FCA, PRA labelled risk adverse and growth hampering in House of Lords report

The UKʼs financial regulators have a “deeply entrenched culture of risk aversion”, which is stalling their efforts to advance their secondary objective of facilitating international competitiveness and growth of the economy, a powerful committee of lawmakers said this morning.

The senior leadership at both the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) must do more to drive cultural change throughout their organisations, the House of Lords Financial Services Regulation Committee said in its report, Growing pains: clarity and culture change required.

“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,” said Lord Forsyth of Drumlean, chair of the committee.

Metrics

Giving evidence to the committee in January, PRA chief executive Sam Woods said the regulator did not have a metric for measuring the effect of its regulation and supervision on the real economy.

In its report, the committee acknowledged the current “gap in the evidence base” regarding how regulatory mechanisms directly affect wider economic growth, and proposed the introduction of granular outcomes-based metrics for the secondary objective.

The report also calls on the government to undertake a focused assessment to identify where regulatory overlap can be eliminated for financial firms. And, after hearing evidence of the “UK’s perceived disproportionate compliance burden”, the committee said the government should commission a study into the cost of complying with financial services rules in the UK compared with other countries.

Asked if it planned to act on either of those suggestions, a spokesman for HM Treasury referred Compliance Corylated to Prime Minister Keir Starmer’s commitment to cut the compliance burden and the government’s regulation action plan. Announced in March, the plan promises to reduce the “administrative costs for business by 25% by the end of the parliament”.

The committee also recommended that the government rationalise and reduce the “have regards to” instructions it gives regulators.

Regulators

Additionally, the committee criticised the practice of “stop the clock” periods when firms and individuals were seeking authorisation, because this allowed the PRA and the FCA to effectively massage their authorisation figures. It recommended more transparent reporting of authorisation data.

The cumulative effect of some of the PRAʼs capital and leverage requirements on firms’ ability to lend also drew criticism, as chief executives at the UK largest building societies and challenger banks recently highlighted to the Treasury Committee. The Financial Services Regulation Committee called on the PRA to work with its Cost Benefit Panel “to develop a rigorous approach to assessing the cumulative burden of compliance”.

A PRA spokesperson said it had a strong forward pipeline of initiatives to build on the work it had already done. These included: remuneration reform; introducing a concierge service for firms seeking authorisation in the UK; its Strong and Simple regime for domestic banks; the creation of a special purpose vehicle (SPV) regime for insurers; and removing the Building Societies Sourcebook.

“We agree it is vital that we support the UK’s growth. That is why we have already been working hard to embed the secondary competitiveness and growth objective throughout our organisation, while recognising that there cannot be sustainable growth without financial stability,” the PRA spokesperson said, adding: “We will also continue to work with industry, government and the FCA to ensure our regulation is efficient and proportionate, and that the UK is as attractive as possible for business, innovation, and responsible risk taking.”

FOS and Consumer Duty

The committee criticised the FCA for not doing enough to distinguish between wholesale and retail firms in its supervisory and regulatory requirements. It also urged the FCA to address the “tension” between its rules and the decision of the Financial Ombudsman Service (FOS), and to clarify how firms should interpret the Consumer Duty as a matter of urgency.

“It has been almost two years since the Consumer Duty was introduced — the FCA must work at pace to remove redundant or duplicative rules and requirements to provide firms with the certainty and clarity they need to maximise the duty’s benefits,” the committee said in the report.

Responding to the report, an FCA spokesman said the regulator was “fully committed to supporting economic growth in the UK”. It had begun stripping out data requests; had retired outdated supervisory documents; introduced a new private stock market; and pared back its rulebook for the insurance sectors.

The FCA was committed to being more “predictable and proportionate”, the spokesperson said, adding: “We agree that there is more to do to understand the role of regulation in unlocking growth in the wider economy, and thatʼs why we have commissioned research on this topic.”