A culture of risk aversion among financial regulators undermines financial firms’ competitiveness and growth, the Financial Services Regulation Committee said.

In a new report published today the committee accused the FCA and PRA of holding back international competitiveness and growth by pervasive risk aversion, regulatory uncertainty, and inefficiency in the regulatory system.

It called on the regulators to drive cultural change throughout their organisations by introducing a more tailored and proportional approach to the risks posed by regulated firms.

It also demanded a culture of continual operational improvement and innovation, and a more transparent and trusting relationship with stakeholders.

Lord Forsyth of Drumlean, chairman of the House of Lords Financial Services Regulation Committee, said: “The deeply entrenched culture of risk aversion and the high cost of compliance are among the regulatory barriers that are unnecessarily constraining firms. These barriers are getting in the way of doing what these firms do best, which is competing, innovating and growing.

“The lack of clarity under the Consumer Duty and the FOS's evolution into a quasi-regulator, coupled with regulatory uncertainty, also gives the impression that there is a regulatory penalty on investment in UK businesses.”

He said the UK’s financial and insurance services sector contributes more than £200bn to the UK economy, “so its continued success is vital for the UK’s economic prospects. Regulators need to address barriers and do more to remove, or mitigate at the very least, anything that makes the UK a less attractive place to do business.”

The FCA responded to the report by saying: “We are fully committed to supporting economic growth in the UK and a thriving financial services sector. That's why we have made it easier for companies to list, supported greater home ownership, set out a roadmap for crypto regulation, and are reimagining financial advice and guidance to boost investments.”

It said it agreed that there is more to do to understand the role of regulation in unlocking growth in the wider economy and that's why it has commissioned research on the topic.

The FCA said it will “carefully consider the committee’s recommendations and look forward to responding.”