Financial Services Regulation Committee report on the secondary international competitiveness and growth objective

Approximate read time: 16 minutes

1. Background

In the UK, financial services are regulated by operationally independent organisations. The two principal regulators are the Financial Conduct Authority (FCA) and the Bank of England’s Prudential Regulation Authority (PRA), each with separate and independent statutory mandates.^[1] The Financial Services and Markets Act 2000 sets out the statutory objectives of these organisations. The primary strategic objective of the FCA is to ensure “that the relevant markets function well”.^[2] The PRA has two primary objectives: the general objective of “promoting the safety and soundness of PRA-authorised persons” and an insurance objective of “contributing to the securing of an appropriate degree of protection for those who are or may become policyholders”.^[3]

The Financial Services and Markets Act 2023 introduced a new secondary international competitiveness and growth objective for both the FCA and PRA. This is given in section 25(3) as follows:

The competitiveness and growth objective is: facilitating, subject to aligning with relevant international standards—

(a) the international competitiveness of the economy of the United Kingdom (including in particular the financial services sector), and

(b) its growth in the medium to long term.

The FCA and PRA both published reports one and two years after the act came into force which set out how they have implemented their new secondary objective, as required by the 2023 act.^[4]

2. Financial Services Regulation Committee report

On 8 May 2024, the House of Lords Financial Services Regulation Committee launched an inquiry to examine the progress made on the FCA and PRA’s secondary competitiveness and growth objective. The committee published its inquiry report ‘Growing pains: Clarity and culture change required’ on 13 June 2025.

The committee concluded that “the secondary objective has proved a valuable stimulus for the regulators to increase their focus on the impact of their activities on growth and international competitiveness within the sector”.^[5] However, the inquiry also uncovered long-standing cultural and regulatory barriers that they argue may undermine this objective.

The report first considered the secondary objective in the context of the financial sector, then in the context of the wider economy. Lastly, it analysed the role of government in helping regulators to navigate the secondary objective.

2.1 Secondary objective in the financial services sector

The committee concluded that the progress towards the secondary objective in the financial services sector was being impeded by the following key barriers:

• Culture of risk aversion. Witnesses claimed that the financial services regulatory environment was characterised by a culture of risk aversion driven by repercussions of the 2008 financial crisis and conflicting pressures from the government, parliament, industry, consumers, and the media.^[6] The report recommended that the FCA and PRA’s senior leadership team should drive cultural change towards “a more tailored and proportional approach to the risks posed by regulated firms”.^[7]
• High burden of compliance. The committee also found that the UK is perceived to have a disproportionately high burden of compliance and that regulators have a poor understanding of the cumulative burden of regulation on financial services firms.^[8] Firms told the committee that this is driven partially by ‘mission creep’ as the FCA and PRA have expanded the range of activities they regulate.^[9] The report also stated that the FCA and PRA did not appropriately tailor their approach to ensure that regulation and supervision are proportionate.^[10] In particular, they did not do enough to distinguish between firms that cater to wholesale and retail markets. To combat these issues, the committee recommended that “the government commissions an independent study to assess the cumulative cost of compliance in the financial services sector relative to other international jurisdictions”.^[11]
• Complex regulatory environment. Financial services firms also told the committee that the UK’s regulatory environment was overly complex, due partly to significant overlap between regulators.^[12] The inquiry found that this overlap “has made it harder for firms to conduct business and has delayed the implementation of key reforms”.^[13] The committee welcomed the government’s commitment to simplify the UK’s regulatory regime and recommended an assessment of regulatory overlap in the financial services landscape.^[14]
• Regulatory inefficiencies. The inquiry also found that regulatory inefficiencies were slowing the ability of domestic firms to launch new products and services, despite commitments from the FCA and PRA to improve authorisation times.^[15] The report recommended that regulators should be more transparent in reporting timescales involved in authorisations and that statutory operating service metrics for the FCA and the PRA should be reviewed. It also recommended that the FCA and PRA should do more to facilitate innovation and explore the use of regulatory and supervisory technology.^[16]
• Regulatory uncertainty. The committee found that regulatory uncertainty may reduce the attractiveness of investing in the UK.^[17] Sources of uncertainty included failure of the FCA to clarify how firms should comply with the Consumer Duty and tension between the FCA rules and the Financial Ombudsman Service (FOS) decision processes. The committee recommended that the FOS’s remit should be brought closer to its original mandate (to resolve disputes between consumers and financial service firms) rather than operating as a “quasi-regulator”.

