Rebalancing act: Approach to growth and risk-taking
Published 6 May 2025
Introduction
The Government and policymakers have been clear in their view that regulation, particularly in the financial services sector, has been too restrictive. A recent policy paper from the Treasury, on its approach to ensuring that regulators support growth, promised that administrative costs for businesses would be cut by a quarter before the end of the current Parliament.
The regulators have been supportive of this agenda but also clear about the trade-offs that the push for growth entails. They have repeatedly advised that it will involve allowing financial services companies to take more risks. The Financial Conduct Authority’s (FCA’s) new five-year strategy made this explicit, with a focus on ‘rebalancing risk’ and an acknowledgement that there needed to be more ‘focus on risks that regulation should allow in the context of our current environment.’
The Prudential Regulation Authority’s (PRA’s) business plan for the next year acknowledges its role in supporting competitive, dynamic and innovative markets, as part of its duty to facilitate international competitiveness and growth. Nonetheless, the PRA is also clear that it will continue to focus on identifying and addressing emerging risks, horizon-scanning and identifying emerging trends in the sectors it regulates.
While the two approaches are broadly aligned in that they both support growth, it is reasonable to ask how divergent the two regulators’ approach to risk will be. The FCA’s emphasis on rebalancing suggests a greater willingness to allow for some failures in the pursuit of innovation, whereas, as a prudential regulator, the PRA’s first instinct will often be to prevent failures.
The PRA’s primary concern for stability could lead to a more cautious approach to certain innovations or market developments that the FCA might be more willing to explore. Dual-regulated firms in particular may therefore start to feel the inherent tension between these two impulses.
