UK regulator has no metric to measure its effect on growth in real economy, says Woods

Sam Woods, chief executive of the Prudential Regulation Authority (PRA), told lawmakers that its current performance metrics do not directly measure the effect its actions have on growth in the real economy.

A set of metrics was introduced by the last government to assess how the PRA and the Financial Conduct Authority (FCA) were delivering on their new secondary objective — to facilitate the international competitiveness of the UK economy (particularly through the contribution of financial services sector) and its growth in the medium to long term.

However, Woods said metrics would always be “a bit unsatisfactory on the big picture points” of the level of investment in the economy and growth in the economy because the PRA was only “one small input” in such things.

Woods was giving evidence alongside David Bailey, executive director for prudential policy at the PRA, to the House of Lords Financial Services Regulation Committee inquiry into the secondary competitiveness and growth objective, which was introduced in 2023.

Woods said the Bank of England did not produce data comparing the level of real direct investment in the economy by financial services firms as opposed to secondary markets. “That part of the competitiveness and growth story has been very much downplayed in much of the debate [about the secondary objective],” he said.

He said the PRA had adopted “crude” ways of thinking about delivering on the secondary objective through three channels: how it affects how capital is allocated in the economy; how it affects how firms compete; and how attractive the UK was to foreign investment.

Expert help

Bailey said the regulator had created an internal centre of expertise to help it deliver on its secondary objective. “We have rolled out training across the organisation so that, as we are exercising our policy-making functions, consideration around competitiveness and growth is fully embedded in every discussion that we have,” he said.

The PRA had also appointed Walter Beckert, associate professor of economics at Birkbeck, University of London, as expert advisor, and was recruiting a network of of external researchers to advise it on competitiveness and growth, Bailey added.

A PRA spokesman said the network was still under development and no further details could be given at this time, including on recruitment.  

Compliance cost savings

Banks should be able to reduce the size of compliance operations once the next wave of regulatory changes takes place, Woods said. Citing the example of the one-third cut in reporting obligations that had been made for insurers with the introduction of the Solvency UK framework, Woods said he expected banks would also see a reduction in their compliance costs in the years ahead.

He acknowledged the regulatory change required by Solvency UK had meant an upfront cost of between £90 million to £170 million for insurers but said the ongoing saving from fewer reporting requirements would be £60 million a year.

The “weight of pressure” on firms’ compliance functions was expected to reduce allowing teams to be “a bit leaner and meaner”, Woods told the committee.

Meanwhile, the introduction of a cost-benefit panel would also keep the cost burden of new regulation in check. Challenges from the panel would ensure the PRA could justify that the “benefits outweigh the costs” of any new rules, Bailey said.

Singaporification

Witnesses to previous evidence sessions for the inquiry had told the committee about the proactive support they had received from the Singaporean regulator. In particular, witnesses had highlighted the Monetary Authority of Singapore’s (MAS) offering of a “concierge” service to handhold financial firms through authorisation.

Woods said both he and Bailey had made trips to Singapore to learn from its financial regulators. “There are quite a lot of things that we have learned from that and have been able to incorporate into thinking about how we do things,” he added.

Bailey told the committee that the strong and simple regime for smaller UK-focused firms was a good example of how the PRA had implemented proportionality into its regime.

“We are consulting on putting in place a very simplified capital regime for the smaller firms, which will significantly reduce the cost of regulation for those firms and enable them to grow faster and compete more,” Bailey said.

However, Woods ruled out another of the concierge services offered by MAS, whereby the regulator pays the fees of advice firms when insurers set up catastrophe bonds in Singapore.

“I do not think that our levy payers want us to be using their fees in that way,” he said.