In her first Mansion House Speech in November 2024, Rachel Reeves, the Chancellor of the Exchequer, stated that the “UK has been regulating for risk but not regulating for growth.” She was determined that “while maintaining important consumer protections, upholding international standards of regulation and protecting the vital stability of our financial services system, now is also the moment to rebalance our approach and take forward the next stage of reforms needed to drive growth, competitiveness and investment.”
This was not the first time that a UK Government had stated that it was determined to ensure that the UK regulatory system was internationally competitive and growing. Indeed, the previous government had introduced legislation in the Financial Services & Markets Act 2023 giving both the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) a new secondary objective, requiring both regulators to facilitate, subject to aligning with relevant international standards, the international competitiveness of the UK economy including, in particular, the financial services sector and its growth over the medium to long term.
After the 2007-2008 financial crisis, and due to the perceived regulatory failure of the banks, the UK government decided to restructure UK financial regulation and abolish the existing Financial Services Authority. The PRA and FCA were created to protect consumers and taxpayers, and to ensure the UK financial system was stable. Both regulators took a more judgement-based, forward-looking, and proactive approach to regulatory decision-making in line with their primary objectives of ensuring the safety and soundness of the UK financial system. Martin Wheatley famously described it at the time as “being given the power to shoot first and ask questions later.”
Following on from the FSA’s lead, both regulators continued to be pro-active domestically and internationally in leading the way on the developing new, post financial crisis, regulatory frameworks for insurers and credit institutions. Where the UK regulators led others followed, or where the UK pushed, new regulations, such as the European Solvency II Directive and the Insurance Distribution Directive, were enacted. Thus, the business of rulemaking to ensure safety, soundness and integrity became embedded in both the PRA’s and FCA’s DNA.
The decision to exit from the European Union and forge our own path internationally forced subsequent UK governments to focus on ensuring London remained a competitive location for financial services businesses and there are significant growth-related elements to the regulators’ plans that seek to capitalise on our ability to set our own agenda and make our own rules. This led to the ‘Future Regulatory Framework Review’, now more commonly referred to as the ‘Smarter Regulatory Framework’, and the 2023 Act.
Reviewing some of the statistics, we can see that the number of authorised insurance companies in the UK fell by approximately 150 to around 360 between 2014 and 2021. Subsequently there has been an increase in the numbers to about 430 as those insurers operating in the UK and previously ‘passported’ from other EU states had to become directly authorised by the PRA. Thus arose a growth in numbers, caused by a change in law rather than an increase in the UK’s competitiveness, albeit that it does demonstrate a desire and willingness to continue to operate in the UK as an insurer.
The powers granted by the 2023 Act allowed the regulators to do what they like to do by implementing the rules required to assimilate EU law into UK law and by reviewing and tweaking such matters as the Solvency II regime. But those same powers may now prove to have a secondary purpose as the mechanism through which any change in regulatory direction, driven by a government, might actually occur.
The introduction of the Designated Activities Regime as part of the 2023 Act enables the Treasury to ‘designate’ activities, and to confer rulemaking, supervisory and enforcement powers on the FCA. This flexibility makes it much easier for the Treasury if it wishes to see the FCA act in new ways. We will wait to see if this gets used to directly promote the competitiveness and growth agenda or is used in a more traditional ‘let’s make new rules here’ way.
During 2024, both the PRA and FCA have reported on how they were meeting their new competitiveness and growth objectives. The FCA noted that in “reality, we have been facilitating the competitiveness and growth of the UK economy long before Parliament mandated it.” They have developed a large amount of data to prove they are meeting the requirements by, for example, proposing regulatory reforms, supporting new technologies, improving their performance in terms of speed of authorisation, and supervision.
Similarly, the PRA reported they have started well at embedding the new requirement into their approach to regulation and their thinking. They cite the changes to Solvency II to make Solvency UK, the removal of the ‘bonus cap’ for bank remuneration, the new Solvent Exit rules for banks and those proposed for insurers, as examples of rulemaking providing for increased competitiveness and growth.
The release of the Regulatory Initiatives Grid in late 2024 illuminates the desire for rulemaking, which has clearly not abated. Of the eight initiatives scheduled for the Insurance sector, six are new. Many of the descriptions mention competition or competitiveness. However, a cynic might think that the board of an insurance company might be better concentrating on ensuring its continued solvency by having an effective strategy rather than creating and regularly reviewing a Solvent Exit plan setting out how it might die quietly even though having such a plan is seen as being good for the UK’s overall competitiveness and growth by the regulator.
Only the passage of time will tell us whether regulation of the UK financial services industry will genuinely change from regulating for risk to regulating for growth. Will it just be a re-badging of rulemaking as new rules are somehow identified as being effective promoters of competitiveness and growth or will there be a real change to regulatory thinking that leads to an opening up of markets and a reduction in the regulatory reporting burdens?
February 2025