Committee report warns of risk aversion among financial regulators

A new House of Lords Financial Services Regulation Committee report has found that the Financial Conduct Authority (FCA) and the Financial Ombudsman Service (FOS) must set out how they intend to address longstanding concerns with the redress framework and ensure that their views on regulatory requirements are consistent.

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.

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.”

Stephen Haddrill, Director General of the Finance & Leasing Association (FLA) said “The Committee has produced an incisive report that sets out the problematic dynamic between the Financial Conduct Authority and the Financial Ombudsman Service (FOS) with regards to the consumer redress framework.

“Having examined this issue from a competitiveness and growth perspective, their findings add yet more weight to the call for fundamental change on how the FOS operates.”