We have seen several market cycles and in most cases regulation and regulators are seen as followers, tightening regulation after an event – ‘after the horse has bolted’ if you like. This was certainly the case after the Global Financial Crash (GFC) of 2008/9, which led to expansion and significant tightening of regulation within the financial sector. However, we are now witnessing a substantial swing in the regulatory pendulum leading to some CROs fearing a new ’race to the bottom’.
In our last post, we pointed out the FCA was being more prescriptive in its wordings, but we are now seeing contrasting public calls for the PRA and FCA to loosen their constraints. Rachel Reeves started the swing in the Autumn of 2024. In her Mansion House speech, she said that regulations that had been put in place to protect the economy after the GFC had gone too far. She challenged the regulators to remove the constraints, confirming her view that the UK had been regulating for risk, but not for growth. However, some commentators point out that the previous Labour government had encouraged regulators to take a light touch approach, which ultimately resulted in the rescue of banks by huge financial bailouts during the GFC.
Now fast forward to this month’s House of Lords Financial Services Regulation Committee – one session included the committee’s inquiry into the FCA and PRA’s ’secondary competitiveness and growth objective’. It too, provides further evidence of the loosening trend. As examples, Basel 3.1 adjustments, reduced reporting requirements, weakening of banker pay/bonus caps, allowing insurance companies to invest more rapidly and a new proportionality drive with a ‘Strong and Simple’ regime for smaller UK focused banks. It is no wonder that commentators say we are going from one extreme to the other.
CROs have been quick to highlight the risks associated with this balancing act – the Government requirement for growth versus sound regulatory controls and effective risk management. They point out to us that they need to reassess their firms’ risk appetites to ensure that they align with the new focus on facilitating growth while not compromising safety and soundness. This new approach is a challenge for all concerned and we are seeing an uptick in requests to enhance 2nd and 3rd lines to ensure the right balance is maintained.
Our people are experienced subject matter experts, and we continue to provide independent support and oversight on these and other risk matters. Whether a lender, holder of loan assets, servicer or asset manager, call us to see how we can support policy reviews and provide third line oversight.