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A House of Lords committee has warned that UK financial regulators may be undermining the country’s ambitions for economic growth due to a pervasive culture of risk aversion, uncertainty, and inefficiency.
In its report, Growing pains: clarity and culture change required, the House of Lords Financial Services Regulation Committee has noted that despite the introduction of a new secondary objective to promote growth and competitiveness, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) are being held back by an overly cautious approach to risk.
The report reveals the breadth of concern among stakeholders, including Monzo and TrueLayer, when it comes to compliance with regulatory regimes such as the Consumer Duty, as well as the UK’s progress with open banking.
Lord Forsyth of Drumlean, chair of the committee, criticised the “deeply entrenched” culture of risk aversion at the regulators, warning that it is “unnecessarily constraining firms”.
“These barriers are getting in the way of doing what these firms do best, which is competing, innovating and growing,” the former Conservative cabinet minister said.
“The UK’s financial and insurance services sector contributes over £200 billion to our economy, so its continued success is vital for the UK’s economic prospects,” he said.
“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.”
The ongoing compliance burden
The inquiry assessed the progress made since the Financial Services and Markets Act 2023 introduced the objective for both the FCA and the PRA.
It concluded that longstanding regulatory barriers continue to stifle innovation, deter new entrants into the market, and limit the sector’s contribution to the wider UK economy.
The committee highlighted that the compliance burden in the UK is widely perceived to be disproportionately high, with regulators lacking a clear understanding of the cumulative impact of their rules on firms.
It identified an absence of proportionality in how rules are applied, criticising, for example, the FCA’s failure to distinguish between wholesale and retail markets and the PRA’s approach to capital requirements.
“A key issue that witnesses told us inhibits the advancement of the secondary objective is the cost and complexity of operating within the UK’s regulatory system,” the report says.
“We heard that firms have to comply with disproportionately burdensome compliance requirements and navigate an excessively complex environment without sufficient support.”
For example, the report includes evidence that reporting requirements for certain sectors are felt to be more burdensome in the UK than in competing jurisdictions.
“In our private roundtable with insurers and reinsurers, one participant noted that their firm submitted 300 filings to UK regulators over one year, compared to 56 filings to regulators in another jurisdiction,” the report says.
“Another told us that their firm employed 78 compliance officers for the UK market compared to 73 for the other 40 countries in their European and Middle Eastern operations.”
Open banking delays ‘self-defeating’
The fintech industry features prominently in the report, and the Lords committee has singled out the now-defunct Joint Regulatory Oversight Committee (JROC), which was established to oversee open banking reforms, as a significant factor in delaying the launch of new products.
“The Committee recognises the importance of cross-regulator collaboration, but this must not delay the timely delivery of key reforms,” the report says.
According to the report, witnesses told the committee that overlapping regulatory mandates had created confusion and unnecessary delays, with organisations including Nationwide Building Society and TrueLayer describing the process as overly complex and inefficient.
The JROC, which was disbanded in 2024, was criticised for slowing progress on critical innovations such as variable recurring payments.
Rather than simplifying the regulatory environment, the UK was said to have relied on a patchwork of memoranda of understanding between regulators, adding to the complexity and slowing innovation.
The committee urged the government to learn from these failures and take steps to prevent regulatory overlap from stalling other critical reforms in future.
Consumer Duty causing uncertainty
Although the report is broadly supportive of the FCA’s Consumer Duty in principle, it says it been implemented in a way that created significant uncertainty for firms, particularly those already subject to robust regulatory obligations.
Firms including Monzo indicated that this uncertainty was contributing to a risk-averse culture, and industry groups such as UK Finance argued that the lack of clarity was deterring international investment in the UK.
Concerns were also raised about the potential for inconsistent rulings by the Financial Ombudsman Service (FOS), with firms warning that differing interpretations between the FCA and FOS risked undermining regulatory certainty and adding to compliance challenges.
Although the FCA has begun a review of its conduct rules to identify duplication and unnecessary complexity, the committee stressed the importance of this work being completed swiftly to reduce compliance burdens and provide greater clarity for firms.
Calls for cultural change
To address these challenges, the committee called on both the FCA and the PRA to embed internal cultural change, adopt a more proportionate and tailored approach to risk, and engage more closely with industry stakeholders to build transparency and trust.
It also urged the government to provide clearer strategic direction on how financial regulation should support the UK’s broader growth ambitions.
Alongside this, the committee recommended commissioning independent research to assess the UK’s regulatory competitiveness compared to other leading jurisdictions.
