House of Lords Committee challenges UK government response to report on growth and competitiveness

The House of Lords Financial Services Regulation Committee (the Committee) has issued a formal response to HM Treasury's (HMT) reply to its report "Growing Pains: Clarity and Culture Change Required" which evaluated the progress made by the UK Financial Conduct Authority (FCA) and UK Prudential Regulation Authority (PRA) in supporting growth and competitiveness in the financial services sector and the wider UK economy. The Financial Services and Markets Act 2023 introduced a secondary objective for the UK regulators focused on international competitiveness and growth. While welcoming initial steps taken by the UK government, the Committee notes that HMT did not engage with several key findings, critical to the success of the secondary objective and broader UK economic growth.

The Committee uses this opportunity to restate some of its recommendations and raise further questions on the following themes as set out below.

• Facilitating economic growth – the Committee is concerned that the government has not provided a clear, evidence-based policy on how growth in the financial services sector will generate growth in the real economy. It highlights, among other things, the limited engagement with the impact of regulatory bank capital and liquidity requirements on the ability of specialist lenders to grow, which, as acknowledged, are vital to proving lending to small and medium-sized enterprises. The Committee urges HMT to revisit its conclusion that the government should "give recommendations and set parameters or benchmarks in relation to its economic policy and should be clear in what it asks".
• Growth metrics – the Committee finds HMT's proposed metrics insufficient, with only two addressing how financial services support wider economic growth. It is disappointed that HMT has decided not to review the secondary objective metrics and seeks information on, among other things, the reasoning for this decision and the role of metrics in the proposed long-term strategy for the FCA and PRA.
• Performance metrics – the Committee seeks information from HMT on whether the performance metrics of the FCA and PRA are sufficiently challenging.
• International comparisons – the Committee reiterates its call for an independent study to facilitate an international comparison of the cost of regulation. It rejects HMT's view that this would duplicate existing work, as the Committee intends such benchmarking to build on HMT's baselining exercise. The Committee requests additional information on how the government intends to identify aspects of the UK's regulatory regime which incur expenses to businesses in excess of those incurred in other jurisdictions, so that the government might propose targeted reforms.

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