The Treasury Select Committee has issued a hard-hitting report saying that the Bank of England, the Financial Conduct Authority and the Treasury are exposing the public and the financial system to potentially serious harm due to their current positions on the use of artificial intelligence in financial services.

The Committee says that by adopting a wait-and-see approach, the major public financial institutions, which are responsible for protecting consumers and maintaining stability in the UK economy, are not doing enough to manage the risks presented by the increased use of AI in the financial services sector.

The Committee received evidence that more than 75% of UK financial services firms are now using AI, especially international banks and insurance companies. Businesses are using AI in a variety of ways, including to automate administrative functions and to deliver core services such as processing insurance claims and credit assessments.

In the report, the Committee acknowledges that AI and wider technological developments could bring considerable benefits to consumers. As a consequence, it encourages firms and the FCA to work together to make sure that the UK capitalises on AI's opportunities.

However, the Treasury Committee also believes that action is needed to ensure that this is done safely. One recommendation is for the Bank of England and the FCA to conduct AI-specific stress-testing to boost businesses' readiness for any future AI-driven market shock.

The Treasury Committee is also recommending that the FCA should publish practical guidance on AI for firms by the end of this year. This should include how consumer protection rules apply to their use of AI as well as setting out a clearer explanation of who in those organisations should be accountable for harm caused through AI.

The Critical Third Parties Regime was established to give the FCA and the Bank of England 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. The UK government is responsible for deciding which firms are brought into this regime. The report notes that, despite being set up for more than a year, no organisations have yet been designated under the regime. The Committee urges the Government to designate AI and cloud providers deemed critical to the financial services sector to improve oversight and resilience.