“Risk is good,” and is a key feature of growing financial markets, said the Financial Conduct Authority’s chief economist Kate Collyer.  

The City regulator is “shifting our approach to risk, giving firms and consumers more space to innovate while still protecting markets,” she added in a speech at Warwick Business School. 

Collyer outlined the work the watchdog is doing to boost a range of retail investments and pensions outlined in a June consultation paper (CP25/17), now closed, which will see the body “finalise our rules by the end of the year”. 

She also pointed to the mortgage market as an early example of the changes the regulator aims to make.

The move is the latest of a series of changes to help boost UK economic growth, following a Mansion House speech by Chancellor Rachel Reeves last November, where she said that easing regulatory burdens on firms was an imperative for UK growth.    

Collyer pointed out: “There are lots of ways to measure productivity. But if we look at the ten years since 2015, the annualised change in productivity was just 0.4%.  

“That compared to 1.1% across the whole economy over the same period.” 

She added that “appropriate risk-taking” has an important role to play in the economy. 

The regular’s chief economist said: “There are risks in not taking risks.  

“For consumers, the seemingly ‘safe’ option can mean missing out in the long run and can have life-changing consequences.  

“For markets and firms, risk-taking can lead to both efficiency and dynamism. 

She added: “So, risk is good and is a critical feature of financial markets.” 

For firms, Collyer said, “we need to think about how to create incentives and institutional structures for firms to take considered, not excessive, risks”. 

She added: “We often hear, in our AI work, for example, that firms are worried about taking the plunge, and a lack of knowledge is holding them back.  

“In our strategy, we said we will take an increasingly tech-positive approach – that means we are open-minded about tech and its ability to improve efficiency and productivity for firms and to improve access for consumers.  

“We’ll allow space for firms to innovate without dictating solutions.” 

Collyer also outlined “different types of regulatory risk”. 

She said: “There are times when we face radical uncertainty, and the consequences of failure are catastrophic, those times require risk aversion.  

“But quite a lot of what we do as a regulator is not in that space and there may be opportunities within a ‘safety zone’ where more risk could bring benefits without significant harm.” 

But the economist pointed out: “There are trade-offs when we make regulatory choices.  

“This means we need to explore the relationships between the benefits we’re seeking and the potential harm that could be caused in pursuing those benefits.  

“We also need to use regulatory judgement to look at the distributional consequences. Who bears risk and how well-equipped they are to bear it is an important consideration.” 

Collyer said that the regulatory changes to boost affordability in the mortgage market are an example of taking risks to boost growth. 

The Financial Policy Committee (which FCA chief executive Nikhil Rathi sits on) said in July that large lenders would be able to lend over 15% of overall new home loans at over 4.5 times a buyer’s income, as long as the aggregate flow of this high loan-to-income lending remains under 15% among large banks overall.   

Previously, no large bank could top the 15% rule. This left a situation where some banks threatened to breach this level, while others were comfortably under this mark.  

The Chancellor said the move would lead to 36,000 extra first-time buyers entering the market in the first full year of the relaxations. 

Collyer said: “We expect the changes we’ve made to improve the efficiency of the mortgage market, to increase access to mortgages and subsequently widen home ownership and increase competition. All of that is important for productivity and for consumer wellbeing.  

“But we weighed the risk of house price inflation and increased risk of arrears and repossessions as well as the wider potential economic risks.” 

The economist said that evidence, evaluation and monitoring will be “critical tools as we make this shift”. 

She said: “We’re developing metrics for our strategy and exploring how best to measure risk using metrics, looking at the individual policy or regulatory decisions and the system-wide perspective. 

Collyer added: “Where we see opportunities from rebalancing risk we are driving hard and fast, with rigorous testing informed by evidence and analysis and focusing on how quickly we can support firms to get propositions to market.”