurance measures and related risk governance.?Attention to these issues in the audit sector seems likely to continue into 2025.
4. Growth of NBFIs
Over the past decade, the growth of non-bank financial institutions (NBFIs) has vastly outpaced that of the traditional financial sector. In 2023, these institutions represented about $239 trillion in assets globally, compared to just $189 trillion among banks, according to the Financial Stability Board (FSB) . This presents a number of potentially systemic risks.
NBFIs are much more lightly regulated than banks, when they are regulated at all, and they face less stringent capital requirements, resolution planning guidelines, and supervisory oversight. But the web of funding, liquidity insurance, and other relationships between traditional banks and NBFIs has led some to question whether further regulation of the NBFI space should be considered, given worries that the true systemic risk such institutions may pose is perhaps greater than has been previously recognized.
There are ongoing attempts in the EU, US, UK, and elsewhere to determine what a more comprehensive NBFI regulatory framework, tailored to the specifics of those institutions, should look like. But many of these efforts are still in their infancy and, going forward, they will evolve in an environment that is far less tolerant of increased regulation, well-considered or otherwise.
The Cultural Imperative
As we enter 2025, the financial sector finds itself at a critical juncture. Political mandates for growth and competitiveness are reshaping regulatory priorities, even as concerns about systemic risk persist. The rapid pace of technological change demands innovation from both firms and regulators alike. Meanwhile, cultural challenges continue to drive misconduct and operational failures across sectors.
Success in navigating these crosscurrents will require a delicate balance. Regulators must promote growth without sacrificing stability. Firms must innovate while demonstrating good governance and maintaining operational resilience. And both must rebuild trust with a public grown skeptical.
The path forward requires abandoning the false choice between growth and stability. Instead, as we've long argued at Starling, attention to culture risk governance and supervision offers a way to achieve both aims.?
"Culture sets the preconditions for sustained collaboration that define the modern firm," Starling's Stephen Scott wrote in a Weekend Reading article last month. "Compliance with cultural norms establishes trust. Trust creates social capital. Organizations with greater social capital are more productive and enjoy sustainable competitive advantages that permit for growth. As it is for organizations, so is it too for whole economies and societies: trust, growth, and culture go hand-in-hand."?
Organizations with strong cultural foundations are better positioned to innovate safely, grow sustainably, and maintain the trust of their stakeholders. In 2025, this cultural imperative will only grow more pressing.
We will have more to say about all of these themes in the coming months, and they are certain to feature largely in the 2025 issue of our flagship annual report, the Starling Compendium, coming this June.
But we're eager to hear from you, the Starling Insights community. What have I missed in my observations and musings above? What themes do you expect to fill the headlines, and what would you like to read more about here? Please drop your comments on our LinkedIn posting, or reach out to us directly at [email protected] …!
This piece first appeared in Starling Insights' newsletter on January 5, 2025. If you are interested in receiving our thrice-weekly newsletter, among many other benefits, please consider signing up as a Member of Starling Insights.