House of Lords Committee finds the FCA and PRA have a ‘deeply entrenched culture of risk aversion’

The burden of compliance in the UK is perceived to be disproportionately high and negatively impacting the growth of the sector. 

There has been a significant degree of ‘mission creep’ with both regulators expanding the range of business activities they regulate.

The regulatory landscape is characterised by complexity and regulatory overlap which makes it challenging for firms to navigate and remain compliant. In particular, this regulatory overlap has delayed the implementation of Open Banking reform, which has impeded innovation for firms to develop new products.

The Government should undertake a focused assessment of the financial services landscape to identify where regulatory overlap can be eliminated.

Firms continue to raise concerns about authorisation timescales, which are reported to be slower than those of regulators in competing jurisdictions, impacting the UK’s international competitiveness.

The FCA and PRA must be more transparent with how they report on the timescales involved in authorisations, including when they ‘stop’ the clock’. The Government should review the statutory operating service metrics for the FCA and PRA to ensure they are in line with comparative jurisdictions.

The FCA and the PRA must review their operational processes and rule-making functions to explore how they might make better use of regulatory and supervisory technology.

The FCA and PRA should work together to develop a proposal for a ‘concierge service’ in the UK, as part of broader efforts to instil a culture based on efficiency and an appropriate degree of flexibility.

The FCA and PRA should explore developing a formal secondment system to both send supervisory staff out to regulated firms, and to bring employees from regulated firms in, to help improve staff understanding.

The FCA does not do enough to distinguish between firms that cater to wholesale and retail markets, imposing unnecessary burdens and frictions on firms that could constrain their ability to grow. Thresholds can constitute ‘cliff edges’, arresting the growth of smaller firms. .

Regulatory uncertainty is prevalent throughout the system and has created the perception of a regulatory penalty on investment in UK businesses. 

Firms have no confidence that compliance with law and regulations will be sufficient to avoid mass redress events. In particular, the Financial Ombudsman Service (FOS) has evolved into a quasi-regulator as its actions have created regulatory precedents that the FCA requires firms to follow. 

Any reform to the redress framework should be focused on ensuring that the FCA’s and FOS’s views on regulatory requirements are consistent. 

The Committee believes the following actions should be prioritised:

• The FCA is consulted on judgments that are likely to have sector-wide implications and the FCA should review its DISP rules to enable the FOS to pause its timescales while it awaits FCA input on interpretation of its rules and guidance.
   
• The precedent-setting effect of FOS decisions should be reviewed with a view to removing it entirely, particularly for mass redress events.
   
• The FOS’s remit must be brought closer in line with its original mandate, to provide swift redress, rather than examining major, complex issues.

The FOS and the FCA’s review of the Handbook following the introduction of the Duty  must result in clear actions to ensure there is a consistent interpretation of the Consumer Duty and identify where further clarification of its expectations around implementation is needed.

The PRA should consider whether it is appropriate to apply the Basel Framework to all UK domestic lenders or whether a more proportionate and tailored approach could be applied to determining capital requirements for lenders who are not internationally active.

The Government should work with 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.

The Government must do more to improve financial education, and the FCA must do more to make available the support UK consumers need in managing their savings.

The FCA must allocate resource to prioritise the delivery of the Advice Guidance Boundary Review to give UK consumers more support to save and invest.

The Government should introduce 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.  The Government should also do more to commission academic research into how regulation can support growth.

The Government should provide parameters and clear direction to the regulators, including through the use of benchmarks.