The Treasury Committee today warns against the danger of the
lessons of the financial crisis being forgotten as memories of
the crash fade.
In a new report on the Future of Financial Services Regulation,
the Committee outlines that, while there are real opportunities
to improve competitiveness through regulatory reform,
competitiveness should not become a primary objective of
financial regulators, and it warns against any inappropriate
weakening of the UK’s strong regulatory standards.
In the report, the cross-party Committee of MPs reaffirms its
commitment to regulatory independence, and warns it will remain
alert for any evidence that regulators are coming under undue
pressure from the Treasury to inappropriately weaken standards.
The Committee wants to see the regulators take the importance of
growing the economy into account and recommends that the
Financial Conduct Authority (FCA) and the Prudential Regulation
Authority (PRA) should each be given a secondary objective to
promote long-term economic growth. This objective should reflect
the ways in which financial services facilitate economic growth
by providing capital, credit and insurance to firms outside of
the financial services sector.
While regulators should not be carrying out social policy, or
filling the gaps where the Government ought to be stepping in,
the Committee recommends that the FCA should have regard for
financial inclusion in its rule-making. The FCA should also
consider how to improve its engagement with the poorest
consumers, and seek data on the issues vulnerable consumers
experience directly.
The Committee recommends that the PRA consider what more can be
done to level the playing field between smaller banks and
insurers, and larger firms which model their own capital
requirements. It is the Committee’s view that this could
strengthen competition.
The Committee also encourages the FCA to investigate whether
there are opportunities for larger firms to be more experimental
with innovative products, for example by setting aside additional
capital to compensate consumers if new products turn out not to
benefit consumers as anticipated. While this would not be without
risks, it is an example of the bold approach which the FCA should
be prepared to consider.
Chair's comments
Commenting on the report, Rt. Hon. MP, Chair of the Treasury Committee, said:
"The financial services sector is at a turning point, with
regulators taking on new powers following the UK’s exit from the
EU. While it is vital that regulators are not leant on to
inappropriately water down regulations, and the Committee will
remain vigilant in this area, there are likely to be real
opportunities to lessen regulatory burdens without weakening
standards.
It is also important that the regulators have an objective to
promote growth, not just for the financial services sector, but
for the wider economy.”
Summary of the report’s conclusions and
recommendations:Our views on the future overall
direction of financial services regulation
- Given the UK has historically exercised significant influence
in the framing of EU regulations, Brexit should not in itself be
the cause of instant or dramatic changes to financial services
regulation in the UK. Nevertheless, there will be opportunities
to tailor inherited EU regulations to the UK market, and to seek
opportunities for simplification, while being mindful of
continued compliance with global standards.
- The Treasury should respect the principle of regulatory
independence, and must not pressure the regulators to weaken or
water down regulatory standards, or to accept changes to the
regulatory framework which could impede the regulators' ability
to achieve their primary objectives.
- We will remain alert for any evidence that regulators are
coming under undue pressure from the Treasury to inappropriately
weaken regulatory standards.
Regulators' objectives
- There should be a secondary objective for the FCA and the PRA
to promote long-term economic growth. The wording will be
crucial: pursuing international competitiveness in the short term
is unlikely to lead to economic growth or international
competitiveness in the long term if it is achieved by weakening
the UK's strong regulatory standards. Weakening standards could
reduce the financial resilience of the UK's financial system and
undermine international confidence in that system and the firms
within it.
- In designing the new secondary objective, there should also
be some consideration for the ways in which financial services
serve the 'real economy'. Financial services can help deliver
economic growth by facilitating economic growth by providing
capital, credit, insurance and other services to firms in the
'real economy'.
- The Treasury should continue to reject any calls for a growth
and/or competitiveness objective to become a primary objective.
This would increase any pressure on regulators to trade off
competitiveness against resilience, and would undermine the
regulators' ability to deliver on their core functions. There is
a danger that as memories of the financial crisis fade, its
lessons are forgotten.
Financial inclusion
- Regulations made by the FCA, and the manner in which it
supervises and enforces those regulations, could have a
significant impact on financial inclusion. However, a primary
role of the FCA should not be to carry out social policy, or to
fill the gaps where it is Government that ought to be stepping in
and addressing these issues.
- When placing new requirements on firms, the FCA should
consider not only the impact on consumers and businesses, but
also the impact on those who might be prevented from accessing
financial services as a result of those new requirements, or who
might find themselves accessing services on inferior terms. The
Treasury should require the FCA to have regard for financial
inclusion in its rule-making.
- The FCA should provide an annual report to Parliament on the
state of financial inclusion in the UK.
Regulatory independence
- Regulatory independence is critical for the competitiveness
and effectiveness of UK financial services regulation. The host
of new accountability mechanisms proposed by the Treasury must be
carefully reviewed in this light, to ensure that regulatory
independence is not compromised.
- The information the FCA has made available on how it is
performing against its service standards shows a deteriorating
picture. The FCA has a reputation for being too slow in its
authorisation work. When the FCA publishes its next update on the
service standards it should write to the Committee, outlining
areas where it is not meeting its statutory and voluntary
timelines, and setting out its strategy for closing any
gaps.
Consumer representation
- The FCA should consider how to improve its engagement with
the poorest consumers, and must seek data on the issues
vulnerable consumers experience directly.
Capital requirements
- The PRA should consider where there is more that can be done
to reduce the advantages from which large banks and insurers
benefit through modelling their own capital requirements. The
purpose of doing so would be not only to strengthen competition
by reducing the barriers faced by smaller or newer firms, but
also to assess whether firms modelling their own capital
requirements are truly reflecting the levels of risk
involved.
Innovation
- The FCA should investigate whether there are opportunities to
enable larger firms to undertake controlled, supervised
experiments with innovative products. For example, allowing firms
to be more experimental with the designs of new products by
setting aside additional capital to compensate consumers if new
products turn out not to benefit consumers as anticipated. This
approach would not be without risks, but it is an example of the
type of bold approach which the FCA should be prepared to
consider.
