MPs and Peers Call for a “Culture Change” in UK Financial Supervision

The UK’s financial regulatory landscape is facing an unprecedented level of scrutiny as a powerful coalition of MPs and peers intensifies calls for a fundamental review of how the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) operate. Amid concerns that a “culture of risk aversion” is stifling the post-Brexit “Global Britain” ambition, the debate has shifted from incremental rule-tweaking to a demand for systemic reform.

The “Growing Pains” of Post-Brexit Regulation

A central catalyst for this movement is the House of Lords Financial Services Regulation Committee’s landmark report, “Growing pains: clarity and culture change required.” The report concludes that while the regulators were given a new secondary objective to support “international competitiveness and growth” in 2023, progress has been impeded by deep-seated institutional barriers.

Key criticisms leveled by the Committee include:

• Excessive Risk Aversion: A culture shaped by previous financial crises remains overly cautious, leading to duplicative and complex regulatory activity that can hinder innovation in the fintech and crypto sectors.

• High Compliance Burdens: The cumulative cost of compliance is cited as a major deterrent for firms looking to scale within the UK. The Committee has called for an independent study to benchmark these costs against international peers to ensure the UK remains a competitive hub.

• Lack of Proportionality: Peers noted that regulators often fail to distinguish sufficiently between firms catering to wholesale markets and those serving retail customers, creating unnecessary friction for B2B fintechs.

A Cross-Party Push for Efficiency

The pressure is not limited to the Lords. All-Party Parliamentary Groups (APPGs), including the APPG on Financial Technology, have become vocal forums for highlighting the “accountability gap” in financial supervision. Industry bodies have consistently argued that the current authorization timelines for new fintech entrants remain a bottleneck for innovation, urging for more “actionable intelligence” from regulators.

Recent reports have added fuel to the fire. For instance, the implementation of the “Consumer Duty” regime, while designed to protect customers, has been noted by some industry analysts for creating levels of uncertainty for firms trying to align with broad new standards. In response, there are growing calls for the FCA to report specifically on how it plans to address these concerns to prevent them from becoming a drag on economic output.

Real-World Impact: The SME and Private Market Gap

The call for a review is also driven by shifting market dynamics. Recent analysis into private markets has highlighted that post-crisis capital reforms (such as Basel 3.1) may have inadvertently reduced the capacity of traditional banks to lend to UK SMEs.

• Lending Availability: Many small and medium-sized enterprises in the UK are finding it increasingly difficult to access credit as banks retreat due to restrictive capital requirements.
• Data Insight: Research indicates that the PRA’s approach to setting capital requirements has limited the commercial incentives available to provide finance for growth, necessitating a review of the “cumulative impact” of these rules on lenders.

What’s Next: The Regulatory Action Plan

In response to this mounting parliamentary pressure, the government has moved toward a refreshed Regulation Action Plan. This initiative aims to introduce stronger performance and accountability measures for regulators, shifting from a focus on “risk management” to “outcomes-based regulation”.

For the fintech and crypto sectors, this could mean:

• Streamlined Authorisations: A push for more transparent reporting and shorter timescales involved in new firm approvals to encourage market entry.
• Tech-Positive Supervision: The FCA is under pressure to adopt a more “proactive” stance, using digital intelligence to identify harm more quickly while reducing the volume of manual data requests from compliant firms.

As the UK seeks to maintain its edge against burgeoning fintech hubs in the US and EU, the message from Westminster is clear: regulation must be a catalyst for growth, not just a safety net for failure.

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