House of Lords Report on the Regulators’ Secondary International Competitiveness and Growth Objective Flags Risk Aversion and Inefficiency

On 13 June 2025, the House of Lords Financial Services Regulation Committee (the Committee) published its report on the UK regulators’ secondary international competitiveness and growth objective (the Report).

The Report’s conclusions might come as no surprise to those operating in the insurance sector but, as highlighted below, the financial services regulators continue to face competing views of where their priorities should lie.

Key Findings

In the Report, the Committee takes aim at what is described as a regulatory culture “characterised by risk aversion driven by the repercussions of the global financial crisis and the conflicting pressures under which the regulators operate“, stating that the introduction of the secondary objective has brought into view a number of long standing issues which create frictions for regulated firms and risk constraining growth and reducing the attractiveness of investing in the UK.   The Report also notes that the secondary objective envisages more than the growth of the financial sector, namely that the regulators should facilitate growth in the wider economy, which is not something the Committee is convinced has been understood. 

Key findings, that are viewed as a potential hinderance to the aims of the secondary objective, include:

1. disproportionate capital requirements;
2. compliance burdens which are poorly understood by the regulators;
3. operational inefficiency;
4. a lack of certainty and predictability of regulatory requirements;
5. mission creep, where the regulators appear to have expanded the range of their activities into areas that are outside their core responsibilities; and
6. tensions between the Financial Ombudsman Service (FOS) and the FCA, including instances where the FOS has become a quasi-regulator, taking actions that have regulatory implications.

The Report also comments on the Consumer Duty, stating that the FCA’s implementation has created considerable uncertainty for firms, driven by a lack of clarity on the FCA’s expectations as to how firms should comply with the Consumer Duty, including which markets and customers it applies to.

The Report does acknowledge that some responsibility for the issues highlighted in the Report lies with the Government, noting that the regulators themselves are subject to a multitude of regulatory objectives and principles, which adds complexity to the policy and rulemaking process and slows down decision-making.

Committee Recommendations

To address the identified criticisms, the Committee makes a number of recommendations aimed at both the regulators and the Government, including that:

1. the Government should commission an independent study to assess the cumulative cost of compliance in the financial services sector relative to other international jurisdictions;
2. the Government must ensure that the number of objectives, regulatory principles and “have regards” placed on the regulators are not inflated to the point where the regulators are unable to balance their varying obligations;
3. the regulators should work with their respective cost benefit analysis panels to develop a rigorous approach to assessing the cumulative burden of compliance, accounting for monetary and resource demands;
4. the FCA must work at pace to remove redundant or duplicative rules and requirements to provide firms with the certainty and clarity they need to maximise the Consumer Duty’s benefits;
5. the regulators should work to reduce authorisation timelines, along with embedding a focus on consistent improvement of operational efficiency;
6. the regulators should review their operational processes and rule-making functions to explore how they might make better use of regulatory and supervisory technology; and
7. the FCA and the FOS should work together to ensure their views on regulatory requirements are consistent, with the FOS consulting the FCA on judgements that are likely to have sector-wide implications; and
8. the regulators should explore developing a formal secondment system to send supervisory staff out to regulated firms and bring employees from regulated firms in.

A fair analysis?

For many stakeholders in the financial services sector, the criticisms aimed at the regulators are unlikely to be new or novel.

In particular, the criticism of the FCA’s implementation of the Consumer Duty, its flagship policy in recent years, reflects the opinions of many regulated firms.

From an insurance sector perspective, we anticipate that many market participants will agree with the Report’s observations that there is work to be done on streamlining the regulatory burden, removing redundant guidance and overlapping rules, and clarifying the scope of retail protections as they relate to commercial customers.

Competitiveness as a secondary objective

Despite the criticisms in the Report being largely reflective of market sentiment towards the regulators, the current regulatory culture is a product of a time when the regulators were accused of being “asleep at the wheel” during the global financial crisis.

Furthermore, it should not be forgotten that the competitiveness objective is a secondary objective, and must be treated as such by the regulators. In addressing the recommendations in the Report, the regulators will need to play close attention to the interplay between their primary regulatory objectives and the wider push to improve the competitiveness of, and investment in, the financial services sector.

With this seemingly in mind, Nikhil Rathi, chief executive of the FCA, gave a speech on 26 June 2025 to the TheCityUK’s annual conference 2025. In his speech, Mr Rathi acknowledged the criticisms levelled at the regulators in the Report, and noted the accusation that excessive regulatory compliance and perceived lack of commercial nous is stifling growth and innovation.

However, Mr Rathi noted that being open to growth and competition needs to take place with a clear view of the risks and the need to safeguard market integrity and confidence.

Next steps

The Report calls on the FCA, PRA and Government to report further to the Committee within 12 months on how they have implemented the Committee’s recommendations, and on an ongoing basis.

In response to the Report, the FCA has stated that growth is at the heart of its 5-year strategy and that it is fully committed to supporting economic growth in the UK and the financial services sector. The FCA has recently been taking some tentative steps that reflect some of the issues highlighted in the report – this includes looking at the potential to streamline some of the Consumer Duty rules, retire outdated supervisory documents and pare back its insurance rule book. In its Secondary International Competitiveness and Growth Objective report 2024/25, published earlier this month, the FCA reflects on some of these initiatives and their potential to support the FCA’s aims in respect of the secondary objective.

The PRA has so far said that coming reforms around pay, authorisations, welcoming foreign firms, and cutting red tape are also designed with competitiveness and growth in mind for both the financial services sector and the wider economy.

From a Government perspective, the Chancellor’s Mansion House address on 15 July 2025 was accompanied by the announcement of a number of initiatives, including the publication of the Financial Services Growth and Competitiveness Strategy.  The Strategy is described as a “bold new vision for kickstarting growth in the financial services sector over the next ten years” and asserts that “the UK must now regulate not just for risk, but for growth“. The proposals in the strategy cover five areas of focus:

1. delivering a competitive regulatory environment;
2. harnessing the UK’s global leadership in financial services;
3. embracing innovation and leveraging the UK’s Fintech leadership; 
4. building a retail investment culture and delivering prosperity through UK capital markets; and
5. setting the UK’s financial services sector up with the skills and talent it needs.

In respect of delivering a competitive regulatory environment, the strategy sets out a number of reforms, including:

1. stripping away duplicative processes to enable the regulators to become more agile and responsive;
2. streamlining the Senior Managers and Certification Regime, to reduce the overall burden on firms by 50%;
3. addressing concerns about the application of the Consumer Duty to provide more certainty on its scope and application to wholesale firms; and
4. supporting faster and more efficient authorisations for new firms.

Specific consultations were published on a number of issues raised in the Report, including amendments to the SM&CR and significant changes to the operation of the Financial Ombudsman Service.  (See our article on the Mansion House announcements here)

Accordingly, it appears that the regulators and the Government are aligned in their drive to commit to the aims of the secondary objective. However, what remains to be seen is the regulators’ appetite for the scale of the changes that are recommended by the Report and whether they can strike the right balance between protecting customers and the stability of the market whilst being a driver of innovation and growth.