UK financial system exposed to ‘serious harm’ from AI risks
The Treasury, the financial watchdog and the Bank of England have been handed a stiff warning that the nation’s financial system is not adequately prepared for an AI shock.
A group of influential MPs sat on the Treasury Select Committee took aim at the institutions for “not doing enough to manage the risks presented by AI,” despite claims from regulators that the current rulebook was sufficient.
In a session with policymakers, the Financial Conduct Authority’s chief data, information and intelligence officer said the current regime gave the watchdog “enough regulatory bite that we don’t need to write new rules for AI”. But the committee dismissed this, finding the “three authorities are exposing consumers and the financial system to potentially serious harm”.
Writing in CityAM today, Chair of the Treasury Select Committee Dame Meg Hillier doubled down on these warnings.
“I do not feel confident that our financial system is prepared for a major AI-related incident,” Hiller wrote. “This needs to be addressed.”
The financial services industry has bullishly embraced AI over recent years in a bid to streamline operations and cut costs amid rising competition.
The City’s banking giants have bet heavily on the tech, forming their own AI units and incorporating it across customer-facing and back-room operations.
Natwest, Lloyds and HSBC each occupy a spot on the top 20 Evident AI index, which serves as a global benchmark for AI integration in the banking sector.
Banks get caught up in cyber outages
Analysts at UBS said banks would likely be “significant beneficiaries of AI” and expect lenders to be “pressed hard this year” to sell their tech narrative to investors.
Yet banks have still found themselves swept up in the cyber chaos with Amazon Web Services – which was triggered by a failure in automation systems – with Lloyds and Halifax facing an outage.
The lawmakers gave a scathing assessment of the UK’s “slow” implementation of the Critical Third Parties (CTP) Regime, which was created to give regulators powers to oversee firms like Amazon, Google, and Microsoft.
In sessions with the committee last year, Treasury ministers revealed that not a single tech giant has been formally designated under the regime – more than a year after the powers were established.
The committee called for major AI and cloud providers to be designated by the end of 2026 to prevent these systemic “single points of failure” from operating without adequate oversight.
Chair of the Treasury Select Committee Dame Meg Hillier said: “Firms are understandably eager to try and gain an edge by embracing new technology… [but] the use of AI in the City has quickly become widespread and it is the responsibility of the Bank of England, the FCA and the government to ensure the safety mechanisms within the system keeps pace.”
In December, the FCA opened the doors to its first-ever ‘AI live testing’ where major financial firms where given a controlled environment to trail AI without the fear of tripping regulatory wires.
NatWest, Monzo, Santander, Scottish Widows, Gain Credit, Homeprotect and fintech Snorkl are among those participating in the event, which the regulator said would help fix governannce before the algorithms begin making high-stakes decisions.