AI Regulation isn't Necessary; Improved Guidance Suggested by Innovate Finance, According to the Statement
In the rapidly evolving landscape of financial technology, the UK Financial Conduct Authority (FCA) is taking a proactive and supportive stance towards the adoption of Artificial Intelligence (AI) in the financial services sector. This approach is characterised by the establishment of the AI Lab and the Supercharged Sandbox, initiatives designed to foster safe, responsible innovation.
The Supercharged Sandbox, set to commence its live testing phase in October 2025, offers a controlled, live but safeguarded environment for financial firms to experiment with early-stage AI technologies. This includes prototypes and proofs of concept, with the FCA collaborating with tech giants like Nvidia to provide enhanced computing power, advanced data sets, and technical as well as regulatory support. This setup enables firms to test AI solutions while managing risks, without granting regulatory exemptions, but allowing pragmatic exploration of AI use cases that might need rapid implementation over the next 24 months.
However, despite this supportive environment, firms in the financial sector are seeking additional support from the FCA. They are calling for clearer regulatory guidance on AI usage, particularly around automated decision-making, especially where sensitive data is involved. The recent UK legislation such as the Data Protection (Use and Access) Act 2025 (DUA Act) has started to address some aspects of AI decision-making, but firms require ongoing regulatory clarity and support to ensure compliance and consumer protection.
This combined strategy reflects the FCA’s commitment to balancing innovation with consumer protection and market integrity amid growing AI adoption and regulatory uncertainties in UK financial services.
Examples of Innovate Finance members using AI in various financial services include Starling Bank, YouLend, and Bonsai. Adoption is highest in operations and IT, followed by retail banking and insurance, with another 10% of firms planning to adopt AI in the next three years.
Common use cases for AI in UK financial services include fraud detection, anti-money laundering, cybersecurity, and back-office automation. Thirty-seven percent of firms cite cybersecurity as a primary application, and 33% focus on improving fraud detection.
The increased use of so-called 'foundation models' in AI has also been noted, now accounting for 17% of AI use cases. Forty-one percent of firms report using AI to streamline internal processes.
The FCA's approach of applying existing frameworks such as the Consumer Duty is supported in a recent paper, which also expresses concern about the UK falling behind international competitors investing in deployment-ready AI frameworks. The paper urges regulators to offer more practical support, such as clearer examples of compliant AI use, more visible backing for innovation, and better signposting of resources like the Digital Regulation Cooperation Forum's AI Hub.
Without faster action to build industry and public confidence, the UK may lose ground in AI deployment. Innovate Finance recommends the development of a full 'UK financial tech stack' for AI deployment, and case studies from Innovate Finance members demonstrate AI-powered financial planning, embedded lending, and conversational finance tools.
As of now, 75% of UK financial services firms are currently using AI, up from 58% two years ago. This trend underscores the growing importance of AI in the UK financial sector and the need for continued regulatory support and clarity.
The Supercharged Sandbox, starting its live testing phase in October 2025, offers financial firms a controlled environment to experiment with early-stage AI technologies, even collaborating with tech giants like Nvidia for enhanced support.
Firms in the financial sector, however, are requesting clearer regulatory guidance from the FCA, particularly regarding automated decision-making and the handling of sensitive data, as they aim to ensure compliance and consumer protection.
