A powerful House of Lords committee has issued a stark warning that UK policymakers are operating without crucial data, leaving them effectively 'flying blind' on the potential risks posed by the rapidly expanding private markets sector.
A Call for Transparency and Better Data
The Industry and Regulators Committee, in a report published on Wednesday, 22 May 2024, expressed serious concern over the opaque and fast-growing nature of private markets. These markets, which include private equity, private credit, and venture capital, have seen assets under management surge to an estimated $12 trillion globally. The committee highlighted that this growth has far outpaced the development of regulatory oversight and the availability of reliable information.
Lord Hollick, the committee's chair, emphasised the gravity of the situation. He stated that the current lack of transparency creates a 'black box' for regulators, making it impossible to assess systemic risks or the potential impact on UK financial stability and pension holders. The report argues that this data gap is a critical vulnerability.
Key Findings and Recommendations
The committee's investigation pinpointed several core issues. It found that the Bank of England's Financial Policy Committee (FPC) and the Prudential Regulation Authority (PRA) lack the necessary data to monitor risks effectively. This includes understanding the interconnectedness between private markets and the broader financial system, as well as the levels of leverage and hidden liabilities within private funds.
To address this, the Lords made a series of urgent recommendations:
- The Financial Conduct Authority (FCA) must be given a new, explicit statutory objective to promote transparency and monitor systemic risks in the asset management and pensions sector.
- Regulators must be granted enhanced information-gathering powers to compel private market firms to disclose essential data.
- A comprehensive review of the pensions regulatory framework is needed to ensure it is fit for purpose given the increasing allocation to private assets.
- The government should clarify the roles of the FPC and PRA in overseeing non-bank financial institutions to prevent dangerous gaps in supervision.
Potential Consequences of Inaction
The report warns that failure to act could have severe repercussions. Without better oversight, a major shock or failure in the private markets could destabilise the UK's financial system and inflict significant losses on pension savers, whose funds are increasingly invested in these opaque assets. The committee stressed that the current regulatory approach, which relies heavily on disclosures to investors, is insufficient for safeguarding the wider economy.
The government and regulators now have two months to formally respond to the committee's findings. The Lords' intervention adds substantial weight to growing calls from across the financial industry for a more coherent and data-driven approach to regulating the shadow banking world, ensuring that its growth does not come at the expense of economic stability.
