The Financial Conduct Authority (FCA) is facing calls for reform following a report from the House of Lords financial services regulation committee.
Under the Financial Services and Markets Act 2023, the FCA was handed a secondary objective to promote international competitiveness and economic growth.
However, the cross-party group has accused both the FCA and Prudential Regulation Authority (PRA) of clinging to a culture of risk aversion that is stifling innovation and undermining the UK’s ambition to remain a leading global financial hub.
The committee said there has been “minimal” progress from the FCA on the delivery of the new mandate, while the report identifies a series of structural and culture problems, including a one-size-fits-all approach to regulation that fails to distinguish between wholesale and retail markets, thus creating an unnecessary compliance burden on firms.
Committee members repeatedly heard that “uncertainty” is prevalent throughout the system. For example, the interaction between the FCA and the Financial Ombudsman Service (FOS) through the consumer redress framework was cited as a significant source of regulatory uncertainty.
Action to resolve the tension between the FCA regulations and the FOS’s decision processes is “long overdue”, according to the report.
“The FCA’s and FOS’s response to their joint call for input to modernise the redress system and the government’s review of the FOS must both result in minimising, if not eliminating entirely, the current uncertainty and unpredictability caused by the FOS’s powers and discretion,” it said.
In addition, the committee pointed to excessive regulatory correspondence, with the Nationwide Building Society receiving over 4,500 direct contacts from the regulators in 2024 alone.
Firms also informed the committee that the cost and complexity of complying with UK regulations is increasingly becoming a deterrent to doing business in the country.
Committee chair Lord Forsyth of Drumlean said the FCA needs a cultural reset. “The deeply entrenched culture of risk aversion and the high cost of compliance are among the regulatory barriers that are unnecessarily constraining firms,” he said.
“These barriers are getting in the way of doing what these firms do best, which is competing, innovating and growing.”
The report calls for the FCA to adopt a more tailored, transparent and proportionate regulatory approach, urging the government to commission an independent review of the cumulative cost of regulation.
“The UK’s financial and insurance services sector contributes over £200bn to our economy, so it’s continued success is vital for the UK’s economic prospects,” said Forsyth.
“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.”
A spokesperson for the FCA said: “We are fully committed to supporting economic growth in the UK and a thriving financial services sector. That's why we have made it easier for companies to list, supported greater home ownership, set out a roadmap for crypto regulation, and are reimagining financial advice and guidance to boost investments.
They said the FCA has begun stripping out data requests, retired “outdated” supervisory documents, introduced a new private stock market, pared back its insurance rulebook and are working on redress reforms.
"We have put growth at the heart of our five-year strategy, set out a vision for more informed risk-taking and committed to being more predictable and proportionate.
"We agree there is more to do to understand the role of regulation in unlocking growth in the wider economy and that's why we have commissioned research on this topic.”
A spokesperson for the PRA said: “We agree that it is vital that we support the UK’s growth. That is why we have already been working hard to embed the secondary competitiveness and growth objective throughout our organisation, whilst recognising that there cannot be sustainable growth without financial stability.
“That work is reflected in major reforms such as Solvency UK and removing the banker bonus cap. Upcoming reforms around pay, authorisations, welcoming foreign firms and cutting red tape are also designed with competitiveness and growth in mind for both the financial sector and wider economy.”