Rachel Reeves argued that regulatory changes to eliminate risk after the financial crisis have “gone too far” and watchdogs should now have “a greater focus on supporting economic growth,” at her set-piece speech at Mansion House last month.

In a follow-up letter, dated 14 November, sent by the Chancellor to the FCA, she wrote that the regulator “should also consider how you can enable informed and responsible risk-taking by authorised firms and customers”.

But FCA chair Ashley Alder said that standards must remain high among financial firms, he told the Treasury Select Committee this morning.

Alder added: “This is not a return to pre-crisis light touch regulation. Because, frankly, that ended in tears. Not just in the UK, but elsewhere.

“Standards have to remain high for firms. But there is a very good agreement for proportionality.”

FCA chief executive Nikhil Rathi, also appearing before the committee, added that allowing risk into the system would lead to more failures.

Rathi said: “If we’re going to allow more risk into the system, there’s going to be, sadly, in the financial services industry — not just here but around the world — it sometimes does attract people who don’t have the best of intentions and we’re not going to be able to stop everything.”

Alder described the watchdog’s Consumer Duty regulation, introduced in July 2023, as a “landmark” piece of work around which any loosening of guidance should be judged.

Its wide-ranging guidance requires financial firms to document their fair dealing with consumers.

The regulation covers the whole of the UK’s 60,000 regulated financial firms, including the mortgage industry’s roughly 100 lenders and 18,000 brokers and broker firms.

However, the regulator’s dual remit of protecting consumers and supporting growth may come under pressure as the Chancellor pushes to make the UK the fastest-growing economy in the G7 over the next five years.

Following Reeves’ speech last month, a range of City trade bodies backed her move to free up the sector, which employs 1.2 million people in the UK and is the second largest exporter of financial services in the G7.

UK Finance chief executive David Postings said: “The Chancellor has set out a positive vision for financial services, which are a UK success story and vital to our economy.

“I strongly welcome her support for the sector, coupled with the fact that she is addressing how we can best balance risk and consumer protection to help support economic growth.

“Key to this is the regulatory environment, with the new remit letters rightly stressing the importance of growth and competitiveness in regulators’ work.”

Association of British Insurers head of prudential regulation David Otudeko added: “A regulatory focus on driving growth and competitiveness will help to boost investment and enable innovation in the UK market.

“We strongly support the emphasis on regulating for growth and not just risk. That’s why we welcome the focus on simplifying the regulatory landscape to free up companies to innovate and invest.”