Secondary International Competitiveness and Growth Objective (FSR Committee Report)

Lord Lilley Excerpts

Wednesday 11th March 2026 Grand Committee

[Lord Lilley (Con)]

My Lords, it has been a great pleasure and privilege to serve on this committee, not just because I have served under the distinguished and stimulating chairmanship first of my noble friend Lord Forsyth and now of my noble friend Lady Noakes but because of the calibre of the committee. None of the committees I have ever served on, in this or the other House, has assembled so much expertise. Indeed, I shocked my wife by pointing out that I had the least expertise of anybody on the committee. She thought for a moment that I was becoming modest, but it actually is true. This reflects the high level of expertise of everybody else, including the noble Lord, Lord Eatwell, who actually has expertise of having been a regulator as well as having worked, as many of us have, in the financial sector.

The only benefit of delaying this debate, from when the report was committed until now, is that it falls in the week when we celebrate the 250th anniversary of the publication of The Wealth of Nations by Adam Smith. This gives me an opportunity to try to bring to bear some of the insights he brought to this issue of regulation. Above all, he was famous for saying:

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest”.


Of course, competition ensures that businesspeople, in pursuing their self-interest, must satisfy the desires of their customers efficiently.

Self-interest is not our only motive, but it is the strongest, and it is the strongest for all of us, not just those working within business—and that includes regulators. That is why we should recognise that regulators regulate in the interest of regulators, and that interest does not necessarily and always coincide with promoting the growth of either the financial sector that they are regulating or the economy as a whole and its competitiveness, which of course are new secondary objectives. Because of the relative absence of competition between regulators—although there is of course competition between the regulators of different countries, as pointed out by previous speakers—we are tasked, as a committee, with ensuring that the regulators in this sector try to pursue the objectives of promoting growth and competitiveness.

We found a number of symptoms of this factor that regulators regulate in the interest of regulators. For example, time can be of the essence for any company setting up, appointing new management or undertaking some new activity for which it requires approval, but time is much less pressing for regulators. There were complaints that regulators take an inordinate time to approve, for example, board appointments and even appointments of people who have been approved for other financial services companies and are active there. The regulators get around time limits that have been imposed on them for concluding their appointments or approvals by restarting the clock whenever they seek new information.

I have a second example. Other people complain that regulators refuse to answer “what if” questions from people being regulated: “What would happen if I did such and such?” But regulators should not see their task as simply deterring or punishing companies for breaching the rules. They should help them actively comply and tailor their business to make sure that it is legitimate.

Thirdly, we were told that in Singapore the regulators offer a sort of concierge service, as it is called, particularly to companies newly entering the market and those newly entering Singapore itself and unfamiliar with its rules and regulations. In the past there seems to have been a reluctance for our regulators to add that role of helping people to the role of telling them what they cannot do.

Fourthly, we had some rather confused discussions with the FCA about its request that the Government should define the appropriate appetite for risk. Many of us thought that it was for individual investors to decide what risks they were prepared to take with their money. Of course, financial advisers need to make sure that investors whom they are advising do not unwittingly take risks that they could not absorb, and the adviser should tailor their advice to the reasonable risk appetite of those they are advising. But it emerged that the regulators meant that they were worried about the risks to themselves, since the regulator would be blamed if any companies failed or defrauded investors. It seems that they wanted some quota of companies that would be allowed to fail or not be properly regulated and carry out frauds. That was their idea of a risk appetite, rather than the risk appetite of the investor.

For a similar reason, regulators—not just in the financial sector—put too great an emphasis on box-ticking. They are conscious that if something goes wrong, questions will be asked about how assiduous the regulator has been. So the regulator needs to be able to show that it has at least ticked all the boxes, made companies go through all the formal checks et cetera, even if those procedures rarely prevent wrongdoing or financial mismanagement. Ideally, regulators should allocate most effort to supervising companies that are the greatest cause of concern. When I was a financial analyst, we were always aware of some of the symptoms of companies that should be a cause of concern—late accounts, constant changes of accountants or lawyers, dodgy people on the board and so on. It is these to which the regulators should devote most of their attention.

An unusual feature of financial regulation is that since Brexit the regulators have had the task of setting regulations as well as administering them. They have had to review the body of regulation inherited from the EU, at the very least adapting it to make it work where they—the FCA and the PRA, rather than the EU—are now the ultimate regulators, but also revising it to fit the UK’s needs now that we are free to do so.

So far, there have been only relatively modest changes. Why is that? Partly, I think it reflects bureaucratic inertia: people are always happy with the status quo. More significant is that even companies that implemented EU regulations reluctantly and at great cost are not keen on changing it, even to make it simpler, especially if those companies recognise that the more burdensome the regulations, the greater the barrier they are to the entry of new competitors.

Despite there being only modest changes so far to the rules that we inherited from the EU, industry values the changes that have been made and seems to have lobbied successfully to be excluded from the reset of our relationship with the European single market, which is currently going on. The financial sector seems to have no desire to return to EU rules, still less to accept dynamic alignment in future without even having a vote on it. Indeed, the Chancellor herself is implicitly willing to diverge further where it helps and has called on the regulators to seek ways to change the regulations to make them encourage growth and competitiveness.

I recommend that the Government go back to the ministerial briefs that were prepared when these directives and regulations were first negotiated. I had to negotiate some from the very first in the single market, the second banking directive and so on. I cannot remember a brief that did not begin, “We don’t want this directive, Minister, but we can’t avoid it so let’s try to seek some of the following list of amendments to improve it”. If we went back to those briefs, we would find a good working idea of changes that might be needed to make those directives simpler, less burdensome, more appropriate and more growth and competitiveness promoting.

The final point that I want to make echoes that made by the noble Lord, Lord Eatwell. It became known as the Eatwell thesis and I was its seconder in the committee. It is that the impact on the economy—the growth of the whole economy, not just the financial sector—depends on the amount of lending by banks and investment of the nation’s savings by financial institutions that goes into the creation of new assets, not just the purchase of secondary assets. Sadly, in this country the total volume of lending has not recovered to the previous level since the great financial crisis of 2008, unlike in the United States where, after a couple of years of delay, it returned to that rate of growth. We received conflicting evidence about why this may be. Some said that it is simply that the United States is different from us and the rest of Europe because it has the tech giants and that stimulates the economy and demand for lending. That may be part of the reason, but others said that US banks, especially regional banks, have been regulated with less onerous demands for new capital, which means that they are freer to increase the amount of lending to the real economy. That is a crucial issue, to which we need to return and make sure that, if it is true, we increase the amount of lending that meets the Eatwell criterion.