The FCA and PRA’s competitiveness and growth objective is pointless unless their culture of risk aversion is addressed, warns Lords report

The Financial Conduct Authority (FCA) and Prudential Regulation Authority's (PRA) have a deeply entrenched culture of risk aversion which has meant that they have not advanced their secondary international competitiveness and growth objective in a meaningful way.

The senior leadership teams of both organisations must do more to drive cultural change throughout their organisations. This change should emphasise 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.

These are among the findings and conclusions of a new report, ‘Growing pains: clarity and culture change required. An examination of the secondary international competitiveness and growth objective', published today by the cross-party House of Lords Financial Services Regulation Committee.

The committee concluded that the secondary objective given to the FCA and PRA, following the enactment of the Financial Services and Markets Act (FSMA) 2023, has highlighted long-standing issues that limit or introduce unnecessary frictions to financial services firms' ability to grow, innovate, compete, and that discourage new entrants both domestic and foreign.

The FCA and PRA must address the regulatory barriers identified in the report which are placing undue constraints on firms, and negatively impact on the perceived attractiveness of the UK as a global financial centre.

The burden of compliance in the UK is perceived to be disproportionately high. The committee heard that the FCA and PRA together employ over 6500 staff and their budgets are projected to exceed £1.1 billion. Firms told the committee that they are inundated by information requests from the FCA and PRA and that there has been a significant degree of 'mission creep'.

The FCA does not do enough to distinguish between firms that cater to wholesale and retail markets in its regulation and supervision which, again, imposes unnecessary burdens and frictions on firms. 

The committee was told by Nationwide Building Society that in 2024 it received over 4,500 pieces of direct correspondence from its regulators, while Santander UK said that this year it had responded to over 300 regulatory requests and managed over 400 regular regulatory reports. In the last three years, Phoenix Group said it had dealt with over 150 regulatory and legislative changes.

There is also lack of proportionality in the PRA's approach to capital requirements. The Government should work with the PRA and the Bank of England to review the cumulative impact that the regulatory capital requirements and MREL requirements have on lenders, specifically regarding the cost of lending. This should be done with a view to balancing financial stability and enabling banks and building societies to lend for productive investment and support growth.

The regulators must work with their respective cost-benefit analysis panels to develop a rigorous approach to assessing the cumulative burden of compliance. As part of its work to establish a baseline for the administrative costs of regulation, the Government should also commission an independent study to assess the cumulative cost of compliance in the financial services sector relative to that in other international jurisdictions.

The secondary objective contains a clear ambition for the regulators to facilitate economic growth, but the committee is not yet convinced that the link between financial services regulation and growth in the wider economy is properly understood or has been rigorously evidenced. Regulation alone cannot generate economic growth. The Government, regulators, and industry must be aligned in their approach to improve the provision of finance for UK businesses and productive assets. While this requires regulatory action to remove barriers to productive investment, the Government's growth objectives cannot be achieved without a joined-up approach.

Lord Forsyth of Drumlean, Chair 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 it's 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. “

Other key findings and recommendations in the report include: 

• The committee was told the regulatory environment is overly complex and that many firms find it challenging to navigate and remain compliant. There are significant overlaps between the regulators. The committee recommends the Government undertake a focused assessment of the financial services landscape to identify where regulatory overlap can be eliminated.

• The committee heard repeatedly that a sense of 'uncertainty' is prevalent throughout the system. The interaction between the FCA and the Financial Ombudsman Service (FOS) through the consumer redress framework - specifically the tension between the FCA rules and the FOS's decision processes - was cited as a significant source of this regulatory uncertainty. The FCA and FOS must set out how they intend to address long-standing concerns with the redress framework and ensure that their views on regulatory requirements are consistent.

• The committee is concerned by the state of financial literacy across the UK, which it heard has resulted in chronically low levels of investment amongst UK consumers who instead hold their savings and wealth in cash and physical assets. A greater culture of investment in a range of appropriate financial products would increase returns for UK savers in the long-term, as well as deepen the UK's secondary capital markets. This requires unified action between the Government to improve financial education from school age and up, and the FCA to facilitate better support for consumers to manage their savings as well as work with universities and research organisations to develop new financial education programmes.

• The current set of metrics produced by the regulators is limited to operational issues and cannot in its current form be treated as a barometer for success in advancing the secondary objective. The Government must do more to commission academic research into how regulation can support growth.