The London Market Group (LMG) has commended the House of Lords Financial Services Regulation Committee for its newly published report, which examines how UK regulators are implementing the secondary growth and competitiveness objective introduced by the Financial Services and Markets Act 2023.
A House of Lords committee has issued a sharp critique of the UK’s financial regulatory framework, warning that excessive risk aversion and an expanding remit among watchdogs are eroding trust and deterring investment - particularly from international insurers and banks.
In a report published on Friday, the Financial Services Regulation Committee of the House of Lords said that reforms are needed to reduce the burden and cost of compliance, which it argued is increasingly out of step with global financial centres such as Ireland and Singapore.
One of the committee’s central concerns is the expanding role of the Financial Ombudsman Service (FOS), which it said is issuing such large awards - especially in relation to motor finance complaints - that overseas firms now view the UK as a risky regulatory environment.
The committee’s findings focus on the secondary objective of promoting growth and competitiveness, a mandate recently given to both the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) by the government.
Michael Forsyth, chair of the Lords committee, said overlapping mandates between regulators and slow decision-making are contributing to a "disproportionately high cost of compliance" for firms operating in the UK. “Culture change is required,” the report concluded.
“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. He added that the UK compares poorly with more agile regulatory systems such as those in Singapore and Ireland.
As part of its economic strategy, the Labour government is urging regulators to streamline rules and remove growth barriers. Chancellor Rachel Reeves has told banks she is “open-minded” about potentially scrapping the retail ring-fencing rules that separate consumer banking from riskier investment activities.
Both the PRA and FCA are already making adjustments to address what the committee described as “mission creep” - the gradual shift beyond their statutory responsibilities. However, Forsyth stressed that the goal is smarter regulation, not a complete rollback of oversight.
“It’s not about deregulation, it’s about effective regulation,” Forsyth told Bloomberg. “Proportionate regulation does not equate to deregulation.”
The PRA acknowledged the importance of aligning regulatory efforts with the UK’s economic growth agenda. “We agree it is vital that we support the UK’s growth,” a spokesperson 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.”
The FCA, for its part, pointed to recent efforts to cut back on bureaucracy and increase efficiency. A spokesperson noted the regulator has reduced data reporting requirements, removed outdated supervisory materials, created a private market framework for securities, simplified insurance regulations, and is advancing reforms aimed at clarifying redress processes for firms and consumers.
“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,” the FCA spokesperson said.
A major focus of the committee’s report is the Financial Ombudsman Service, which it said has drifted beyond its intended role as a provider of rapid consumer redress. In particular, large compensation payouts related to motor finance loans risk becoming the next major mis-selling scandal.
The committee warned that the FOS has started operating like a quasi-regulator, creating legal uncertainty and, in turn, discouraging foreign investment. It called for the ombudsman to be brought back firmly under the FCA’s oversight, in line with its original remit.
“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,” the report stated. “It cannot continue to function as a quasi-regulator.”
While the report acknowledged the importance of linking financial regulation with wider economic outcomes, it expressed doubt about whether the current approach can realistically deliver that objective.
“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,” the committee noted.
The report concluded that long-term economic growth cannot come from regulatory tweaks alone. “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.”
Caroline Wagstaff, CEO of the LMG, praised the report’s focus on creating a more tailored and proportionate regulatory framework. “For the UK’s financial services sector to compete and thrive on the global stage, we need a more tailored and proportionate approach to regulation,” Wagstaff stated. “So, it is very pleasing to see this theme as a golden thread running through this important report.”
The Committee’s findings reflect months of evidence gathering and propose practical steps for regulators to adapt their operations and culture to support long-term growth and global competitiveness. While regulators have made initial efforts to respond to the new objective, the report stresses that further action is needed to ensure tangible progress.
LMG, which has consistently called for measurable reform, strongly supports the Committee’s call for H.M. Treasury to implement outcome-based growth metrics. Wagstaff emphasised that “metrics and measurement” are “critical to understanding whether change is being delivered and having an impact.”
The report also recommends increased transparency in how regulators report performance and calls for a reassessment of statutory operating metrics. In addition, it urges an independent study to evaluate the cumulative cost of regulatory compliance in the UK compared with other international markets.
“Our members have for a long time highlighted the cumulative burden of regulation, so the recommendation of an independent study to assess the cost of compliance relative to other international jurisdictions is very welcome,” Wagstaff noted. “Businesses have choices about where they put capital and people, and understanding of relative costs is critical.”
The LMG expressed particular support for the Committee’s intention to maintain ongoing scrutiny of regulators throughout the current Parliament. Wagstaff noted, “Making sure the UK regulatory environment is both robust and supportive is always going to be a work in progress and, as the Committee has rightly said, requires a culture of continuous improvement.”
The Lords Committee’s report is expected to influence future debate on how the UK can better balance regulatory stability with the need to foster a dynamic and competitive financial sector.
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