A committee of peers has just finished looking into the UK’s booming private credit market—a sprawling, complex world where loans are made outside of traditional banks. What they found wasn’t just a niche concern for specialist investors. They found a trillion-pound corner of our financial system where, by their own admission, the people in charge are effectively flying blind.
A House of Lords Financial Services Regulation Committee report has shown that nobody in authority knows enough about Britain’s fast growing private credit markets. The committee, chaired by Lord Forsyth of Drumlean, says the Bank of England, the FCA besides HM Treasury are all working in the dark – shocks could hit the system without warning. The blunt conclusion is that the three bodies lack the data to judge whether the sector, which held roughly £1.2 trillion in assets last year, threatens wider financial stability. Lord Forsyth said the inquiry set out to discover what this rapid expansion means when so much is still unknown.
The committee directed its sharpest criticism at HM Treasury – it says the department has only a patchy understanding of the new risks and appears content to wait rather than act. When City minister Lucy Rigby and senior officials Lowri Khan or Daniel Rusbridge gave evidence on 19 November, they failed to convince members that the Treasury has a firm grip on any dangers. The report warns that taxpayers could face the bill if the private credit market runs into serious trouble. Because large sums now move through deals that take place out of public view, the committee calls the Treasury’s reluctance to intervene a clear failure of oversight.
Parallel to these systemic concerns, the committee identified a distorting regulatory burden stifling competition in traditional lending. It heard evidence, including from Paragon Banking Group CEO Nigel Terrington, that the current framework places a disproportionate compliance load on smaller UK and specialist lenders, unfairly advantaging large banking groups permitted to use internal ratings-based (IRB) models. This view was corroborated by written evidence from Handelsbanken. The consequence, the committee argued, is a constrained flow of credit to UK small and medium-sized enterprises (SMEs), potentially hampering economic growth. Analyst John Cronin of SeaPoint Insights strongly endorsed this assessment, asserting that progress from the Prudential Regulation Authority (PRA) towards levelling the playing field in risk-weighted asset density has been glacial. He stressed the critical need for the PRA to swiftly implement proposed changes to IRB approvals and asset risk weightings.
In response to these dual challenges of opacity and distortion, the committee issued several recommendations. It welcomed the Bank of England’s launch of a system-wide exploratory scenario in December 2025, focusing on private markets. It urged this exercise to rigorously examine the diverse fund structures, lending practices, interconnections with insurers and banks, and the accuracy of often-opaque private market valuations and credit ratings. A Bank spokesperson acknowledged the committee’s support for this novel initiative. Furthermore, the committee called on the FCA to complete and publish its review into conflicts of interest at private market firms, a follow-on from a March 2025 review of valuation practices that found some firms were not properly documenting conflicts. Potential conflicts identified include those relating to the impact of write-downs on management fees and the inflation of asset valuations to avoid breaching loan covenants. An FCA spokesperson committed to sharing findings later this year.
Finally, looking for structural solutions, the committee encouraged the government and the Bank of England to examine lessons from community banking models in the United States and Germany, suggesting that a more diversified banking ecosystem could enhance resilience and SME funding. The collective portrait painted is of a regulatory apparatus playing catch-up with a shadow financial system that has grown too large, too fast, without the requisite transparency. For investors, this signals both latent risk within an attractive asset class and a looming period of regulatory reckoning that could reshape competitive dynamics and cost structures across the entire credit landscape.
