A culture of risk aversion and mission creep among UK financial regulators is undermining trust and placing costly burdens on banks and insurers, an influential group of parliamentarians found.
The House of Lords Financial Services Regulation Committee said officials need to clip the wings of the Financial Ombudsman Service, whose awards for motor finance claims have been so large foreign firms fear there is a “regulatory penalty attached to investing in the UK.”
The findings from lawmakers in Parliament’s upper house were published Friday in a report on the secondary growth and competitiveness objective that the government has given the Bank of England’s Prudential Regulation Authority and the Financial Conduct Authority.
Michael Forsyth, chair of the Lords committee, warned of a “disproportionately high cost of compliance” caused in part by overlapping remits between regulators. Reporting requirements are “more burdensome than in competing jurisdictions,” damaging the UK’s attractiveness as a financial center, the report added. “Culture change is required.”
“Throughout the evidence we received, there was a clear link made between the current regulatory culture characterized by risk aversion and its impact on the advancement of the secondary objective.” Forsyth said the UK compared unfavorably with Singapore and Ireland.
Britain’s Labour government is urging regulators, in finance and elsewhere, to simplify rules to make it easier for the private sector to grow. Chancellor of the Exchequer Rachel Reeves has told banks she is “open-minded” to their pleas for the ring fence that protects UK retail bank customers to be removed.
Effective Regulation
Both the FCA and the PRA are in the process of amending rules to roll back what the committee called “mission creep” into areas “outside their core responsibilities,” but Forsyth insisted the goal was not to deregulate.
“It’s not about deregulation, it’s about effective regulation,” he told Bloomberg. “Proportionate regulation does not equate to deregulation.” He said speed and clarity in decision making by regulators were important.
The FCA and the PRA said they are taking steps to reduce the regulatory burden and underpin growth. They will respond to the committee shortly.
“We agree it is vital that we support the UK’s growth,” a PRA spokesman said. “That is why we have already been working hard to embed the secondary competitiveness and growth objective throughout our organization, while recognizing that there cannot be sustainable growth without financial stability.”
An FCA spokesman said it has reduced “data requests, retired outdated supervisory documents, introduced a new private stock market, pared back our insurance rulebook and are working on redress reforms to give consumers and firms greater certainty.”
“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.”
Compensation Awards
One of the biggest concerns is the financial ombudsman, which oversees customer compensation. It has made large awards over motor finance loans that threaten to become the next consumer finance scandal. That has led to regulatory uncertainty and “created the perception of a regulatory penalty on investment in UK businesses,” the report said.
The committee said the ombudsman must be brought back under the control of the FCA, “in line with its original mandate, to provide swift redress rather than examining major, complex issues.” It “cannot continue to function as a quasi-regulator,” the report said.
Lawmakers were skeptical about whether a secondary remit to deliver economic growth is a plausible goal. “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,” it said.
“Regulation alone cannot generate economic growth, rather, the government, the regulators, and industry must be aligned in their approach to improve the provision of finance for UK businesses and productive assets.”
Photograph: Commuters pass the Bank of England, left, and the Royal Exchange, as they make their way to work in London, UK, on Monday, June 2, 2025. Photo credit: Jason Alden/Bloomberg
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