A senior UK official has warned that regulators are in an 'arms race' to keep up with the rapid adoption of artificial intelligence in financial services. Sheldon Mills, an executive director at the Financial Conduct Authority (FCA), told the Financial Times that the watchdog needs greater powers to monitor and address the risks posed by AI. Mills emphasized the need for regulators to embrace AI themselves to stay ahead of the 'speed, pace, and scale of change' the technology is bringing to the sector. 'It is an arms race,' he added. The FCA is set to publish a report commissioned by Mills, which outlines both the benefits and risks of AI in financial services, including the potential for hyper-personalization to enable bias, opaque pricing, and personalized manipulation. The report also highlights the growing popularity of AI models for managing personal finances, with a fifth of UK adults open to letting AI make financial decisions for them. Mills said some firms argue that AI could be an 'economically equivalent type of service' that is not regulated and sits outside the regulatory perimeter.
However, he also noted that AI could 'democratize' finance by providing access to sophisticated services previously available only to the wealthy. The report recommends the FCA convene public and private sector groups to develop an 'AI-enabled financial capability service' that offers free information and guidance to the public on financial choices. Many financial services companies are already piloting AI agents that can autonomously carry out financial transactions for consumers and businesses. 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 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.
Source: arstechnica
