In a speech, Rathi said the FCA was “rebalancing risk in the system – not just to encourage growth but because there is benefit to consumers”.
He addressed the criticism that with “more risk come fewer consumer protections, more chances for things to go wrong”.
“If we intervene more with ever more granular restrictions, we may in fact limit the type of innovation required to bring people into financial services.
“We have been upfront that some of our revolutionary targeted support changes may result in a worse outcome for some. But not acting leaves millions facing the risk of no support when making key financial decisions,” Rathi added.
He pointed to the clarification of mortgage stress test rules, which lenders have told the regulator has allowed them to lend around £30,000 more.
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“We judged this a risk worth taking, allowing more people the security that comes with homeownership,” Rathi noted.
Financial capability progress lagging behind inclusion
Rathi said “solid progress” has been made with financial inclusion, pointing to more people being able to access basic banking and improved insurance take-up.
However, he said increased access alone “doesn’t guarantee successful outcomes for individuals – or the wider system”.
Rathi said that over the past decade, access to new products has “exploded”, and while there has been “some improvement” in financial capability, the rate “has not been anywhere near the same”, which has consequences.
Financial capability is defined as “knowledge, confidence and support to make good choices or avoid bad ones”.
He explained that the financial capability gap was partially due to rapid digitisation, which has placed “complex products at people’s fingertips”.
Another factor is the fragmentation of initiatives aiming to improve financial capability, so they are “not always reaching the people who need them most”.
Rathi added that financial capability is too often being treated as an “add-on under community engagement rather than a key part of how firms design products and services”.
Finally, he said the benefits of financial capability are hard to measure effectively.
All the above dynamics “reinforce one another”.
“Fragmentation makes delivery uneven. Add-on treatment makes capability a nice-to-have, rather than essential. The measurement debate delays action,” he explained.
Rathi continued: “We now need to connect financial inclusion and capability. Improved inclusion should be the goal, but capability needs to be enhanced at the same time and potentially more quickly.
“We need to build skills that let people navigate products that may not even yet exist – in an AI-driven and automated future – while reaching those excluded from the system and encouraging those who opt out to re-engage.”
He said it was not the exclusive remit of the FCA to do this, but it was “uniquely placed to help fill some of the gaps”.
Getting both financial inclusion and capability ‘right’ benefits people and the system
Rathi urged the government to implement its financial inclusion strategy, “turning ambition into clear outcomes”.
Specifically, he said the government should “deepen and embed the work in schools” and support workplace savings.
Rathi continued that banks should “expand” the good work it does around financial education in schools so it is “consistently ready and available for individuals”.
“That means embedding support into product design, not tacking it on at the end,” he said.
Rathi said much progress had been made with financial inclusion, but widening access without improving capability “leaves people with more choices they don’t feel ready to make”.
“If we lift capability to match inclusion, buffers rise, cover improves, more people save and invest with confidence, scams fall,” he noted.
Rathi concluded: “Inclusion gives people the tools, and the choice. Capability helps them to use those tools. Getting both right strengthens households and stabilises the system.
“The direction is set. The momentum is building. Let’s take advantage of it to finish the job and transform financial capability.”
