By Tommy Reggiori Wilkes and William James

LONDON (Reuters) -Britain's finance watchdog told the government on Friday that it would "take greater risks" to support its drive for more economic growth but warned that the approach would lead to more failures and harm to consumers and businesses.

Financial and Conduct Authority (FCA) Chief Executive Nikhil Rathi wrote in a letter sent to Prime Minister Keir Starmer and finance minister Rachel Reeves that it would collaborate to support the government's growth mission, as it set out proposals including easing mortgage access and reducing regulations.

Reeves has urged regulators to eliminate barriers to growth, tasking them with creating a regulatory environment that boosts investment and innovation.

She has also called on regulators to institute cultural change to deliver growth instead of focusing "excessively" on managing risk.

"To achieve the deep reforms necessary, your acceptance that we will take greater risks and rigorously prioritise resources is crucial," Rathi said in the letter.

Politicians, among others, needed to accept that more risk-taking would lead to more failures, the FCA boss added.

"We will not stop all harm when making risk-based choices about the cases and intelligence we pursue, and we increasingly deploy technology to make those choices with speed and at scale. Metrics for tolerable failures within the overall system could help to support this," Rathi said.

Britain's drive to reduce red tape comes amid expectations that the incoming Trump administration will slash or water down rules in the United States.

Bank of England Deputy Governor Sam Woods said this month that Britain should avoid participating in a "race to the bottom" on financial regulation.

The BoE said on Friday it would delay implementation of tougher global bank capital rules to 2027.

Setting out its proposals for reform to aid growth, Rathi said the FCA would aim to boost capital investment, accelerate digital innovation and reduce the regulatory burden.

In the mortgage market the regulator will begin "simplifying responsible lending and advice rules for mortgages, supporting home ownership and opening a discussion on the balance between access to lending and levels of defaults".

More broadly, the regulator said it would assess the proportionality of reporting requirements for some firms.

"We could go even further and, with government support, reduce costs of anti-money laundering measures, relaxing 'know your customer' requirements on small transactions," Rathi wrote.

Among its proposed digital reforms, the FCA is considering removing a 100-pound ($122) cap on payments with contactless cards, giving businesses and consumers more flexibility.

($1 = 0.8202 pounds)

(Reporting by Tommy Reggiori Wilkes and William James; Additional reporting by Sachin Ravikumar; Editing by Catarina Demony, Gareth Jones and Toby Chopra)