The Committee believes that the financial services regulators are not doing enough to manage the risks presented by AI.
By Becky Critchley, Gary Whitehead, and Charlotte Collins
On 20 January 2026, the House of Commons Treasury Select Committee published a report on AI in financial services. This follows an inquiry that was launched in February 2025, and took evidence throughout the year. The core question posed by the inquiry was whether the financial services regulators are doing enough to manage the risks to consumers and to financial stability presented by AI in financial services. Overall, the report is critical of the regulators’ approach to AI, which somewhat undermines the regulators’ current pro-innovation stance and the careful line the regulators have attempted to tread.
Shortly afterwards, on 27 January 2026, the FCA announced a review into the long-term impact of AI on retail financial services (to be known as “the Mills Review”). The review will seek views across four main themes (discussed further below). The overall aim of the review is to ensure that the FCA remains prepared for the future of AI in financial services and is able to adapt accordingly.
Key Findings of the Report
The Treasury Select Committee report found that the FCA, the Bank of England, and HM Treasury are not doing enough to manage the risks presented by AI. The Committee believes that, by taking a “wait and see” approach to AI in financial services, the regulators are exposing consumers and the financial system to potentially serious harm. In contrast, the regulators have communicated on a number of occasions that they believe the existing regulatory framework offers sufficient protection.
Specific risks associated with AI that are highlighted in the report include lack of transparency in AI-driven decision-making, AI financial decision-making leading to financial exclusion, unregulated financial advice from AI search engines that could mislead consumers, heightened cybersecurity vulnerabilities, and operational resilience issues (due to reliance on a small number of US technology firms for AI and cloud services).
Treasury Select Committee Chair Dame Meg Hillier said in a statement, “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”.
The report also admonishes the regulators for their “reactive” approach to AI, stating that this leaves firms with “little practical clarity on how to apply existing rules to their AI usage”.
Further, the report strongly criticises the fact that no technology firms have yet been designated under the Critical Third Parties Regime, which has been in place for over a year. The regime is designed to increase oversight of firms which provide critical services to the UK financial services sector, and HM Treasury is responsible for making designation decisions.
Recommendations
The report goes on to make three key recommendations:
- By the end of 2026, the FCA should publish comprehensive, practical guidance for firms on: (a) the application of existing consumer protection rules (i.e., the Consumer Duty) to their use of AI; and (b) accountability and the level of assurance expected from senior managers under the SMCR for harm caused through the use of AI.
- The Bank of England and the FCA must conduct AI-specific stress testing.
- By the end of 2026, HM Treasury must designate the major AI and cloud providers as critical third parties for the purposes of the Critical Third Parties Regime.
FCA Review
It is perhaps no accident that the FCA announced its review shortly after publication of the Treasury Select Committee’s report. While the FCA remains emphatic that it is not seeking to introduce new detailed rules on AI, one of the four themes covered by the review is looking at the future regulatory approach to AI (alongside the future evolution of AI technology, the future impact of AI on markets and firms, and future consumer trends).
The FCA plans to consider whether existing frameworks, such as the Consumer Duty, the SMCR, the Operational Resilience framework, and the Critical Third Parties Regime, remain flexible and sufficiently outcomes-focused. No doubt mindful of the Treasury Select Committee’s first recommendation, the FCA also indicates that it will reflect on how quickly guidance might be needed for applying these regimes to the use of AI. In doing so, it will explore the balance between providing regulatory certainty versus promoting adaptability and support for innovation.
The FCA is seeking input for this review by 24 February 2026. The review will then share its recommendations with the FCA board this summer, following which it plans to issue an external publication on the findings and recommendations.
Comment
Although the Treasury Select Committee has stopped short of recommending that the regulators introduce new AI-specific regulation for financial services firms, its approach suggests that the Committee and the regulators are not fully aligned on how best to deal with the potential risks and benefits of AI. The FCA is likely to feel this criticism keenly, given that it has been working hard to balance the government’s pro-growth agenda with consumer protection concerns. The launch of the FCA’s review seems to indicate that the regulator wants to demonstrate its proactive stance when it comes to AI.
Nevertheless, the industry is likely to welcome additional practical guidance, provided that this can genuinely bring clarity rather than further confusion. Firms should note that the statement from Dame Hillier implies that firms themselves need to be doing more to address the risks associated with AI. Therefore, firms should continue to ensure that they deploy AI-based solutions responsibly and with appropriate oversight. Work in this area is likely to be bolstered by the appointment of two AI Champions in financial services, announced in parallel with the publication of the Treasury Select Committee report. This follows a commitment made by the government as part of the July 2025 Financial Services Growth and Competitiveness Strategy.