On 22 April 2024, the Financial Conduct Authority (FCA) published a speech by its chief executive, Nikhil Rathi, entitled ‘Navigating the UK’s Digital Regulation Landscape: Where are we headed?’. In the speech, Mr Rathi announced the FCA’s plans to focus on Big Tech, which are included in Feedback Statement FS24/1 (published alongside the speech). The speech also covered the FCA’s response to the Government’s White Paper on Artificial Intelligence (AI), which was also published in parallel with the speech.

The speech: key points

As part of his speech, Mr Rathi explained that the FCA plans to examine how Big Tech firms’ unique access to large sets of data could unlock better products, more competitive prices and wider choice for consumers and businesses. He noted that whilst the growing emergence of Big Tech in financial services has already made life easier for consumers, it remains unclear how valuable their data will become in financial markets. If the FCA’s analysis finds Big Tech data is valuable in financial services, it will look to incentivise more data sharing between Big Tech and financial firms through its Open Banking and broader Open Finance work. If it finds potential risk or harms from non-sharing of data it will also look to develop proposals for the Competition and Markets Authority (CMA) to consider when they are given powers to regulate designated firms’ digital and data conduct, expected via the Digital Markets, Competition and Consumers Bill.

Mr Rathi also highlighted the FCA’s continued joint work with the Bank of England (BoE) and the Prudential Regulation Authority on the role of critical third parties and AI. He flagged that collaboration, including with industry, through fora such as the newly launched Digital Regulation Cooperation Forum (DRCF) AI and Digital Hub is key to ensuring the FCA’s approach is proportionate and supports innovation.

FS24/1 on data asymmetry between Big Tech and firms in financial services

In FS24/1, the FCA summarises its analysis of the responses it received to the call for input (CFI), launched in November 2023, on potential competition impacts from the data asymmetry between Big Tech and firms in financial services. The FCA also sets out its next steps.

The FCA has already committed, as part of its 3-year strategy, to identifying potential competition benefits and harms from Big Tech firms’ growing presence in financial services, and one area of concern was that the asymmetry of data between these firms and financial services firms could have significant adverse implications for how competition develops in financial services in the future. In FS24/1, the FCA explains that it aims to mitigate the risk of competition in retail financial markets evolving in a way that results in some Big Tech firms gaining market power while enabling the potential competition benefits (from Big Tech entry and expansion).

Four ‘next steps’ are set out in FS24/1 to address the key issues identified by the FCA. In determining these next steps, the FCA notes that it has balanced the fact that no significant harms have arisen from data asymmetry to date, while starting to develop a regulatory framework that enables increased competition and innovation. The steps are for the FCA to:

  • Continue monitoring Big Tech firms’ activities in financial services to assess whether policy changes are needed and working with its regulatory partners.
  • Work with Big Tech firms to examine whether their data from their data from their core digital activities would be valuable in certain retail financial markets.
  • Develop proposals (dependent on those results) in the context of Open Finance, and for the CMA to consider.
  • Examine how firms’ incentives, including Big Tech firms, can be aligned to share data where this is valuable to achieve good outcomes for consumers.
  • Work closely with the Payment Systems Regulator (PSR), alongside these initiatives, to understand the risks and opportunities related to digital wallets.

FCA response to Government White Paper on AI

The ‘AI update’ published by the FCA provides an update on its approach to AI following the Government’s publication of its pro-innovation strategy in February 2024. The FCA welcomes the Government’s principles-based, sector-led approach to AI and confirms that it is focused on how firms can safely and responsibly adopt the technology as well as understanding what impact AI innovations are having on consumers and markets – including close scrutiny of the systems and processes firms have in place to ensure regulatory expectations are met. It confirms that it will continue to closely monitor the adoption of AI across UK financial markets, including keeping under review if amendments to the existing regulatory regime are needed, and will continue to monitor the potential macro effects that AI can have on financial markets (e.g. cybersecurity, financial stability, interconnectedness, data concerns or market integrity).

The document outlines the ways in which the FCA’s approach to regulation and supervision addresses the five key ‘AI principles’ identified by the Government: 1) safety, security, robustness; 2) appropriate transparency and explainability; 3) fairness; 4) accountability and governance; and 5) contestability and redress.

It also sets out what the FCA plans to do in the next 12 months in relation to AI, including:

  • Continuing to further its understanding of AI deployment in UK financial markets: This is intended to ensure that any potential future regulatory interventions are not only effective but also proportionate and pro-innovation, and also that the FCA can respond promptly from a supervisory perspective to any emerging issues at specific firms. Examples of work in this area includes current diagnostic work on the deployment of AI across UK financial markets; re-rerunning a third edition of the machine learning survey (jointly with the BoE); and collaborating with the PSR to consider AI across systems areas.
  • Building on existing foundations: While the existing framework, in so far as it applies to firms using AI, aligns with and supports the Government’s AI principles in various ways, the FCA notes that it is continuing to closely monitor the situation and may actively consider future regulatory adaptations if needed. It flags regulatory regimes such as those relating to operational resilience, outsourcing and critical third parties as having increasing relevance to firms’ safe and responsible use of AI and says it will feed in lessons from its better understanding of AI deployment in UK financial markets into its ongoing policy work in these areas.
  • Collaboration: The FCA explains that it routinely collaborates with partners domestically and internationally, including on AI, and that given recent developments (such as the AI Safety Summit and the G7 Leaders’ Statement on the Hiroshima AI Process) it has further prioritised its international engagement on AI.
  • Testing for beneficial AI: As greater use of AI by market participants means its impact on consumers and markets is expected to increase, the FCA highlights that it is working with DRCF member regulators to deliver the pilot AI and Digital Hub, whilst at the same time running its own Digital Sandbox (which allows for the testing of technology via synthetic data) and the Regulatory Sandbox (for which the FCA is the global pioneer). The FCA is also assessing opportunities to pilot new types of regulatory engagement as well as environments in which the design and impact of AI on consumers and markets can be tested and assessed without harm materialising – this includes exploring changes to its innovation services that could enable the testing, design, governance and impact of AI technologies in UK financial markets within an AI Sandbox.
  • Its own use of AI: The FCA uses web scraping and social media tools that are able to detect, review and triage potential scam websites, and plans to invest more into these technologies to proactively monitor markets, including for market surveillance purposes. It notes that it is currently exploring potential further use cases involving Natural Language Processing to aid triage decisions, assessing AI to generate synthetic data or using Large Language Models to analyse and summarise text.
  • Looking towards the future: Finally, the FCA notes that it is taking a proactive approach to understanding emerging technologies and their potential impact as part of its Emerging Technology Research Hub – e.g. as part of the DRCF Horizon Scanning and Emerging Technologies workstream in 2024-2025, it will conduct research on deepfakes and simulated content following engagement with stakeholders. It also notes that it has been actively monitoring advancements in quantum computing and examining the potential benefits for industry and consumers, while also considering the impact of the inherent security risks.