UK Private Credit:
Data First, Regulation Later
September 2026
UK Private Credit:
Data First, Regulation Later
September 2026
Private credit has experienced a remarkable period of growth over the past decade. As prominent instances of default at private credit-backed firms have increased and geopolitical events have contributed to a more challenging macroeconomic outlook, regulatory scrutiny has also intensified.
However, the current UK approach is notable for what it does not seek to do. Rather than regulating private credit as a distinct asset class, UK regulators are seeking to understand whether its rapid growth presents risks to financial stability through its interaction with banks and the wider financial system. This position could change over the medium term, however, as the UK regulatory approach is still developing.
The UK is a major center for private markets, with estimates presented to the House of Lords Financial Services Regulation Committee (“FSRC”) indicating that it is the world’s second-largest market after the U.S.1 Private credit has been a key driver of that growth, expanding from a negligible base in 2013 to approximately £59.9 billion by 2024 - a compound annual growth rate of 43%2.
UK banks now carry an estimated £173 billion of banking-book exposure to private market funds and to highly leveraged, sponsor-backed corporates — around 8% of their total committed wholesale lending limits3.
What Makes up UK Banks’ £173Bn Private-Market Exposure?
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Source: Bank of England, 2025 Bank Capital Stress Test/ December 2025 Financial Stability Report
The UK is a major center for private markets, with estimates presented to the House of Lords Financial Services Regulation Committee (“FSRC”) indicating that it is the world’s second-largest market after the U.S.1 Private credit has been a key driver of that growth, expanding from a negligible base in 2013 to approximately £59.9 billion by 2024 - a compound annual growth rate of 43%2.
UK banks now carry an estimated £173 billion of banking-book exposure to private market funds and to highly leveraged, sponsor-backed corporates — around 8% of their total committed wholesale lending limits3.
What Makes up UK Banks’ £173Bn Private-Market Exposure?
Click to find out more
Source: Bank of England, 2025 Bank Capital Stress Test/ December 2025 Financial Stability Report
This extraordinary growth can be credited to a combination of regulatory and macroeconomic factors. It is an illustration of how private credit has developed in response to broader changes across the financial services industry. Tighter bank capital and liquidity requirements introduced following the global financial crisis reduced banks’ capacity and appetite for certain forms of corporate lending, encouraging the migration of lending activity to private credit funds.
At the same time, private equity firms have increasingly diversified into credit strategies as buyout opportunities became scarcer, while a prolonged period of low interest rates has fueled investor demand for higher-yielding private credit investments. These developments were reinforced by broader regulatory reforms and changes in banks’ risk appetite, which further contributed to the expansion of non-bank lending.
Regulation of Private Credit in the UK
In the UK, there is no dedicated regulatory framework for private credit. Instead, regulation is indirect. It attaches to the fund manager of private credit firms and to the banking system, rather than to the lending activity itself. Some of the key components of this framework include:
The manager, not the activity, is regulated
Private credit funds fall within the UK’s Alternative Investment Fund Managers (“AIFMD”) regime. The UK AIFMD framework does not impose a dedicated loan-origination regime governing matters such as borrower concentration, loan retention, or liquidity management. Instead, UK regulated managers are subject to, among other things, requirements related to capital, governance, risk management, liquidity rules, leverage monitoring, and remuneration restrictions.
Banking regulation shapes the market from the outside
Tier 1 Capital requirements have risen by an estimated 300-400% since before the financial crisis4. The resulting migration of lending to private credit is an intended consequence of differing capital and liquidity treatment, designed to move risky activity away from the banking sector. Risk weights add to the effect. Differences in prudential treatment may in some circumstances make lending to private credit funds more capital-efficient than originating equivalent loans directly.
This approach is in contrast to the position in the EU following the implementation of amendments to the Alternative Investment Fund Managers Directive that came into force in April 2026 (“AIFMD II”), which introduced specific obligations on private credit funds operating within the EU’s broader funds regulatory framework. AIFMD II introduced a harmonized loan-origination framework for EU funds, including mandatory liquidity-management tools.
Recent Developments
The UK’s financial services regulators are approaching the sector initially by mapping market practices and interconnections, and exploring vulnerabilities.
FCA Valuations Review
In March 2025, the Financial Conduct Authority (“FCA”) published a multi-firm review of valuation practices for private market assets5. The review highlighted shortcomings in governance, independence, conflict management, and firms’ ability to perform ad hoc valuations during periods of market stress. The review illustrates the FCA’s growing focus on valuation governance as private markets expand, with the regulator emphasizing that firms should be able to demonstrate independence, expertise, transparency, and consistency throughout the valuation process.
