LONDON—Britain’s financial regulators face mounting pressure to overhaul their approach to artificial intelligence after a parliamentary panel warned that the current “wait and see” stance exposes consumers and markets to serious harm. The Treasury Committee’s report, released January 20, 2026, calls for the Financial Conduct Authority (FCA) and Bank of England (BoE) to launch AI-specific stress tests, designed to simulate market shocks triggered by automated systems.

“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,” said Dame Meg Hillier, chair of the Treasury Committee, in a statement quoted by Reuters. The report highlights that about three-quarters of British financial firms now deploy AI in core operations, from insurance claims processing to credit assessments, amplifying risks like opaque decision-making and algorithmic exclusion of vulnerable customers.

Experts testifying before the committee pointed to threats from heavy reliance on a handful of U.S. tech giants for AI and cloud services, warning that outages—such as the October 2025 Amazon Web Services disruption affecting banks like Lloyds—could cascade into systemic failures. AI-driven trading could exacerbate “herding behaviour,” where imitative decisions amplify market crashes, the panel noted.

Treasury Committee Targets Regulatory Gaps

The cross-party group criticized the FCA, BoE, and HM Treasury for inadequate oversight, urging the FCA to issue guidance by the end of 2026 on applying consumer protection rules to AI and clarifying senior managers’ responsibilities for understanding these systems. “By taking a wait-and-see approach to AI in financial services, the three authorities are exposing consumers and the financial system to potentially serious harm,” the report stated, as covered by The Guardian.

Firms struggle with AI’s “lack of explainability,” conflicting with requirements for executives to control risks, according to trade group Innovate Finance’s testimony reported by The Register. The committee also slammed delays in implementing the Critical Third Parties (CTP) regime, introduced in January 2025, which empowers regulators to oversee non-financial providers like AI and cloud firms. “Over a year since the regime was established, it is not clear to us why HM Treasury has been so slow,” the report said.

The FCA, which has resisted AI-specific rules due to technology’s rapid evolution, plans to review the recommendations. A spokesperson told The Paypers the regulator welcomes the focus but favors principles-based oversight. The BoE, meanwhile, has assessed AI risks and will respond formally.

Agentic AI Emerges as New Threat

A race among banks to adopt “agentic AI”—systems that autonomously make decisions, unlike basic generative models—poses fresh dangers to retail customers, the FCA warned Reuters late last year. This shift from chatbots to operational influencers in lending and fraud detection raises concerns over “black box” outcomes hard to challenge, potentially discriminating against vulnerable groups.

Fraud risks and unregulated advice from AI chatbots compound consumer perils, while financial stability hangs on diversified infrastructure. “If something has gone wrong in the system, that could have a very big impact on the consumer,” Hillier told Reuters. The report advocates incorporating AI scenarios into system-wide stress tests to probe resilience.

In parallel, HM Treasury appointed Starling Bank CIO Harriet Rees and Lloyds Banking Group’s Rohit Dhawan as unpaid “AI Champions” on January 20, 2026, to guide safe adoption, as announced via government channels and echoed in Ground News aggregation.

Global Echoes and Industry Pushback

The UK push mirrors international concerns, with India’s RBI voicing similar AI governance needs in financial services, per Economic Times BFSI. Jonathan Hall, BoE Financial Policy Committee member, endorsed tailored AI stress tests to spot risks early, cited in coverage by MEXC News.

Industry voices like EY’s Preetham Peddanagari stress defined regulation for competitiveness, as noted by Mortgage Strategy. The FCA’s existing tools, including its April 2025 AI live testing service and a planned June 2025 code with the Information Commissioner’s Office, represent steps forward but fall short of lawmakers’ demands.

Financial services, a cornerstone of the UK economy, must balance innovation with safeguards. The Treasury Committee insists proactive measures, including designating AI providers under CTP by year-end, to avert crises where tech failures morph into economic shocks, drawing from TechRepublic.

Path Forward for Regulators

The BoE’s Financial Policy Committee should monitor CTP progress and recommend acceleration if needed, the report urges. With no dedicated AI laws, reliance on legacy rules leaves gaps, especially as 75% of firms embed AI deeper than other sectors.

David Geale, FCA Executive Director for Payments and Digital Finance, emphasized individual accountability for AI-induced harm, yet committee evidence reveals governance shortfalls. Upcoming FCA guidance could bridge this, mandating executive AI literacy.

As AI evolves, the UK’s light-touch history risks complacency amid global competition. Lawmakers’ blueprint—stress tests, oversight of third parties, and clear rules—aims to fortify the system without stifling growth, positioning Britain as a leader in responsible fintech.