2.2 Secondary objective in the wider economy

The committee concluded that it was unclear if and how financial services regulations impact the wider economy due to a lack of evidence.^[18] However, it did identify the following issues that may impede wider growth:

• Restrictive capital requirements. The inquiry found that “PRA’s approach to setting capital requirements has limited the commercial incentives and capital available to provide finance for growth”.^[19] The committee recommended the government review the cumulative impact of regulatory capital and Minimum Requirement for own funds and Eligible Liabilities (MREL) requirements on lenders to better balance financial stability and enable lending.
• Lack of an equity investment culture. The committee also argued that there was a need to build an equity investment culture to bring benefits to consumers and deepen the UK’s secondary capital markets.^[20] It concluded that the UK’s current consumer saving habits are driven by low financial literacy and levels of trust in the financial services sector. The report recommended that the government should improve financial education at all levels, starting in schools, and that regulators should develop financial education programmes with universities and research organisations. Additionally, the committee recommended that the FCA should provide more support for consumers in managing their savings.

2.3 The role of government

The report stated that regulation alone cannot generate economic growth and that there was a need for a joined-up approach between government, regulators and industry. It also highlighted the following key issues:

• Lack of direction. The report called on the government to clarify the economic outcomes they want to achieve, and the regulatory activities required to achieve them.^[21] The committee reasoned that, as the secondary objective is broad and implies trade-offs, regulators required “political cover” to make the correct choices.
• Poor metrics. The report also concluded that the metrics used to assess regulators’ progress against the secondary objective were poor.^[22] The committee recommended that HM Treasury should undertake research into how regulators performance can be measured effectively against international counterparts and introduce outcome-based secondary objective metrics.

3. Government response

The government responded to the committee’s report on 2 September 2025.^[23] The government stated that “there is strong alignment” between the committee’s recommendations and the reforms announced in the Financial Services Growth and Competitiveness Strategy, which was published shortly after the committee’s report in July 2025.^[24] The government stated that this strategy “places boosting the competitiveness of the UK’s financial services sector at the heart of the government’s plan to grow the economy” with a key focus on “delivering a competitive regulatory environment”.^[25]

A summary of the government’s response to the committee’s key recommendations is provided below.

3.1 Secondary objective in the financial services sector

The government stated that similar concerns surrounding the cost of compliance in the UK were raised in the Strategy’s call for evidence.^[26] The government explained that there was an ongoing cross-government exercise to establish benchmarks for administrative costs that businesses face to comply with regulation. As part of this, it committed to reducing these costs by 25% by the end of this parliament. Therefore, to avoid duplication, the government did not intend to commission a new study to assess compliance costs as recommended by the committee.

Regarding the complexity of the UK regulatory environment, the government stated that it “will continue to work to identify any overlaps between financial services regulators” but “it would not be practical or proportionate for the government to review all financial services legislative provisions and regulator rules in detail”.^[27] It added that the PRA committed in January 2025 to review potential overlaps with other regulators and the FCA “has outlined steps it is taking to remove rules and requirements where it can rely on the Consumer Duty for the same impact”.^[28]

The government agreed with the committee on the importance of increasing regulatory efficiency. The government reviewed the FCA and PRA’s key performance indicators, including comparisons with other jurisdictions, as part of the Regulation Action Plan, published in October 2025.^[29] Additionally, the Strategy announced that the government “will legislate to shorten the statutory deadlines the FCA and PRA must meet for new firm authorisations, changes of permission, and the appointment of senior managers”.^[30] The FCA and PRA had also committed to new, non-statutory targets.

Regarding regulatory uncertainty, the chancellor of the exchequer asked the FCA to report on how it plans to address concerns about the application of the Consumer Duty, which it did on 29 September 2025.^[31] The government also stated that the Strategy “will deliver the most significant package of reforms to the FOS since its inception, to end its present position as a quasi-regulator and provide greater regulatory coherence with the FCA”.^[32] It added that there were ongoing consultations on policy reforms to set clearer roles for the FOS and the FCA.

