The FCA’s approach to AI

Within the government’s White Paper AI Regulation: A Pro-innovation Approach, the following five principles are identified and explained as key for regulating AI in the UK:

1. Safety, security, robustness; 
2. Appropriate transparency and explainability;
3. Fairness; 
4. Accountability and governance; and 
5. Contestability and redress.

The FCA’s rules, regulations and core principles do not prohibit specific technologies, but rather intend to identify and mitigate risks to their objectives, including from regulated firms’ reliance on different technologies, and the harms these could potentially create for consumers and financial markets. There is a range of high-level principles-based rules and more detailed guidance which are relevant to a firm’s safe use of AI systems in the delivery of UK financial services. A condensed list of the relevant rules includes:

• FCA’s Principles for Business provide a general statement of the fundamental obligations of firms and other persons to whom they apply, for example, Principle 3 on Management and Control. 
• FCA’s Threshold Conditions represent the minimum conditions to be satisfied by firms with a Part 4A permission.
• Senior Management Arrangements, Systems and Controls (SYSC) sourcebook includes more specific rules and guidance relating to systems and controls which apply to different firm categories. For example, provisions related to risk controls are prescribed under SYSC 7, general organisational requirements in SYSC 4, operational resilience in SYSC 15A and outsourcing and operational risk in SYSC 8 and SYSC 13. 
• Consumer Duty stipulates a cross-cutting obligation to act in good faith, which is characterised by honesty and fair and open dealing with retail consumers.
• The Senior Managers and Certification Regime (SM&CR) emphasises senior management accountability and is relevant to the safe and responsible use of AI.
• Dispute Resolution: Complaints’ Sourcebook (DISP) contains rules and guidance detailing how firms should deal with complaints.

As a regulator, the FCA has been closely monitoring the impact of AI on financial services markets, firms, and consumers, with the aim of promoting the safe and accountable use in UK financial markets, as well as controlling its use to drive innovation and therefore effective competition. The FCA welcomed the government’s adoption of a principles-based, sector-led approach to AI and recognises that a data-driven industry needs a data-led regulator, and so as part of their strategy, harnessing AI for the benefit of markets and consumers will be pivotal. 

An important consideration of using AI is to ensure that the risks imposed are not detrimental to the market, firm, and clients. To ensure that appropriate preventative measures are taken, the FCA places scrutiny on the systems and processes that the firms have in place to ensure that the regulatory expectations are met. To promote the safe adoption of AI technology, it is necessary to develop a clear understanding of the risks and based on the evidence gathered ensure that these are appropriately addressed to balance the benefits and risks of AI. This will ensure a proportionate and effective approach to the use of AI in financial services. Firms are expected to have appropriate measures in place to timely respond to the risks and address any potential harms accordingly.

Over the next year, the FCA is aiming to:

• Continue to further understand the AI deployment in UK financial markets to ensure that any future regulatory adaptations are proportionate, effective, and pro-innovation.
• Build on existing regulatory regimes and utilise these to actively consider any future regulatory adaptations needed. 
• Collaborate with the government and other regulators to develop empirical understanding and intelligence and create consensus on best practice and potential future regulatory work.
• Collaborate domestically and internationally to aid global alignment and standardisation on how best regulate AI.
• Test for beneficial AI through programmes such Digital Sandbox, Regulatory Sandbox and the pilot AI and Digital Hub to ensure its safe and responsible use. 
• Use AI proactively monitor markets, including for market surveillance purposes.
• Continue to be forward-looking and to collaborate with a diverse set of stakeholders to identify potential novel risks and opportunities, as well as being proactive to understand emerging technologies and their potential impact and interdependencies. 

The government and regulators are collaborating to better understand AI deployment in the UK financial markets and to promote the safe use of technology, with the main goal of improving competition. The paramount objectives of the FCA remain; as a technology-agnostic, principles-based, and outcomes-focused regulator, it aims to enable the safe and responsible adoption of the technology, while understanding and monitoring the impact of technological innovations on consumers and markets to ensure continued success and competitiveness.

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