Shadow Work and Pensions Secretary David Willetts has warned that any further increase in FSA regulation will leave the poor excluded from mainstream financial services and widen the poverty gap.
Speaking at a National Consumer Council fringe meeting at the Conservative party conference this week, Willetts slammed Government moves to extend regulation into areas such as credit unions.
Willetts added that the decline in door-to-door selling has aggravating the problem of financial exclusion and destroyed the UK's savings habit.
But NCC chairwoman and FSA deputy chairwoman Deirdre Hutton argued that deregulation would leave the most vulnerable people more at risk from misselling.
Willetts is one of a number of senior party members calling for “compassionate Conservatism” to regain voters.
He predicted that the lowest earners could become excluded entirely from the mainstream financial services market if regulation is not cut.
In his keynote speech at the conference, Shadow Chancellor Oliver Letwin promised to cut red tape. But Hutton defended the FSA's role to protect consumers with regulation.
She emphasised that the regulator's role is to protect people from the worst cases of misselling that can arise when people are pushed to their limits.
She added that the FSA is looking closely at equity-release products.
Willetts claimed regulation has caused greater restrictions and complications for small financial groups such as friendly societies and has contributed to financial exclusion.
He said: “The burden of financial regulation has to be cut. It seems we have become so preoccupied with security that we are trying too hard to protect people. We have to accept that there will be mistakes. If there is less regulation, we do have to accept there is more risk.”