Bank of England & PRA
The Prudential Regulation Authority (“PRA”) has carried out a thematic review of banks’ private equity related financing. It found that many banks could not properly aggregate their exposures to private markets6. This has led the regulator to specifically address the risks in relation to illiquid and structured financing portfolios through a ‘Dear CFO’ letter and update its supervisory statement on significant risk transfer securitization7.
Concerns around leverage, valuation uncertainty, and interconnectedness with other risky credit markets have also been a recurring feature of the Financial Policy Committee’s Financial Stability Reports, with the July 2026 Report8 noting that vulnerabilities in private credit had become more pronounced amid weakening investor sentiment and growing concerns over asset quality and liquidity.
The Bank of England is also actively monitoring the private credit ecosystem through its System-wide Exploratory Scenario on private markets (“SWES”), launched in December 20259.
A Brief History of the Bank of England’s System-Wide Exploratory Scenario Exercise
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A Brief History of the Bank of England’s System-Wide Exploratory Scenario Exercise
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Unlike a traditional stress test, the SWES is designed not to assess the resilience of individual firms but to understand how the collective behavior of banks, asset managers, and institutional investors could interact under stress and whether those interactions could amplify risks to UK financial stability. It is the first exercise of its kind directed at the private markets ecosystem, reflecting the Bank’s concern that rapid growth and increasing interconnectedness have outpaced the available data.
Participating firms are modeling the effects of a hypothetical five-year global recession and the actions they would take in response. The exercise is being conducted over two rounds, with firms asked to reconsider their responses after receiving feedback on the likely behavior of other participants, allowing the Bank to identify potential feedback loops and contagion effects.
The final report, due in early 2027, is expected to provide the first comprehensive assessment of whether private credit gives rise to systemic risks to UK financial stability. Its findings are likely to shape future regulatory policy, with the PRA observing in its latest Annual Report that there will be “ongoing monitoring and escalation where standards weaken, remediation proves insufficient, or exposures grow materially”10.
These initiatives suggest that UK policymakers are less concerned with the size of the sector than with improving visibility over interconnectedness, valuation practices, and the transmission of risk into the wider financial system.
Future Direction of Travel
Current regulatory action in the UK suggests a period of observation and monitoring, with the shape of any future regime likely to become clearer after mapping and exploratory scenarios are completed.
So far, there is no indication that a bespoke private credit regime, or a UK equivalent to AIFMD II’s loan-origination framework, will be implemented. Rather, current policy thinking appears to favor enhancing supervisory visibility over the private credit market — including through a possible “Flow of Funds” framework similar to that in the U.S — before considering whether further regulatory intervention is necessary.
Recent FCA, PRA and Bank of England initiatives suggest that the UK is deliberately avoiding premature product-specific regulation. Regulators appear focused on determining whether existing prudential and fund management frameworks are adequate once better data on exposures and interconnectedness become available.
If further regulatory measures are introduced, they are likely to initially focus on improving transparency, reporting, and market visibility, rather than imposing substantive constraints on lending activity.
The supervisory architecture for regulatory escalation is already in place, but whether it is ultimately deployed will depend less on the continued expansion of private credit than on whether the SWES and other supervisory work identify systemic vulnerabilities that cannot adequately be addressed through existing tools.
Future Direction of Travel
Current regulatory action in the UK suggests a period of observation and monitoring, with the shape of any future regime likely to become clearer after mapping and exploratory scenarios are completed.
So far, there is no indication that a bespoke private credit regime, or a UK equivalent to AIFMD II’s loan-origination framework, will be implemented. Rather, current policy thinking appears to favor enhancing supervisory visibility over the private credit market — including through a possible “Flow of Funds” framework similar to that in the U.S — before considering whether further regulatory intervention is necessary.
Recent FCA, PRA and Bank of England initiatives suggest that the UK is deliberately avoiding premature product-specific regulation. Regulators appear focused on determining whether existing prudential and fund management frameworks are adequate once better data on exposures and interconnectedness become available.
If further regulatory measures are introduced, they are likely to initially focus on improving transparency, reporting, and market visibility, rather than imposing substantive constraints on lending activity.
The supervisory architecture for regulatory escalation is already in place, but whether it is ultimately deployed will depend less on the continued expansion of private credit than on whether the SWES and other supervisory work identify systemic vulnerabilities that cannot adequately be addressed through existing tools.
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