Pressure on Chancellor for regulatory reform grows

Government and regulators are coming under pressure to move more quickly on promised financial services reforms in the run-up to the Chancellor’s Mansion House speech next week, which marks a year since Rachel Reeves first challenged the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) to implement regime change in order to facilitate growth and competitiveness, claiming  they “have been regulating for risk, but not regulating for growth.”

Ahead of the speech, industry body UK Finance, which represents around 300 firms, has submitted its own ideas to help support economic growth to the Treasury.

UK Finance describes the government’s commitment to reduce the cost of regulation by 25% as an important target and says that to achieve this, reporting should be limited to information genuinely useful for financial stability and supervisory decision-making.

It also calls for urgent reform of the Financial Ombudsman Service (FOS), and the need to address the fact that decisions that go beyond FCA rules create legal uncertainty and see the Ombudsman acting as a quasi-regulator, as has proved the case in the auto finance sector.

UK Finance says providing certainty and stability on this and other conduct-related reforms will better allow firms to innovate in the interest of consumers, and wants to see a FOS reform timetable published, with legislation to make reforms in the next King’s Speech.

In addition, the body says work should commence with swift reform of the FCA’s DISP rules to introduce a long-stop limit on complaints, clarify “wider implications” cases, and allow regulatory input in precedent-setting disputes.

It also wants the government to commit to a more ambitious timetable for Consumer Credit Act reform – including publication of the phase two consultation this year, and commencement of FCA engagement with industry on its replacement regime before the legislative process has concluded.

SME lending

On the topic of SME lending, UK Finance notes that the market for providing finance to this sector is “competitive and diverse” but argues more could be done as supply side constraints, including the complex regulatory environment and regulatory capital requirements, make it harder to lend to riskier businesses, which in turn makes it more expensive to start or grow a business in the UK relative to other jurisdictions. 

It cautions that bringing more SME lending into the regulatory perimeter, or restricting lenders’ use of personal guarantees, which enable smaller businesses that may not have a trading record or few assets to access capital at competitive rates, risks exacerbating these challenges.

Instead, it wants to strengthen tools that are already working, most notably the Growth Guarantee Scheme, which it says should be placed on a long-term footing with an In loan caps, term lengths and allocation volumes to support SMEs’ access to finance. 

Additionally, tools to avoid placing an undue compliance burden on firms and creating a patchwork of protections that is very difficult for customers to understand. Moreover, an increase in the number of codes and charters applicable to SME lending should be avoided. 

Export challenges

Meanwhile the UK branch of the International Chamber of Commerce has warned Britain’s financial regulators are failing to push through vital reforms needed to unlock about £22bn in trade finance for SMEs, according to the Financial Times which has seen a letter the organisation has sent to the FCA and PRA.

The letter says moves by regulators to rework Basel 3.1 regulations ahead of a 2027 implementation deadline were too slow and insufficiently far-reaching.  The ICC wants reforms accelerated and deadlines brought forward to improve what it calls the “antiquated” regulatory framework for trade finance, which makes it difficult for companies to take advantage of digitisation.

ICC’s letter describes the current framework as “bureaucratic and inefficient, with laborious compliance checks and overburdensome capital requirements”, and wants to see a lighter touch regulatory regime, with onerous “know your customer” rules streamlined, and a lowering of the capital requirement threshold for trading SMEs. 

“We need to see urgent action from the government, as well as words – they admit that the regulatory environment is stifling growth and competitiveness, but are proving slow to address this,” he added

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