Treasury Committee demands AI stress tests as finance sector risks crisis

Britain's financial watchdogs are exposing consumers and the financial system to potentially serious harm by failing to properly regulate artificial intelligence in financial services, according to a Treasury Committee report published on Tuesday.

The cross-party group of MPs criticised the Bank of England, Financial Conduct Authority and Treasury for adopting a "wait-and-see" approach despite more than three-quarters of UK financial firms now using AI across core operations including insurance claims processing and credit assessments.

Dame Meg Hillier, chair of the Treasury committee, told Reuters she lacked confidence that Britain's financial system was prepared for a major AI-related incident. "It is the responsibility of the Bank of England, the FCA and the government to ensure the safety mechanisms within the system keeps pace," she said.

The report highlighted multiple consumer protection concerns, including lack of transparency around how AI influences lending and insurance decisions, potentially disadvantaging vulnerable customers. MPs warned it remained unclear whether data providers, technology developers or financial firms would be held accountable when AI systems caused harm.

MPs also flagged increased fraud risks and the spread of unregulated financial advice through AI chatbots as growing threats to consumers.

On financial stability, the committee warned that rising AI adoption had increased firms' cybersecurity vulnerabilities and created dangerous overreliance on a small number of US technology giants including Google for essential services. The report cautioned that AI-driven trading systems could amplify "herd behaviour" during economic shocks, with firms making similar automated decisions that could trigger a financial crisis.

The committee called for immediate action, including new AI-specific stress tests to assess the City's readiness for automated market shocks. MPs urged the FCA to publish practical guidance by the end of 2026 clarifying how consumer protection rules apply to AI and establishing clear accountability when systems cause harm.

The report also criticised the government's failure to designate any firms under the Critical Third Parties Regime, which was established over a year ago to give regulators powers over non-financial companies providing critical services to the sector.

An FCA spokesperson said the regulator had "undertaken extensive work to ensure firms are able to use AI in a safe and responsible way" and would review the findings carefully. The watchdog has previously resisted AI-specific rules, citing the rapid pace of technological change.

A Treasury spokesperson said the government would "strike the right balance between managing the risks posed by AI and unlocking its huge potential", noting the appointment of new AI champions for financial services announced on Tuesday.

The Bank of England said it had already taken active steps to assess AI-related risks, including publishing a detailed risk assessment examining potential implications of sharp falls in AI-affected asset prices.

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