MPs warn against financial rules being weakened ‘inappropriately’

MPs have warned the UK government against putting “undue pressure” on regulators to “inappropriately weaken” standards for banks, insurers and other financial services firms.

The call by the Treasury select committee is an indication of its concerns about the risks of a post-Brexit shift to light touch financial regulation. It comes as regulators continue the long process of transposing or adapting EU rules into UK laws.

“We will remain alert for any evidence that regulators are coming under undue pressure from the Treasury to inappropriately weaken regulatory standards,” the Conservative-dominated committee said in a report on Thursday.

The report, to the Treasury, the Prudential Regulation Authority and the Financial Conduct Authority, added that the department should “respect regulatory independence”.

Releasing the UK from the burden of complicated EU regulations has been a longstanding goal of many Brexiters. Prime minister Boris Johnson recently proposed that lending standards be relaxed so millions on housing benefit could use their allowances as income to qualify for mortgages.

UK regulators have promised to make financial rules more pragmatic but not to dilute their substance.

The Treasury and regulators have already clashed on some issues, including plans for an overhaul of insurance capital rules, known as Solvency II, intended to make it easier for insurance companies to invest in infrastructure.

“The financial services sector is at a turning point, with regulators taking on new powers following the UK’s exit from the EU,” said Mel Stride, the committee chair. He added there were “likely to be real opportunities to lessen regulatory burdens without weakening standards”.

The select committee also cautioned against a government plan to make competitiveness a secondary objective of regulators, arguing that the secondary goal should be to “promote long-term economic growth”.

“The wording will be crucial: pursuing international competitiveness in the short term is unlikely to lead to economic growth or international competitiveness in the long term if it is achieved by weakening the UK’s strong regulatory standards,” the committee added.

The report’s other proposals include a call for the FCA to promote financial inclusion by looking at “the impact on those who might be prevented from accessing financial services as a result of [new rules] or who might find themselves accessing services on inferior terms.” It urged the FCA to publish an annual report on the issue.

The committee also suggested the FCA allow firms to be more “experimental” with financial services products if they set aside a rainy-day fund to compensate customers if products do not deliver promised benefits. “This approach would not be without risks, but it is an example of the type of bold approach which the FCA should be prepared to consider,” it added.

Recommendations for the PRA include examining if it can reduce a competitive advantage that big banks and insurers enjoy because of their size. Such companies can use financial models to lower their capital requirements, because they have enough data to power sophisticated models that predict how loans and contracts will perform. Smaller companies do not have as much data, so their models are less reliable and they have to hold more capital as a result.

The Treasury, the FCA and the PRA have two months to respond to the select committee’s recommendations.