Secondary International Competitiveness and Growth Objective (FSR Committee Report)

Baroness Noakes Excerpts

Wednesday 11th March 2026 Grand Committee

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[Baroness Noakes]

That the Grand Committee takes note of the Report from the Financial Services Regulation Committee Growing pains: clarity and culture change required. An examination of the secondary international competitiveness and growth objective (2nd Report, HL Paper 133).

[Baroness Noakes (Con)]

My Lords, it is a pleasure to introduce this debate on the Financial Services Regulation Committee’s report on the secondary competitiveness and growth objectives. These were set for the Prudential Regulatory Authority and the Financial Conduct Authority by the Financial Services and Markets Act 2023.

I must start with some thanks. Special thanks go to the noble Lord, Lord Forsyth of Drumlean, formerly my noble friend, still my friend, but now our distinguished Lord Speaker. He chaired the committee from its inception some two years ago with great skill and energy, and the House owes him a debt of gratitude. Thanks also go to our clerk, Beth Hooper, and her colleagues in the Committee Office, as well as to our specialist advisers Professor Rosa Lastra and Mr Michael Raffan. Of course, no committee could exist without its members, some of whom are speaking today, and I thank them, too.

The committee was set up as a direct result of debates about the accountability of the financial services regulators during the passage of the 2023 Act and we chose as our first major inquiry the secondary competitiveness and growth objectives created by the Act. These require the PRA and the FCA to facilitate the international competitiveness of the UK economy, in particular in the financial services sector, and its growth in the medium to long term. They do not override the regulators’ primary objectives, but they are an important element in the complex hierarchy of objectives, have-regards and regulatory principles that we summarise in Appendix 7. These objectives are new territory for the financial services regulators and there is great interest in the financial services sector about the impact that the objectives will have. It is unsurprising that we received a large amount of evidence, both written and oral, as set out in Appendix 2. We have also received responses from the Government and both regulators.

The 2023 Act was Conservative legislation but, with growth as the Labour Government’s number one mission, it was good to see that they embraced the initiative. The financial services sector is important both directly as a component of the UK economy and as an enabler of growth in the real economy. Financial services account for about 9% of GDP. As the Government’s financial services growth and competitiveness strategy, which was published after our report, pointed out, the sector’s contribution to output and productivity growth has fallen behind the rest of the UK economy, so this focus on financial services is important.

I have one final opening remark. We reported at a point in time—last May—that this is not a static area. I have just mentioned the competitiveness and growth strategy, but many other initiatives from the Government and the regulators have emerged or been fleshed out in more detail since then. I am sure that the Minister will reel off a lot of that when he responds later, but let me just say to him that those who are following this debate are interested in what is actually being achieved in terms of growth and competitiveness. I hope that his closing remarks will reflect that.

Our report is long and our conclusions and recommendations run to 77 paragraphs; I will not be able to cover them all, noble Lords will be relieved to hear. There are three angles on the secondary objectives in our report: first, the impact of regulation on the financial services sector; secondly, the impact of that regulation on the wider economy; and, lastly, the role of government.

The UK has a complex regulatory architecture, which we set out in Appendix 6. The PRA and the FCA are the lead actors, but there are many interfaces and overlaps with other bodies. The Government have started to address this with plans to roll the Payment Systems Regulator into the FCA and a consultation to address the interface between the Financial Ombudsman Service and the FCA, which many cited as a major problem. We welcomed these reforms, which must be completed.

In evidence, we heard how financial services firms are inundated by information requests, that the cost of regulatory compliance in the UK was considerably higher than in other jurisdictions and that the regulators did not focus on the cumulative burden of regulation on firms. The FCA’s consumer duty was often cited as lacking clarity and proportionality. We also heard that the regulators take far too long to deal with authorisations, with a disconnect between the regulators’ views of their performance and the experience of firms.

While we were encouraged by a new focus on operational efficiency in the regulators, in particular in authorisations and related performance metrics, we were disappointed that the Government resisted our recommendation that they should undertake international benchmarking as a spur to further UK improvements. Cumulatively, the evidence that we received pointed towards there being a regulatory premium, which discourages investment in UK financial services.

Lurking beneath all these detailed areas lies the complex area of culture in the regulators, which we characterised as risk aversion. Culture is the most difficult thing to change in any organisation. There are encouraging signs that the regulators are trying to change what they do and how they do it—for example, overhauling their voluminous data requirements—but the jury is still out on whether their culture is changing in a deep way.

Turning to the impact of the secondary objectives on growth in the wider economy, one of the problems that we found was that the effect of actions by financial services regulators is not well articulated either by the regulators or by the Government. In addition, the metrics that the Treasury has set in order to monitor progress simply do not deal with much beyond operational processes in the regulators.

Financial services firms, particularly banks, are an important source of funding to businesses, enabling the investment that is needed to underpin growth in the economy. Despite constant assertions that a lack of investment is one of the key factors behind lack of productivity growth in the UK economy and that more productive investment is essential to achieving the Government’s growth mission, we were surprised to find that data do not exist on the proportion of total lending that finds its way into productive investment. We said that the Government and the Bank of England should work on this and, while the Financial Policy Committee has published some findings on high growth firm financing, this falls a long way short of our call for proper data on economy-wide investment. On Monday this week, Positive Money reported that only 6% of bank lending last year went into productive investment. The Government really must start to take this seriously.

