A “deeply entrenched” culture of risk aversion among regulators is holding back firms, a new report from the House of Lords has found.
The Financial Services Regulation Committee said the Financial Conduct Authority and Prudential Regulation Authority need to drive cultural change throughout their organisations, introducing a more tailored and proportional approach to the risks posed by regulated firms.
The report ‘Growing pains: clarity and culture change required’ found that firms’ ability to grow and compete is being held back by pervasive risk aversion, regulatory uncertainty and inefficiency in the regulatory system.
It warned that the burden of compliance in the UK is perceived to be disproportionately high and stressed that the regulators do not have a clear understanding of the cumulative burden of regulation on financial services firms.
Lord Forsyth of Drumlean, chairman 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 Financial Ombudsman Service’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 report identified a lack of proportionality in the regulators’ approach, such as the FCA failing to sufficiently distinguish between wholesale and retail markets and the PRA’s approach to capital requirements.
It also emphasised that regulatory uncertainty regarding the interpretation of the Consumer Duty and the interaction between the FCA’s rules and the Financial Ombudsman Service’s (FOS) decision processes may reduce the attractiveness of investing in the UK. It has called on the regulators to clarify guidance on the implementation of the Consumer Duty and set out how the FCA and FOS intend to address long-standing concerns with the redress framework, as well as prioritise the delivery of the Advice Guidance Boundary Review to give UK consumers more support to save and invest.
In addition, the Committee has urged the Government to identify where regulatory overlap can be eliminated, as well as commission a study to assess the cumulative cost of compliance in the financial services sector relative to other international jurisdictions and carry out further academic research into how regulation can support growth.
Lord Forsyth of Drumlean added: “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.”
Main image: -jr-korpa-9XngoIpxcEo-unsplash
