UK Regulators Warned of Potential Consumer Harm Due to AI Oversight Gaps

UK regulators are being alerted to the risks posed by their current handling of artificial intelligence (AI) in financial services. With rapid advancements in AI technology, the Treasury Select Committee believes that existing regulatory loopholes could significantly endanger consumers.

Key Takeaways

UK financial regulators may be putting consumers at risk due to insufficient oversight of artificial intelligence.
The Treasury Select Committee highlights an over-reliance on a “wait-and-see” strategy regarding AI deployment in the finance sector.
Around 75% of financial services firms in the UK utilize AI, yet no dedicated legislation exists for its use.
The committee calls for proactive measures to mitigate risks associated with AI, especially concerning financial stability and consumer protection.

UK Regulators "Exposing Consumers to Serious Harm" as AI Oversight Gaps Widen — Committee Warns

Regulators' Approach to AI in Finance

UK regulators are expressing concern that their current strategies for overseeing artificial intelligence in financial services are inadequate, potentially exposing consumers to significant risks. The Treasury Select Committee has raised alarms regarding the increasing gaps in regulation as AI technology becomes more prevalent within the industry.

In a report released on January 20, the committee stated that the speed of AI integration has outpaced regulators' capability to effectively manage its associated risks.

Currently, about 75% of financial services companies in the UK are already employing AI, with the highest adoption rates seen among insurers and major global banks. While lawmakers acknowledge that AI can boost efficiency, improve customer service, and enhance cybersecurity measures, they emphasize that these benefits are overshadowed by the unaddressed threats to both consumers and financial stability.

UK’s Reactive Stance on AI Regulation

At present, there is no specialized legislation governing AI applications in the UK financial sector. Regulators have been relying on existing rules, claiming their flexibility accommodates new technologies. The Financial Conduct Authority (FCA) has pointed to frameworks like the Consumer Duty and the Senior Managers and Certification Regime as providing sufficient safeguards, while the Bank of England maintains its stance of reacting only when issues emerge.

However, the committee argues that this approach places excessive responsibility on companies to decipher complex regulations independently. The decisions made by AI systems in areas like credit and insurance are often unclear, making it challenging for consumers to understand or contest outcomes. This lack of transparency can exacerbate financial exclusion for vulnerable populations, and unregulated AI-driven financial advice could mislead users. Additionally, the misuse of AI by malicious actors could escalate fraud risks.

The committee asserts that these challenges are urgent and require more than mere post-factum monitoring.

Current Regulatory Initiatives Fall Short

Although some initiatives have been implemented, such as the formation of an AI Consortium and voluntary testing programs including the FCA's AI Live Testing and Supercharged Sandbox, MPs express that these measures only benefit a limited number of firms and fail to provide necessary clarity to the broader market.

Industry stakeholders have conveyed their concerns to the committee that this reactive regulatory stance leaves firms uncertain about their accountability, particularly when AI systems behave unpredictably.

Financial Stability at Risk from AI

The report further outlines concerns regarding financial stability, suggesting that AI might heighten cyber risks, lead to operational dependency on a few US-based cloud service providers, and cause herd behavior in financial markets. Despite recognizing the potential value of AI-specific stress testing, neither the FCA nor the Bank of England currently implements such tests, and no timeline for their introduction has been established.

The report emphasizes the dependence on third-party technology providers. While Parliament instituted the Critical Third Parties Regime in 2023 to regulate firms offering essential services, no significant AI or cloud provider has yet been categorized under this regime. This inaction persists despite notable outages, such as an October 2025 incident with Amazon Web Services that disrupted several major UK banks.

The committee warns that the slow implementation of this regime continues to leave the financial system vulnerable.

As the UK government pursues a pro-innovation, principles-based AI framework designed to foster growth while minimizing stringent regulations, the committee insists that such ambitions must be matched with concrete actions to safeguard consumers and the overall financial landscape.