Financial services regulation: The road to reducing complexity

Few would argue with the objectives behind the regulation of financial services entities. The expectations that firms should be well governed, financially sound, operationally resilient, manage risks effectively and deliver good outcomes for consumers are hardly controversial.

The challenge is that, as regulation has evolved to address different and emerging risks, these objectives have increasingly intersected. Requirements developed for different purposes can touch the same underlying risk, leaving firms to navigate the boundaries between different regulatory frameworks. The question for regulatory simplification is whether firms are required to demonstrate the management of similar risks in multiple ways.

When complexity accumulates across a group

An example of this can be found in the structure of certain financial services groups. A group may contain multiple regulated entities, including branches and subsidiaries, potentially operating across several jurisdictions. Some groups also span different sectors, such as banking, insurance and asset management, each potentially subject to different prudential regulatory frameworks.

Such structures can require firms to navigate regulatory requirements at entity, group and jurisdictional level. Where supervisory expectations overlap, similar information may need to be produced for different purposes, potentially alongside different governance, assurance and reporting processes. Beyond the administrative burden, this almost always entails additional investment in systems, data and people, as well as significant management time.

When one risk crosses several frameworks

Technology provides another illustration because it cuts across traditional regulatory boundaries. Financial services firms increasingly depend on technology infrastructure, cloud services and other third parties, while different regulatory frameworks examine the resulting risks through different lenses.

Consider, hypothetically, a technology failure affecting an insurer’s claims service. It could engage operational resilience requirements if an important business service were disrupted, raise technology or third-party risk considerations and, depending on its severity, have prudential implications under Solvency UK. Under the Consumer Duty, the firm would also need to consider whether the disruption could cause foreseeable harm to retail customers and whether it was acting to deliver good outcomes, particularly where customers were unable to access services or receive claims payments when they needed them. Similarly, a hypothetical outage affecting a bank’s digital banking or payments services could raise many of the same regulatory questions.

When complexities converge

These two sources of complexity can also converge. Where a group contains multiple businesses that share technology infrastructure or third-party providers, a single incident could affect several regulated entities and engage both common and sector-specific requirements. Looking at each requirement individually may therefore not reveal the cumulative compliance architecture that certain firms have to build around them.

Fit for purpose and proportionate regulation

In my view, the answer is not wholesale deregulation. It is not a term I am particularly persuaded by. The objective should be regulation that is fit for purpose and proportionate to the risks it is intended to address.

Regulation brings benefits as well as costs. In financial services, effective regulation supports confidence in firms and markets, protects consumers and contributes to financial stability. Those characteristics are themselves part of what makes a financial centre attractive to customers, investors and businesses. A substantially deregulated market could therefore find that, in removing regulatory costs, it had also weakened some of the conditions that underpin its attractiveness.

The better question goes beyond how much regulation there should be to whether the regulatory framework achieves its objectives as efficiently and coherently as possible. Simplification should be about removing unnecessary burdens, duplication and complexity while preserving the protections and confidence that good regulation provides.

Building on progress already under way

This debate does not start from a blank sheet of paper, as there is already considerable work under way to make UK financial regulation more proportionate and supportive of growth. Both the PRA and FCA have secondary objectives relating to the UK’s international competitiveness and medium to long-term growth, which they are required to advance alongside their primary objectives.

There are practical examples of this direction of travel. The FCA has consulted on the scope and proportionality of the Consumer Duty, including its interaction with existing product governance requirements. The PRA has similarly sought to support growth and competitiveness through a more proportionate and responsive prudential framework, including proposals for a tailored captive insurance regime and its exploration of alternative forms of capital for life insurers. The Government has also committed to reducing the annual administrative burden of regulation on businesses by 25% by the end of this Parliament, while maintaining high standards and protections.

This work should be recognised. The opportunity now is to build on this progress by identifying where further simplification can reduce unnecessary cost and complexity without compromising regulatory outcomes.

Making the interfaces work better

There is an important distinction between simplifying regulation and simplifying regulatory compliance. Some requirements may need to remain distinct because they serve different purposes, but that does not mean the processes through which firms demonstrate compliance must always be separate.

There are already examples of this approach. In its solvent exit planning requirements for insurers, the PRA allows firms to draw on existing work, including their Own Risk and Solvency Assessments (ORSAs), capital management plans and recovery and resolution planning, rather than recreating relevant analysis from scratch.

The same principle could be applied more widely. Where definitions can sensibly be aligned, evidence reused or approaches to governance, assurance and reporting better coordinated, unnecessary compliance complexity could be reduced without weakening regulatory outcomes and consumer protections.

A shared responsibility between industry and regulators

Industry has an important role to play. Firms and industry bodies are well placed to provide evidence of how requirements interact in practice, identifying where duplication exists, as well as the costs that result. They can also help identify how the same regulatory outcomes might be achieved more efficiently, giving regulators a stronger evidence base on which to assess potential changes.

Regulators, in turn, need to be willing to consider that evidence and, where the case is made, change or remove requirements that no longer add sufficient value. Effective simplification therefore requires a dialogue in which industry does more than identify complexity and regulators are prepared to consider whether established approaches remain the most effective and proportionate way of achieving their objectives. There are increasing signs that regulators are receptive to this dialogue, but continued close collaboration with industry will be essential to sustaining that progress.

The goal of reducing complexity is coherence

Success should not be measured simply by the number of rules removed or pages deleted from regulatory handbooks. The goal should be a more coherent and proportionate framework that achieves its intended outcomes and maintains appropriate protections for consumers and the financial system, without unnecessary complexity.

Take a deep dive into the risk regulatory landscape at RiskMinds this November.