UK financial firms' rapid AI adoption sparks call for tighter regulation and oversight

More than three-quarters of UK financial services firms now use artificial intelligence, yet MPs on the Treasury Select Committee warn that regulation has not kept pace with rapid adoption, leaving consumers and the wider system exposed.

According to the committee’s report, and corroborated by the Bank of England’s 2024 review, roughly 75% of firms employ AI, with insurers and international banks showing the highest take-up. The technology is being deployed to automate back-office tasks and to run core services such as insurance claims processing and credit assessments. Industry surveys and analyses reinforce the picture of fast-growing use: Addleshaw Goddard and Blott both noted the jump to 75% adoption since 2022, while EY’s pan‑European survey found a still-higher figure of 91% using AI to some degree, albeit mostly in early stages.

Dame Meg Hillier, chair of the Treasury Select Committee, told MPs she was unconvinced the financial system could withstand a major AI-related incident. “Firms are understandably eager to try and gain an edge by embracing new technology, and that’s particularly true in our financial services sector which must compete on the global stage,” she 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.”

MPs highlighted several concrete risks. Transparency is a central concern: customers frequently cannot see how automated systems reach decisions on loans or insurance pricing, creating accountability gaps. The committee heard evidence that AI-driven processes can entrench exclusion, locking out people who already struggle to access financial products. Witnesses also flagged the spread of false information through unregulated AI search tools, an elevated fraud risk and the prospect that AI-driven trading could intensify herding behaviour, magnifying stress and volatility in markets.

Another vulnerability is concentration: UK firms rely heavily on a small group of US technology and cloud providers for AI tools and infrastructure, raising both operational dependency and cyber‑security concerns. The report points to the Critical Third Parties Regime, designed to give regulators powers over non-financial suppliers of essential services, but notes that more than a year after its creation no company has been designated under the regime. MPs urged the Government to identify and designate AI and cloud providers deemed critical to UK finance to strengthen oversight and resilience.

Regulators have so far relied on existing frameworks rather than AI-specific rules, a situation the committee said leaves grey areas around accountability and consumer protection. The report calls on the Bank of England and the Financial Conduct Authority to develop AI-specific stress tests to examine how firms and markets would react to AI-driven shocks. It also asked the FCA to publish practical guidance on AI before the end of the year, explaining how consumer‑protection rules apply and who bears responsibility when AI causes harm.

A Bank of England spokesperson told The Independent that the bank had already taken active steps to assess AI risks and would review the committee’s recommendations. The committee’s demands reflect wider industry pressure to demonstrate how AI behaves under stress: Levent Ergin, Chief Strategist for Agentic AI, Regulatory Compliance & Sustainability at Informatica, from Salesforce, warned that “AI decisioning on credit decisions and insurance claims, is like putting a plane on autopilot. When it gets the decision right, it can move at speed. When it is wrong, it has the potential to be catastrophic for both consumers and banks alike.” He added that financial institutions need to show not just what AI can do, but how it performs under stress and that decisions are grounded in trusted, well-understood data.

The case for clearer rules is underscored by business and consumer trends. Lloyds Banking Group’s 2025 survey suggests productivity gains from AI are accelerating, with 59% of institutions reporting improved productivity compared with 32% in 2024, and half planning to increase AI investment over the next year. EY found that most firms plan to raise spending on generative AI, signalling further entrenchment of the technology. Yet consumer research by FIS shows a sizeable information gap: half of UK consumers do not understand how AI could improve their financial experience and 38% believe banks are innovating too quickly, reinforcing the committee’s call for firms to do more to educate customers as they roll out AI.

Industry bodies and law firms have documented the sharp rise in adoption: Addleshaw Goddard flagged an increase from 58% in 2022 to 75% in 2024, while multiple independent analyses emphasise that many firms remain in early stages and that governance, data quality and explainability remain weak points.

MPs want public authorities to move from a largely reactive stance to a proactive regulatory posture: mandatory stress testing, clearer assignment of liability when AI causes harm, formal guidance from the FCA on consumer protections and a faster pace of designations under the Critical Third Parties Regime. The committee argues these steps will reduce uncertainty for firms and better protect customers.

Regulators and some parts of the industry accept the need for stronger oversight but also stress proportionality to avoid stifling innovation. As AI becomes more deeply embedded across banking and insurance, the debate is shifting from whether to regulate to how to do so in a way that preserves safety, competition and consumer trust while allowing legitimate technological progress.