The Treasury Select Committee has warned the Bank of England, the Treasury and the FCA are exposing the financial system and the public to potentially serious harm by taking a passive stance on the use of AI in the financial services sector.

In the report Artificial Intelligence in Financial Services, published today (20 January), the Treasury Select Committee said the major public financial institutions are taking a wait-and-see approach to managing the risks presented by the increased use of AI, deeming it insufficient.

More than 75% of UK financial services firms are now using AI, with the largest take-up among insurers and international banks, evidence received by the Committee shows.

While the Committee acknowledged that AI and wider technological developments could bring considerable benefits to consumers and called for the FCA to work with firms to ensure the UK capitalises on AI’s opportunities, it believes action is needed to ensure that this is done safely.

Recommendations include the Bank of England and the FCA conducting AI-specific stress-testing on businesses and the FCA publishing practical guidance on AI for firms by the end of this year, including how consumer protection rules apply and advice on accountability.

Despite the Critical Third Parties Regime being established over a year ago to arm the FCA and the Bank of England with new powers of investigation and enforcement over non-financial firms which provide critical services to the UK financial services sector, including AI and cloud providers, no organisations have yet been designated under the regime, the report noted.

Dame Meg Hillier, chair of the Treasury Select Committee, said: “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.

“Based on the evidence I've seen, I do not feel confident that our financial system is prepared if there was a major AI-related incident and that is worrying. I want to see our public financial institutions take a more proactive approach to protecting us against that risk.”