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Overview
The Committee’s inquiry examined the progress made in driving the regulators to support growth, both in the financial services sector and, crucially, in the wider UK economy since the introduction of the FCA and PRA’s secondary international competitiveness and growth objective by the Financial Services and Markets Act (FSMA) 2023.
The Committee found that the objective has highlighted long-standing issues that limit or introduce unnecessary frictions to financial services firms’ ability to grow, innovate, and compete and that discourage new entrants both domestic and foreign.
The report warns that the burden of compliance in the UK is perceived to be disproportionately high and emphasises that the regulators do not have a clear understanding of the cumulative burden of regulation on financial services firms.
The Committee identified a prevalent lack of proportionality in the regulators’ approach, such as the FCA’s failure to sufficiently distinguish between wholesale and retail markets and the PRA’s approach to capital requirements.
The report also underlines that regulatory uncertainty regarding the interpretation of the Consumer Duty and the interaction between the FCA’s rules and the Financial Ombudsman Service (FOS)’s decision processes may reduce the attractiveness of investing in the UK.
Although the secondary objective contains a clear ambition for the regulators to facilitate economic growth, the Committee emphasises that the link between financial services regulation and growth in the wider economy is not yet properly understood and highlights that more detailed research is needed.
The report identifies, however, that the PRA’s approach to setting capital requirements has limited the commercial incentives and capital available to provide finance for growth. The Committee highlights that regulation alone cannot generate economic growth and calls for a joined-up approach between the Government, the regulators, and industry to improve the provision of finance for UK businesses and productive assets.
The report also highlights low financial literacy, lack of trust in the financial services sector, and lack of support for consumers in managing their savings.
Key recommendations
The Committee calls on the regulators to:
Drive cultural change throughout their organisations, introducing a more tailored and proportional approach to the risks posed by regulated firms, a culture of continual operational improvement and innovation, and a more transparent and trusting relationship with stakeholders.
Create a joint cost of compliance working group in conjunction with their respective Cost Benefit Analysis Panels and include an assessment of actual costs of large-scale regulatory reforms as part of their post-implementation reviews.
Clarify guidance on the implementation of the Consumer Duty and set out how the FCA and the FOS intend to address long-standing concerns with the redress framework.
Prioritise the delivery of the Advice Guidance Boundary Review to give UK consumers more support to save and invest.
The Committee calls on the Government to:
Undertake a focused assessment of the financial services landscape to identify where regulatory overlap can be eliminated.
Provide parameters and clear direction to the regulators on how it sees financial services regulation supporting its growth strategy.
Include outcomes-based secondary objective metrics that aim to illustrate the impact of the regulators’ action on the real economy and review the regulators’ statutory operating service metrics to ensure they are in line with comparative jurisdictions.
Commission an independent study to assess the cumulative cost of compliance in the financial services sector relative to other international jurisdictions and further academic research into how regulation can support growth.
Engage in concerted action to improve financial education from school age and up and work with the FCA, universities, and research organisations to develop new financial education programmes.
Chairman’s comments
Lord Forsyth of Drumlean, Chairman of the House of Lords Financial Services Regulation Committee, said: “The deeply entrenched culture of risk aversion and the high cost of compliance are among the regulatory barriers that are unnecessarily constraining firms. These barriers are getting in the way of doing what these firms do best, which is competing, innovating and growing. The lack of clarity under the Consumer Duty and the FOS's evolution into a quasi-regulator, coupled with regulatory uncertainty, also gives the impression that there is a regulatory penalty on investment in UK businesses.
“The UK’s financial and insurance services sector contributes over £200 billion to our economy, so its continued success is vital for the UK’s economic prospects. Regulators need to address barriers and do more to remove, or mitigate at the very least, anything that makes the UK a less attractive place to do business.”
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