ICAEW submitted its response in December, and this article highlights some of the key themes and policy points raised in that submission.

Regulation

The regulation of financial services is overly complex, with overlapping requirements that disproportionately burden smaller players and new entrants. Streamlining the regulatory framework is essential to foster competition and drive innovation in the sector. An outcomes and principles-based approach offers greater flexibility for innovation, as evidenced by the FCA’s introduction of the Consumer Duty. However, smaller players often benefit from the clarity provided by clear rules. A balanced approach, combining principles with specific rules, could provide the best outcomes.

In addition to principles, guidance is an effective regulatory tool. Unlike formal rules, guidance can be updated more quickly, providing greater flexibility to respond to emerging challenges and opportunities.

The current Public Interest Entity (PIE) regime potentially drives disproportionate regulation that impacts smaller players. With the potential to impose additional transparency, governance, reporting, and auditing obligations on smaller banks and building societies, which may stifle growth and innovation. As audit and corporate governance reforms take shape this year, revising the criteria for PIEs to ensure they are proportionate and flexible is crucial.

Finally, international regulatory alignment is essential to maintain the competitiveness of UK financial services. Regulatory requirements in other jurisdictions should be carefully considered to ensure the UK remains a global leader in financial services. (See “Competition” for further details).

Trends and Opportunities

Artificial intelligence (AI), blockchain, and the digitalisation of financial services present significant opportunities for developing new business models, blurring the boundaries between traditional and technological offerings. These technologies have the potential to reshape the financial services landscape by fostering innovation and enhancing operational efficiency.

AI is already driving efficiencies and improving back-office functions. Bank of England research shows that 30% of firms are using AI for more complex modelling, such as fraud detection and transaction profiling. There is considerable potential for organisations to harness AI more effectively, especially in utilising vast data sets to perform advanced modelling and improve risk assessment. (Source: Bank of England AI Report 2024).

Third-party service providers are increasingly prevalent within the sector, creating a complex web of interdependencies. While this reliance offers efficiencies, it also introduces risks that may not be fully understood. A holistic, system-based approach is needed to address these risks effectively.

Competition

In addition to the regulatory reforms discussed, clear and consistent regulations for emerging technologies, along with government policy support, are essential to create an environment conducive to investment in new technologies. The UK is currently lagging behind some international competitors in areas such as cryptocurrency and the regulation of digital assets. However, the FCA’s updated roadmap for cryptocurrency and the introduction of the Digital Gilt Instrument will help address these gaps.

The FCA’s regulatory and digital sandboxes have played an important role in fostering innovation. However, uptake of dynamic AI models has been slow compared to static autonomous systems. To encourage adoption, regulators must provide the necessary guardrails and regulation to offer confidence to businesses. Additionally, the development of digital skills requires a coordinated approach across government.

Responsible Risk-Taking

Regulators traditionally adopt a risk-averse stance, but there is a role for them to support responsible risk-taking through education, including showcasing the potential benefits of innovation in financial services.

Skills and Talent

There is a critical need for upskilling and reskilling within the domestic workforce, as a lack of relevant skills is a significant constraint on growth. FSSC research indicates it is nearly £50,000 cheaper to reskill existing employees than to recruit new ones. Clear and high-quality career advice for young people, as well as a clear roadmap for financial services careers, will help attract and retain talent.

Additionally, promoting financial services opportunities outside of London and major centres will encourage regional participation in the sector. Internationally, attracting global talent is essential, and mutual recognition of professional qualifications will play a key role in this effort.

Sustainable Finance and Facilitating Investment

Regional grant finance (now closed) has played a role in targeting investments, but a UK Green Taxonomy, underpinned by assurance, would help businesses and investors identify opportunities and build confidence. The government should also publish a UK National Transition Plan to help businesses align their strategies with net-zero goals.

Methodology uncertainties and data quality issues, especially concerning Scope 3 financed emissions reporting, remain barriers to the transition to net-zero. Financial services can facilitate investment in sustainable projects, but these challenges must be addressed.

International Partnerships

Cross-border harmonisation of regulations is crucial for supporting competition and efficiency. However, regulators must avoid a “race to the bottom” by setting lower regulatory standards. Regulatory arbitrage remains a risk. Targeted regulation, particularly in areas such as the prudential regulation of banks and insurance companies, will be key to ensuring financial stability.

Capital Markets: Barriers to Growth and Retail Participation

Cross-fertilisation of ideas and interconnectedness are key to the success of markets, as demonstrated in the US. Education plays a critical role in fostering these connections. Additionally, early education about personal savings could boost informed retail participation in the financial markets.

The regulatory burden on professional advisors who support retail investors is high, which increases costs. Adjusting the structure of ISAs to better favour equities and other investments, rather than the current predominance of cash ISAs, could stimulate growth. Conversely, younger savers may be attracted to cryptocurrencies due to their ease of purchase and heavy promotion online, despite their volatility.

Insurance and Reinsurance: Barriers to Innovation

Reform to Solvency UK should help release additional capital for green investments. To ensure that these investments remain in the UK, a close partnership between government and the private sector is essential.