by Jonathan Eida, researcher
The UK economy desperately needs a growth plan. With debt hovering around 100 per cent of GDP, sluggish productivity, and anaemic private investment, Britain is drifting into decline. One of the easiest wins? Unleashing the full potential of our financial services sector.
The financial and insurance services sector contributed £208.2 billion to the UK economy in 2023, accounting for 8.8% of total output and ranking as the fourth largest UK industry. But despite its scale and importance, the sector is being held back-not by global headwinds, but by the very regulators meant to support it.
A new House of Lords report powerfully makes this case. Under the previous government, the UK’s main financial regulators - the Financial Conduct Authority and the Prudential Regulation Authority - were handed a new “secondary objective” geared towards supporting competitiveness and growth.
But as of yet, this mission has proven to be unsuccessful.
The report highlights a system hampered by mission creep, where regulators stray well beyond their remits into areas of day-to-day business management. It exposes regulatory overlap, with multiple bodies issuing competing instructions and duplicative data requests. It underlines how a culture of risk aversion-rooted in the post-2008 crisis mindset, has created paralysis.
Regulators have also created legal uncertainty with firms left guessing how to comply, thanks to vague rules and contradictions, with a prime example being the relationship between the FCA and the Financial Ombudsman Service.
Take the motor finance scandal. In late 2024, Santander UK set aside £295 million for potential payouts and warned it could face losses of up to £1.4 billion. Lloyds may be left with a £3.2 billion bill. The cause? A court judgment and FCA review colliding with years of regulatory ambiguity - and a FOS whose decisions can retroactively rewrite the rules.
This all adds up to what peers call a “regulatory penalty”. Businesses can follow the rules and still face the threat of retrospective enforcement or damaging reputational risk; it’s no surprise they hold back investment.
As the report states, the government isn’t blameless. In theory, the government provides regulators with strategic direction. But these instructions are often vague and contradictory. Regulators are being asked to support growth, tackle climate change, deliver inclusion, drive competition, protect consumers, and manage financial risk all at once. It’s a recipe for confusion.
This isn’t just a problem for firms-it’s a problem for the country. A world-class financial services sector should be a key engine for Britain’s recovery. But that requires a regulatory framework that is competitive, coherent, and proportionate.
So, what needs to change?
First, the government must take more responsibility. It should stop outsourcing tough trade-offs to regulators or quangos and start giving clear, prioritised instructions not vague instructions based on political whims. A way to achieve this would be to sign off on any new regulations, effectively throwing their weight in support of any new regulations. Let us see what their real risk appetite is.
Second, the system must be simplified. That means reducing the number of overlapping bodies, eliminating duplicated reporting requirements, and streamlining supervisory structures. If that requires folding some regulators together or removing functions, so be it. The government has merged the FCA and the Payment Systems Regulator. This is a step in the right direction. If, however, there are no substantial shifts in their efficiency, then there will have to be more drastic work done.
Third, we must end the culture of risk paralysis. There’s a difference between managing risk and avoiding it altogether. A stable, rules-based system that firms can understand and predict is far better than one where fear of the unknown drives compliance costs through the roof. Research by Oliver Wyman showed that UK ring-fenced banks devote 15-20% of their investment budgets to regulation. This is simply too much if the government is serious about its growth mission.
Ministers must build a regulatory system that fuels ambition, not fear. Piecemeal reforms won’t cut it. Serious structural change-streamlining regulators, clarifying mandates, and restoring a culture where innovation is encouraged, not punished, is needed. The UK has the talent, capital and global reputation to lead-but only if regulation helps, rather than hinders. Hopefully, the Lord’s report serves as a wake-up call.