The Committee delved into the arcane territory of bank capital, which is a key determinant of lending capacity. We received evidence that, unlike in other countries such as the US, the approach of the PRA starts from the position that the Basel rules, which were aimed at international banks, should apply to all UK banks. The PRA is at long last introducing a small domestic deposit takers regime, which is less onerous and which we welcomed, but the PRA applies the rules in their entirety to mid-sized banks. Mid-sized banks are also hit by the minimum requirement for eligible liabilities—or MREL—rules, which mean that they have to raise costly capital once they hit the MREL threshold or alternatively manage their businesses so as to keep below the threshold. Neither course is good for lending into the productive economy.

An additional problem is that large banks can minimise their risk-weighted assets, and hence their capital, by using approved models—called the IRB approach—but the approval process takes many years, and few mid-sized banks have achieved it. We made a number of recommendations, including asking the PRA to consider a more proportionate judgment-based approach to setting bank capital requirements rather than slavishly following Basel III, and to speed up its IRB approval process. We also said that the Government should work with the Bank of England to look at the cumulative impact on regulatory capital to get the right balance between financial stability and the need to finance productive investment.

The Bank has now increased the MREL threshold, but only to keep pace with inflation. In addition, the Financial Policy Committee has reported that overall bank capital levels can be reduced by one percentage point, and the PRA has said that it will improve the IRB process. Although this is welcome, there is no sign yet that it will improve matters for mid-sized banks, and the PRA is unreceptive to the idea of a proportionate, judgment-based approach. This may be a missed opportunity.

We did not focus entirely on banks. We noted that the Solvency II regime should help insurance companies to unlock more capital for productive investment. We also noted the Government’s pension scheme reforms and recorded our serious reservations about the mandation power, which could force pension schemes to invest in particular ways. The House will express its opinion on that next week during the Report stage of the Pension Schemes Bill.

The final area of our report covered the role of government. We did not find clarity about how the policy objective of growth in the economy was to be achieved by the regulators, and the Government have set metrics that shed no light. The Government need to grasp this issue. I have already referred to our recommendation on benchmarking the performance of the regulators internationally; the Government have not embraced that either, claiming that it is difficult to do. That is not a good reason for not doing it, and I urge the Government to look at it again.

We could not avoid getting into risk appetite, especially as the FCA has regularly called for the Government to set their risk appetite. We did not fully agree with that, but we did think the Government could be more specific about the policies they wanted the regulators to action. We called for this to appear in the Government’s financial services sector strategy, but that strategy was silent. I hope the Minister will explain why the Government refuse to get involved in risk appetite.

Lastly, we recommended that the Government should keep the secondary objective under review. I do not think it controversial to say that it is still a work in progress. We asked that the Government update Parliament and the committee annually, in particular on whether the objective is achieving growth in the UK economy. I hope the Minister will today confirm that the Government will do that, and say when we will see the first of these annual reports. I beg to move.

--- Later in debate ---

[Baroness Noakes (Con)]

My Lords, I start with an apology to the Committee, because I failed to declare my interests at the outset of the debate. I declare shares in listed financial services companies, as on the register and in the report. I apologise for not declaring those interests earlier.

I will keep my remarks short, because the Minister is on his feet in the Chamber and we do not want to break and come back again to hear my conclusions. I thank all noble Lords who have spoken in this important debate and the Minister for his reply. I do not have time to draw out all noble Lords’ points, but I am particularly grateful to those who picked out some of the things that I did not cover in my summary of the report—in particular an important point that I had largely forgotten about the way in which some in the financial services sector are basically too frightened to say in public what they will happily and quite freely say to us in private. That is an indication of something that is not working well that is therefore not in the national interest.

Most people have agreed today that the competitiveness and growth secondary objectives could be an important stimulus to growth in the financial services sector. The problem is that while there are now lots of initiatives, actions and planned actions in play, at the moment we lack the evidence for whether we will get growth either in the financial services sector or in the economy overall. That is one of the things we have to keep a focus on in order to ensure that regulators are accountable for delivering to us on those objectives. I was pleased to hear the Minister confirm that we would be getting a report this summer. I am sure that my committee will look forward to examining that and possibly engaging with the Government on it.

As noble Lords have said, there has been a significant increase in regulation since the global financial crisis. This has weighed on financial services firms in very many ways, and can act as a deterrent to inward investment in financial services in the UK as well as within the financial services sector, reducing the capacity to lend into the productive economy.

One lesson is that regulation has a real-world impact. I hope that the regulators increasingly understand that what they do has real-world consequences, and that they are committed to modifying the behaviours that are leading to burdens on the industry. I hope that the Government will continue to accept their important role in getting better data, setting better metrics and continuing to apply pressure on the regulators to deliver.

Whether the regulators can change their risk-averse culture and become organisations that more creatively balance risks against opportunities in a proportionate way is an open question. I think we have to keep that in constant view. Both the regulators and the Government need to move away from the comfort blanket of operational efficiency. The real issues are much deeper than whether we process paperwork on authorisations in a certain number of days.

Because this is all so important to the UK’s economic success, the Government and Parliament have to keep the regulators in full view and ensure that their impact is kept under scrutiny. My committee is fully up to the task of playing its part in that; I am sure that we will return to that in due course.

Motion agreed.