The House of Lords Financial Services Regulation Select Committee has published a report stating that the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA)'s secondary international competitiveness and growth objectives are being held back by pervasive risk aversion, regulatory uncertainty, and inefficiency in the regulatory system.
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 current government has also made it clear that it expects regulators to promote economic growth.
The Committee found that there are 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. It has also warned 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 has said that the regulators' approach tends to lack proportionality due to the FCA's failure to sufficiently distinguish between wholesale and retail markets and the PRA's approach to capital requirements.
The report also emphasises 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 highlights 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.
However, the Committee identifies 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, in addition to the need for regulators to improve their operational efficiency and timelines for authorisations, as well as improving the quality of their supervision.
Recommendations
In a lengthy report that was critical of the length of time it takes regulators to deliver change, the Committee made 34 recommendations. Among them, it said regulators should:
- 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 the 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 called on the UK 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 make sure that they are consistent 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.
The FCA and the PRA must report to the Committee within 12 months of the publication of the report to set out how they have responded to the Committee's recommendations. The government generally has two months to respond to Committee reports, but has 12 months to specifically report to Parliament and the Committee to evidence whether the secondary international competitiveness and growth objective has facilitated growth in the wider economy (and then on an annual basis).
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