Excessive regulation could turn the City of London into a ‘graveyard’ by stifling innovation and risk-taking, warned Sam Woods, chief executive of the Bank of England’s Prudential Regulation Authority (PRA).
Speaking at the city’s annual banquet at Mansion House, Woods warned that while financial regulation is necessary for stability, overregulation could stifle the financial sector’s ability to stimulate economic growth.
Woods described risk as the “lifeblood” of a thriving economy, arguing that attempting to eliminate it altogether would stifle innovation and leave the city stagnant. “Risk is the lifeblood of a thriving capitalist economy, driving growth and innovation,” Woods said. “The whole point of a strong financial system is to enable society to take risks.”
His comments come amid growing concerns that Britain’s efforts to make financial institutions safer are becoming counterproductive. Acknowledging that the balance between regulation and risk management is difficult but crucial, Woods noted: “Good businesses are unlikely to thrive in an environment of ever-expanding regulation.”
Woods pointed to recent moves by the PRA, such as the decision to eliminate the cap on bankers’ bonuses, as evidence that regulators are taking steps to reduce the burden on the city. The cap was “harmful to competitiveness,” he said, and removing it was an important signal of intent to roll back unnecessary regulations.
The Financial Conduct Authority (FCA) has also been criticized for increasing regulatory requirements. In February, the FCA came under fire over proposals to ‘name and shame’ companies under investigation, and also faced complaints over rules around diversity and inclusion disclosure. Jeremy Hunt, the former Chancellor, introduced a new mandate for regulators, including the FCA and PRA, to treat economic growth as a ‘secondary objective’ to their regulatory duties. The move was seen as a direct response to concerns that regulators were holding back the city’s growth potential.
Sir Keir Starmer, who largely followed the previous government’s regulatory approach, reinforced this direction by urging regulators to take economic growth seriously. Speaking at the International Investment Summit, Starmer said the government would force regulators to focus on growth as a priority.
FCA CEO Nikhil Rathi echoed Woods’ sentiments, describing the new growth mandate as “liberating” and leading to more open conversations about risk. Rathi and Woods both emphasized the importance of finding the right balance between maintaining stability in the financial system and allowing enough flexibility for companies to grow and take calculated risks.
David Postings, CEO of UK Finance, the banking lobby group, agreed, saying: “If we can collectively get the right balance between risk and protection for consumers, it will help support economic growth and financial inclusion in the UK .”
As regulators face increasing pressure to cut red tape and promote competitiveness, Woods’ comments reflect a broader debate about how to balance the need for stability with the need for growth and innovation in the financial sector.