3.2 Secondary objective in the wider economy

The government agreed on the importance of balancing capital requirements to deliver stability while also facilitating lending.^[33] The Leeds Reforms, announced on 15 July 2025, made changes such as increasing the threshold for when banks are required to meet higher MREL.^[34]

The government stated that it is also committed to ensuring that people build financial literacy.^[35] It stated that “HM Treasury is working with the FCA to improve access to support for adults making financial decisions”. It also highlighted that financial education is compulsory in maths (primary and secondary school) and citizenship (secondary school). More recently, the Department for Education stated on 5 November 2025 that it agreed with the Curriculum and Assessment Review “that current references to financial education in the maths and citizenship programmes of study should be strengthened”.^[36]

3.3 The role of government

Regarding the role of government in clarifying desired economic outcomes, the government stated that the Strategy set out long-term indicators and targets.^[37] For example, “to double the average annual growth rate of net exports in financial services seen in the past decade, over the next decade”. It added that it will continue to monitor regulators’ progress on the secondary objective but does not intend to undertake a comprehensive review.

The government agreed on the value of building an understanding of how regulators’ performance can be measured against international counterparts but argued that research into this is difficult as many jurisdictions do not publish relevant data.^[38] The government stated that HM Treasury is seeking collaboration to develop evidence on the ability of the financial sector to support the wider economy through its Areas of Research Interest.^[39]

3.4 Further correspondence

On 31 October 2025, Lord Forsyth of Drumlean, then chair of House of Lords Financial Services Regulation Committee, wrote to Chancellor of the Exchequer Rachel Reeves stating that the government’s response to the committee’s report did not engage with several of the key findings.^[40] Lord Forsyth also requested more information regarding the government’s decision to not implement the following recommendations:

• set clear recommendations and benchmarks for regulators in line with the government’s economic policy
• research how regulatory reforms may support the growth of the wider economy
• research how regulators’ performance can be measured against international counterparts
• review the growth metrics used to illustrate the impact of the regulators’ action on the wider economy
• review regulators’ performance metrics

Responding on 15 December 2025, Economic Secretary to the Treasury Lucy Rigby provided further justification to the government’s decisions not to implement these recommendations.^[41] She defended the government’s current use of remit letters and ongoing engagement to provide strategic steers for regulators, arguing that further guidance and benchmarks were not necessary.^[42] She also said there was no need for commissioning the recommended research, highlighting previous work to close evidence gaps in partnership with industry, academics and other public authorities.^[43] Lastly, Ms Rigby argued that the current growth and performance metrics used were appropriate.^[44]

The minister also provided the following summary of relevant milestones achieved since the government’s initial response:

• The launch of the Office for Investment: Financial Services, a dedicated concierge service for international financial services firms seeking to establish or grow their presence within the UK. […]
• The FCA and PRA have launched a joint Scale-Up Unit, which will make it simpler for scaling firms to get timely responses and expert support.
• I [Ms Rigby] have officially commissioned the Financial Services Skills Commission to produce a report on disruptive technologies and skills needs.
• The Bank of England’s Financial Policy Committee has published an update on its review of bank capital requirements, which judged that the appropriate benchmark for the system-wide level of Tier 1 capital requirements is now one percentage point lower than previously (at around 13% of risk-weighted assets) and identifies several areas of potential further reform to explore.
• The government has published a policy update on the introduction of a ‘provisional licence’ FCA authorisation regime, which will allow innovative new firms to obtain temporary permissions whilst working towards full authorisation.^[45]

4. Response from regulators

In response to the committee’s report, the FCA did not dispute the committee’s recommendations but stated that they “have work underway, or already completed, that addresses most of the committee’s recommendations”.^[46] It pointed to changes announced in its second report on the secondary objective and the Leeds Reforms, including reduced authorisation times, removing rules that duplicate the Consumer Duty and publishing a consultation on modernising the redress system.

Sam Woods, CEO of the PRA, responded to the report on 13 August 2025, stating: “while I very much agree with the committee’s view that the introduction of the secondary objective requires a major change of the regulators, in certain areas I do not share fully the report’s characterisation of the UK regulatory regime”.^[47] For example, he contested the committee’s conclusion that there is a “culture of risk aversion” in regulators and argued that “some of the criticisms directed at the regulators by industry could perhaps be usefully subjected to further scrutiny”. He argued the report also underplayed the impact of changes introduced or planned by PRA and cited only a third of the PRA’s publicly announced initiatives related to the secondary objective. He also pointed to relevant PRA initiatives announced after the publication of the report as part of the Financial Services Growth and Competitiveness Strategy.

Both the FCA and PRA committed to report within 12 months on progress made as requested by the committee.^[48]

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