A recent report from the House of Lords Financial Services Regulation Committee has raised serious concerns about the current state of financial regulation in the UK. The committee found that a culture of risk aversion and "mission creep" among regulators is eroding trust and imposing heavy burdens on banks and insurers.
The report, published on Friday, highlights the need for regulators, particularly the Financial Ombudsman Service, to be reined in. The committee noted that the Ombudsman has issued large compensation awards for motor finance claims, which are deterring foreign investment in the UK. Michael Forsyth, the chair of the committee, emphasized that the excessive costs of compliance are partly due to overlapping responsibilities among regulators, making the regulatory environment more burdensome than in other countries like Singapore and Ireland.
The UK government, led by Labour, is pushing for simpler rules to help the private sector grow. Chancellor Rachel Reeves has indicated a willingness to consider requests from banks to remove the protective ring fence around retail banking.
Both the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) are working to amend rules that have expanded beyond their main responsibilities. Forsyth clarified that this is not about reducing regulations but about making them more effective. He stressed the importance of quick and clear decision-making from regulators.
In response to the committee’s findings, the FCA and PRA stated that they are taking steps to lower the regulatory burden and support growth. They acknowledge the necessity of balancing growth with financial stability.
However, the report raised specific concerns about the Financial Ombudsman. It called for the Ombudsman to be brought back under the FCA’s control to focus on swift resolutions rather than handling complex issues. The committee expressed skepticism about whether the goal of promoting economic growth through financial regulation is realistic, arguing that there needs to be better alignment among the government, regulators, and the industry to enhance financial support for UK businesses.
The findings reflect a growing urgency to reform the UK’s financial regulatory framework to maintain its competitiveness and appeal as a financial hub.