Regulators are in an “arms race” to keep up with the use of artificial intelligence in financial services, a senior UK official has warned, with millions of people using the technology to help them make personal finance decisions.
Sheldon Mills, an executive director at the Financial Conduct Authority, told the FT the watchdog would need greater powers to stay on top of the rapid growth of AI and urged UK authorities to review whether the use of ChatGPT, Claude, Gemini, and other large language models should be subject to their rules.
Speaking ahead of the publication on Monday of an FCA-commissioned report he has written on the impact of AI in financial services, Mills said regulators in the area would have to embrace AI themselves to keep up with the “speed, pace, and scale of change” the technology is bringing to the sector and to help “monitor, detect, and tackle the risks.”
“It is an arms race,” he added.
Mills’ report identifies benefits and risks from increasing use of AI in financial services. “Hyper-personalization could help better match products to needs, but also enable bias, opaque pricing, and personalized manipulation,” it says, according to a summary seen by the FT.
It recommends the FCA carries out a review in the next three to six months to examine the risks of companies providing financial services outside the remit of the regulator as well as “consumer harm” from the increasingly popular use of AI models for managing people’s personal finances.
Research commissioned by Mills found a fifth of UK adults were already open to using AI models to make financial decisions for them, such as on savings or borrowing, even though they are not covered by regulation and there is no recourse to compensation if things go wrong.
“Some firms have said to us that they feel that this could be an economically equivalent type of service that isn’t regulated [and] sits outside of the regulatory perimeter,” he said, pointing out there were “reasonably strict” rules for regulated companies giving similar recommendations.
“Is the fact that the chat model might be able to respond to prompts and have a conversation something closer to a recommendation, or guidance?” he asked.
But he also said AI could “democratize” finance by widening access to sophisticated services currently only available to the richest customers. He said people earning only £20,000 a year could gain access to financial advice usually only available “to somebody who has got £10mn in savings or assets,” adding: “I mean what’s not to like about that?”
His report recommends the FCA convenes public and private sector groups to develop an “AI-enabled financial capability service” that provides free information and guidance to the British public on their financial choices.
Many financial services companies are already piloting AI agents that can autonomously carry out financial transactions for companies and consumers. Mills, who is leaving after eight years at the FCA, said managers would still need to be accountable for the actions of their AI models. “You need a human on the hook for what they’re doing,” he said.
AI is likely to “amplify” the threat of fraud and cyber attacks, the report says, calling for the technology to be used to defend the system from such threats. “Deepfakes, synthetic identities, and personalized social engineering are taking fraud and cyber risks into a new era and changing how fraud and cyber attacks,” it says.
Mills’ report also recommends boosting the FCA’s powers under the “critical third parties” regime that allows it to supervise key technology providers to the financial sector, such as Anthropic, OpenAI, Amazon, Google, and Microsoft.
The government is yet to decide which Big Tech groups to designate under the regime, which allows regulators to impose more robust disclosure requirements, including annual self-assessments and “scenario testing” of their ability to withstand severe disruptions.
The report says the FCA could also seek extra powers under the “designated activities regime” that allows it to regulate specific activities without requiring the firms carrying them out to be authorized.
The FCA board is due to discuss the report from Mills before deciding how to respond to its recommendations.
The watchdog has been criticized by some politicians for a 12-week contract it agreed with US tech group Palantir to test whether its AI systems can help fight financial crime. Some MPs have raised concerns the contract could give US authorities access to sensitive UK financial information. The FCA and Palantir have denied this. Mills declined to comment on the Palantir contract.
This story has been amended to clarify that research commissioned by Sheldon Mills found that a fifth of UK adults were open to using AI models to make financial decisions for them.
