Context
In its report, ‘Growing pains: clarity and culture change required’, the Financial Services Regulation Committee highlights that the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA)’s secondary international competitiveness and growth objective is being held back by pervasive risk aversion, regulatory uncertainty, and inefficiency in the regulatory system. The details of the oral evidence sessions in January and February are also available online.
The report’s headline message is that a “culture of risk aversion among financial regulators undermines their competitiveness and growth objective”.
The report contains key messages for Government and for the regulators, and seems to be criticising what some would see (and what Governments and Regulators have called for in the past following financial crises) as responsible risk-aversion, a desire for consumer protection and appropriate friction to deter bad actors from entering the UK financial services marketplace. In essence, the FSRC, currently, has a different opinion to the Regulators on an appropriate ‘risk vs. reward’ balance.
Key points to note and next actions
The Committee calls on the regulators to:
- 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 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 calls on the 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 ensure they are in line 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 has put out quite a brusque response setting out what it is doing already to support economic growth, and comments that “We’ll carefully consider the Lords Financial Services Regulation committee’s recommendations and look forward to responding.”