Call to address regulation overload

The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) are under fire in a new report from the House of Lords for encouraging a deeply-entrenched “culture of risk aversion”, while both have been subject to “mission creep”, with the result that the burden of compliance in the UK is “disproportionately high”, to the detriment of growth in the UK economy.

The report says regulators do not have a clear understanding of the cumulative burden of regulation, noting: “The FCA does not do enough to distinguish between firms that cater to wholesale and retail markets in its regulation and supervision which, again, imposes unnecessary burdens and frictions on firms. These issues have fuelled an increase in bureaucracy and imposed significant monetary and resource demands on firms.”

The House of Lords Financial Services Regulation committee looked at how regulators are responding to the secondary international competitiveness and growth objective handed to them under the Financial Services and Markets Act 2023. Those giving evidence included Stephen Haddrill, director general of the FLA, along with the chief executives of a number of banks active in the asset finance sector, including Santander, Allica, and Paragon.

The committee says their evidence indicated the “regulatory environment is overly complex and that many find it challenging to navigate and remain compliant”, particularly as there are significant overlaps between the regulators, leading to duplicated compliance requirements.

FOS slammed as “quasi regulator”

Of particular note to auto finance lenders, many of whom are awaiting details of any mis-selling redress scheme pending the outcome of the Supreme Court appeal, the report states: “We heard repeatedly that a sense of ‘uncertainty’ is prevalent throughout the system. The interaction between the FCA and the Financial Ombudsman Service (FOS) through the consumer redress framework—specifically the tension between the FCA rules and the FOS’s decision processes—was cited as a significant source of this regulatory uncertainty.”

There is strong criticism of FOS, which is described as developing into a “quasi regulator” as its actions have regulatory impacts by creating precedents that the FCA requires firms to follow.

The report argues that “The responsibility for issuing binding rules and guidance lies with the FCA. The lack of alignment between the FOS and the FCA generates an unacceptable level of uncertainty for firms, stakeholders, and investors.”

As a result, there is currently no guarantee that that compliance with regulations and the law will be sufficient to avoid mass redress events, which the report suggests are also being fuelled, in part, by the role of claims management companies in submitting large volumes of spurious or meritless claims to firms and the FOS.

The report also flags failures by the FCA to clarify how firms should comply with the Consumer Duty, including which markets and customers it applies to, as contributing to this  uncertainty for firms, which it says amounts to a “regulatory penalty” and is deterring investment in the UK.

“Having examined this issue from a competitiveness and growth perspective, their findings add yet more weight to the call for fundamental change on how the FOS operates.”  

Recommendations for reform

Among its recommendations, the 141-page report calls for the precedent-setting effect of FOS decisions to be reviewed, with a view to removing it entirely, particularly for mass redress events, and states:  “We stress that the FOS’s remit must be brought closer 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.”

It adds: “The FOS and the FCA’s review of the redress system must result in clear actions setting out how they will ensure that there is a consistent interpretation of regulatory requirements associated with the Consumer Duty.”

Overall, the committee wants to see government giving regulators clearer direction on how they are to act in order to support their growth in the economy, and it also wants the government to commission an independent study to assess the cumulative cost of compliance in the financial services sector relative to other international jurisdictions.

“This report is a welcome sign that the tide may be about to turn, and it is notable for highlighting the inconsistency and confusion which currently surrounds the interplay between FCA regulations – which firms must follow – and FOS decision-making in individual cases of grievance.

“But recognising the challenges of over-regulation is one thing. The government must take action, and regulators must heed the demands for a simpler, more supportive regime that does away with unnecessary compliance burdens.  At AFC we will continue to work with our community to ensure good outcomes for us all – regulators, consumers and businesses.”