On 22 April 2024, the Prudential Regulation Authority (PRA) and the Bank of England (BoE) published a joint letter to the Secretary of State for Science, Innovation and Technology, Michelle Donelan, and the Economic Secretary to the Treasury, Bim Afolami. The letter is a response to a joint letter, dated 1 February 2024, regarding the PRA’s and BoE’s work on delivering safe and responsible Artificial Intelligence (AI) and Machine Learning (ML) within their regulatory remit.

The BoE and PRA’s statutory objectives and approach to regulation

The letter outlines the BoE’s and the PRA’s statutory objectives and secondary objectives, and explains that their focus is on understanding how to support the safe and responsible adoption of AI and ML in financial services from a macro-financial and prudential perspective, given the potential benefits – including driving innovation – that AI/ML could bring to firms. It notes that the BoE and the PRA adopt a ‘technology-agnostic’ approach to supervision and regulation of AI and ML, as their core principles, rules and regulations do not usually mandate or prohibit specific technologies.

However, the BoE and PRA acknowledge that risks may arise that relate to the use of specific technologies (such as AI/ML) and have an adverse impact on their statutory objectives, and confirm that they actively work to understand and address these, as well as issuing guidance or other policy tools where needed to clarify how the existing rules and relevant regulatory expectations apply to those technologies.

Current and future work on the safe and responsible adoption of AI/ML in financial services

The letter states that the BoE and the PRA have a close interest in encouraging the safe and responsible adoption of AI and ML in financial services, given the potential risks this could pose to the BoE’s and the PRA’s objectives. The BoE and the PRA explain that they have, in collaboration with the Financial Conduct Authority (FCA), been examining the challenges of using AI and ML in financial services for a number of years, as well as opening dialogue between the public and private sectors on this topic. This remains a key area of focus, particularly in light of recent innovations in this space, for example Large Language Models and Generative AI.

There are four key areas of focus that the BoE and PRA have been exploring, where further clarification on their regulatory framework could be beneficial and which are relevant to AI and ML:

  • Data Management.
  • Model Risk Management.
  • Governance.
  • Operational Resilience and Third Party Risks.

The BoE and PRA are planning to run the third instalment of their ‘ML in UK financial services’ survey, to ensure their understanding of AI/ML adoption remains up to date. In addition, given the rapid pace of innovation and widespread use cases, they are undertaking deeper analysis on the potential financial stability implications of AI/ML over the course of 2024, and that analysis will be considered by the Financial Policy Committee.

The five principles outlined in the guidance and the importance of regulatory collaboration

The BoE and the PRA welcome the Government’s five principles to guide the regulation of AI and ML, as outlined in Implementing the UK’s AI Regulatory Principles: Initial Guidance for Regulators, and consider them to be broadly consistent with their approach to regulating the use of AI/ML. Their approach to these five principles is outlined in detail in the Annex to the letter. The BoE and PRA also agree with the importance of regulatory collaboration, which the Government outlines in the White Paper. They note that they have been working closely with the FCA and other regulators in support of the safe adoption of AI/ML within financial services, and flag that the BoE will be working together with the Digital Regulation Cooperation Forum in 2024 on selected AI/ML projects (e.g. conducting joint research to better understand cross-sector adoption of generative AI technology).

The letter concludes by highlighting that the BoE and the PRA support the Government’s aim to establish a framework for the regulation of AI that is pro-innovation, proportionate, trustworthy, adaptable, clear, and collaborative. It states that the BoE and PRA believe that they have in place a regulatory framework, grounded in their statutory objectives, that will appropriately support the delivery of the benefits that AI/ML can bring, while addressing the risks, in line with the principles set out in the Government’s White Paper.

The Annex in the letter sets out more detail in support of the update.