The UK’s House of Lords Financial Regulation Committee has warned the country’s regulators to abandon their risk-based approach in order to achieve objectives such as international competitiveness and economic growth.

In a 148-page report published on Friday, the Committee says it has examined the progress made by the FCA and the Prudential Regulatory Authority (PRA) towards achieving the above objectives.

The Committee says it has observed “long-standing issues that limit or introduce unnecessary frictions to financial services firms’ ability to grow, innovate, and compete and that discourage new entrants both domestic and foreign. We are not convinced that the link between financial services regulation and growth in the wider economy has yet been sufficiently understood or rigorously evidenced.”

The report has also called for an aligned approach by the Government, regulators as well as industry “to improve the provision of finance for UK businesses and productive assets.”

One of the key hurdles, according to the report, is that the UK’s overall regulatory environment is characterized by a desire to avert risk at any cost, an approach which it believes is a by-product of the 2008 Global Financial Crisis.

The report warns that such an approach, if left unchanged, “risks further undermining levels of trust between the regulators and industry.”

To make things better, the FCA and the PRA have been advised to adopt a culture which is “based on efficiency, proportionality, and an appropriate degree of flexibility and trust.”

Main issues

The Committee has highlighted a number of issues which it believes is affecting the UK financial markets’ global attraction and its ability to compete globally. Some of these issues include:

• A disproportionate compliance burden is put on the industry by the FCA and the PRA, such as unnecessary reporting requests.
• A so-called ‘mission creep’ means UK regulators are intervening in businesses outside their jurisdiction.
• The FCA’s current regulation and supervision does not distinguish between firms that cater for wholesale and retail markets.
• Too much bureaucracy has imposed significant monetary and resource demands on firms.
• Regulators do not have a clear understanding of the cumulative burden of regulation.
• The regulatory environment is overly complex and challenging to navigate for firms.
• Overlap between regulators delays business and firms face duplicated compliance requirements.
• The authorization process remains slow, and it affects the ability of UK firms to introduce new products to the market.
• There is a general sense of uncertainty around certain topics. For example the FCA has not properly explained how firms can comply with Consumer Duty.
• The Government is not helping the situation by putting extra demands on the regulators, which then trickle down onto the industry.

Recommendations

The parliamentary Committee has also made a number of recommendations, both to the Government and the regulators, to improve the current regulatory environment. They include:

• Establishment of a commission by the Government to do a cost-benefit analysis of compliance for firms.
• Regulators must also keep costs and resources in mind when assessing the regulatory burden on firms.
• Government should carry out an assessment to identify and eliminate regulatory overlap.
• Regulators should reduce authorization times and improve operational efficiency. Government should oversee the progress.
• Regulators must make better use of regulatory and supervisory technology to streamline compliance processes.
• Regulators and the industry should exchange staff visits so that each one better understands how the other works.
• FCA’s and FOS’s views on regulatory requirements must be consistent when reforming redress scheme.
• The FCA must remove redundant and duplicative rules around Consumer Duty.
• The PRA could consider a more proportionate and tailored approach when applying the Basel Framework.
• The FCA and Treasury should work to improve financial literacy in the population.
• Secondary objective metrics should be reviewed and revised.
• Treasury and regulators should discuss how performance can be measured against global competitors.
• Government and regulators should work towards enabling informed and responsible risk-taking.
• UK regulators should look at and learn from international counterparts such as the Monetary Authority of Singapore (MAS) in order to address some of the key issues highlighted in the Committee’s report.