Treasury Committee urges Government to remember lessons of financial crisis in report on Future of Financial Services Regulation

16 June 2022

The Treasury Committee today warns against the danger of the lessons of the financial crisis being forgotten as memories of the crash fade.

In a new report on the Future of Financial Services Regulation, the Committee outlines that, while there are real opportunities to improve competitiveness through regulatory reform, competitiveness should not become a primary objective of financial regulators, and it warns against any inappropriate weakening of the UK’s strong regulatory standards.

In the report, the cross-party Committee of MPs reaffirms its commitment to regulatory independence, and warns it will remain alert for any evidence that regulators are coming under undue pressure from the Treasury to inappropriately weaken standards.

The Committee wants to see the regulators take the importance of growing the economy into account and recommends that the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) should each be given a secondary objective to promote long-term economic growth. This objective should reflect the ways in which financial services facilitate economic growth by providing capital, credit and insurance to firms outside of the financial services sector.

While regulators should not be carrying out social policy, or filling the gaps where the Government ought to be stepping in, the Committee recommends that the FCA should have regard for financial inclusion in its rule-making. The FCA should also consider how to improve its engagement with the poorest consumers, and seek data on the issues vulnerable consumers experience directly.

The Committee recommends that the PRA consider what more can be done to level the playing field between smaller banks and insurers, and larger firms which model their own capital requirements. It is the Committee’s view that this could strengthen competition.

The Committee also encourages the FCA to investigate whether there are opportunities for larger firms to be more experimental with innovative products, for example by setting aside additional capital to compensate consumers if new products turn out not to benefit consumers as anticipated. While this would not be without risks, it is an example of the bold approach which the FCA should be prepared to consider.

Chair's comments

Commenting on the report, Rt. Hon. Mel Stride MP, Chair of the Treasury Committee, said:

"The financial services sector is at a turning point, with regulators taking on new powers following the UK’s exit from the EU. While it is vital that regulators are not leant on to inappropriately water down regulations, and the Committee will remain vigilant in this area, there are likely to be real opportunities to lessen regulatory burdens without weakening standards.

It is also important that the regulators have an objective to promote growth, not just for the financial services sector, but for the wider economy.”

Summary of the report’s conclusions and recommendations:

Our views on the future overall direction of financial services regulation

Given the UK has historically exercised significant influence in the framing of EU regulations, Brexit should not in itself be the cause of instant or dramatic changes to financial services regulation in the UK. Nevertheless, there will be opportunities to tailor inherited EU regulations to the UK market, and to seek opportunities for simplification, while being mindful of continued compliance with global standards.
The Treasury should respect the principle of regulatory independence, and must not pressure the regulators to weaken or water down regulatory standards, or to accept changes to the regulatory framework which could impede the regulators' ability to achieve their primary objectives.
We will remain alert for any evidence that regulators are coming under undue pressure from the Treasury to inappropriately weaken regulatory standards.

Regulators' objectives

There should be a secondary objective for the FCA and the PRA to promote long-term economic growth. The wording will be crucial: pursuing international competitiveness in the short term is unlikely to lead to economic growth or international competitiveness in the long term if it is achieved by weakening the UK's strong regulatory standards. Weakening standards could reduce the financial resilience of the UK's financial system and undermine international confidence in that system and the firms within it.
In designing the new secondary objective, there should also be some consideration for the ways in which financial services serve the 'real economy'. Financial services can help deliver economic growth by facilitating economic growth by providing capital, credit, insurance and other services to firms in the 'real economy'.
The Treasury should continue to reject any calls for a growth and/or competitiveness objective to become a primary objective. This would increase any pressure on regulators to trade off competitiveness against resilience, and would undermine the regulators' ability to deliver on their core functions. There is a danger that as memories of the financial crisis fade, its lessons are forgotten.

Financial inclusion

Regulations made by the FCA, and the manner in which it supervises and enforces those regulations, could have a significant impact on financial inclusion. However, a primary role of the FCA should not be to carry out social policy, or to fill the gaps where it is Government that ought to be stepping in and addressing these issues.
When placing new requirements on firms, the FCA should consider not only the impact on consumers and businesses, but also the impact on those who might be prevented from accessing financial services as a result of those new requirements, or who might find themselves accessing services on inferior terms. The Treasury should require the FCA to have regard for financial inclusion in its rule-making.
The FCA should provide an annual report to Parliament on the state of financial inclusion in the UK.

Regulatory independence

Regulatory independence is critical for the competitiveness and effectiveness of UK financial services regulation. The host of new accountability mechanisms proposed by the Treasury must be carefully reviewed in this light, to ensure that regulatory independence is not compromised.
The information the FCA has made available on how it is performing against its service standards shows a deteriorating picture. The FCA has a reputation for being too slow in its authorisation work. When the FCA publishes its next update on the service standards it should write to the Committee, outlining areas where it is not meeting its statutory and voluntary timelines, and setting out its strategy for closing any gaps.

Consumer representation

The FCA should consider how to improve its engagement with the poorest consumers, and must seek data on the issues vulnerable consumers experience directly.

Capital requirements

The PRA should consider where there is more that can be done to reduce the advantages from which large banks and insurers benefit through modelling their own capital requirements. The purpose of doing so would be not only to strengthen competition by reducing the barriers faced by smaller or newer firms, but also to assess whether firms modelling their own capital requirements are truly reflecting the levels of risk involved.

Innovation

The FCA should investigate whether there are opportunities to enable larger firms to undertake controlled, supervised experiments with innovative products. For example, allowing firms to be more experimental with the designs of new products by setting aside additional capital to compensate consumers if new products turn out not to benefit consumers as anticipated. This approach would not be without risks, but it is an example of the type of bold approach which the FCA should be prepared to consider.

Further information

Image: Pexels