UK Parliamentary Panel Warns of AI Oversight Gaps Exposing Financial System to Harm

UK lawmakers have raised concerns about the risks of artificial intelligence in financial services, with the Treasury Committee urging regulators to take immediate action. The committee highlighted the lack of preparedness in the financial system against a major AI-related incident. It recommended AI-specific stress tests and clearer guidance on consumer protection.

The report emphasized the widespread adoption of AI in financial firms, with over 75% of companies now using the technology. While AI offers benefits like increased efficiency, it also carries risks such as opaque decision-making and potential exclusion of vulnerable consumers.

The committee criticized the current 'wait-and-see' approach taken by the Bank of England and the Financial Conduct Authority (FCA). It warned that this approach could expose consumers and the financial system to serious harm if a significant AI-related issue arose.

Why Is AI a Concern for Financial Stability?

AI-driven systems are being used across core financial functions, including insurance claims processing and credit assessments. However, the report warned that opaque algorithms could lead to unfair outcomes for certain groups.

Experts contributing to the report pointed to the potential for AI to amplify herding behavior in financial markets. If many institutions rely on similar AI systems, they could all make similar financial decisions in response to economic shocks, risking a financial crisis.

The reliance on a small number of U.S. tech companies for AI and cloud services is also a risk. If these companies experience outages or security breaches, UK financial institutions could be significantly impacted.

What Are Regulators Being Asked to Do?

The Treasury Committee has called for new stress tests to assess the readiness of financial institutions for AI-driven market shocks. These tests would help regulators understand how the financial system might respond to a major AI-related incident.

In addition, the FCA is being urged to publish detailed guidance by the end of 2026. This guidance should clarify how consumer protection rules apply to AI systems and who would be held responsible if things go wrong.

The FCA responded by stating it had already undertaken work to ensure AI is used safely and responsibly. However, it acknowledged it would review the report's findings carefully.

What Are the Next Steps for the UK Financial Sector?

The government has appointed two new 'AI Champions' from the financial sector to help guide the responsible use of AI. These individuals will play a role in ensuring the opportunities of AI are harnessed safely.

The Bank of England has said it has taken active steps to assess AI-related risks and will consider the committee's recommendations carefully.

The report serves as a call to action for regulators and policymakers to address the growing use of AI in financial services. As AI becomes more sophisticated, the need for clear guidelines and oversight will become even more critical.