How will AI shape retail financial services for consumers, firms, markets and regulators? To 2030 and beyond – The Mills Review

Introducing The Mills Review

On 20 January, a Treasury Select Committee report focused all ‘financial services eyes’ on the regulatory gap that currently sits between existing regulatory frameworks and the eagerness of the industry to embrace the potential offered by AI. Four key recommendations were made to the regulators, to be acted on within the year:

• Do something to manage the risks presented to consumers and the markets;
• Provide clarity on the application of existing regulatory rules to the use of AI;
• Bolster resilience to AI-driven shocks; and
• Designate the major AI and cloud providers as critical third parties.

Just a week later, the FCA has launched The Mills Review (the Review) to examine how “advances in artificial intelligence (AI) could transform retail financial services.” The Review acknowledges the tricky exercise of balancing innovation with consumer protection, the need to address ever-evolving risks, and promises “clear recommendations to ensure the FCA remains prepared, adaptive and able to support a thriving, innovative UK financial services sector.”

Focus and themes

The Review will focus on:

• retail financial services;
• consumer outcomes;
• consumer protection; and
• competitiveness and growth. 

The Review will not consider the wholesale markets or “broader societal impacts” save where relevant to retail markets. It cites the specific example of AI tools that enable retail participation in capital markets as within scope.

The Review centres on four themes:

1. How AI could evolve in the future;
2. How developments in AI could affect markets and firms;
3. The impact on consumers; and
4. How the regulatory approach may need to evolve.

The FCA wants your insight

The FCA is seeking a range of views and is looking to engage widely, with responses requested by 24 February. The responses will inform feedback to the FCA's board, expected to happen in summer, with an external publication to follow. We will be engaging with the FCA on their request for insight and anyone who wishes to collaborate with the regulator and in so doing shape the future of financial services regulation in this space should consider responding. It is crucial that firms who have an interest in the evolving regulatory picture send their insights to the FCA, either directly or via membership of an industry body, all of whom are likely to be positioning their responses to the FCA. The FCA are genuinely keen to collaborate with all stakeholders and engage widely. This is an opportunity to shape the future of financial services regulation that should not be missed. 

Why now?

The Review includes a lengthy section providing the all-important context. In summary:

• We are at a ‘consumer - technology turning point’: Consumer trends are key. Although we are at an early stage in this journey, we have already seen the rapid adoption of generative AI by “millions of customers” with an associated and significant shift in consumer behaviours as they use freely available AI tools to navigate their financial lives and make potentially significant financial decisions. To add to the ‘potential versus risk’ equation in this space, we also have to consider consumer understanding and financial literacy, both critical issues requiring attention.
• The impact on the markets is as yet unknown: We face many unknowns in relation to how the markets may change, including how AI will shape the provision of financial services, transform the dynamics of the markets, how incumbents relative to challengers will adapt and evolve, whether technology will move within the regulatory perimeter, or how agents might transform the dynamics of market competition. The outcomes “will depend on how the technology evolves, how firms choose to adopt it, and the regulatory and market design decisions taken in the coming years.”
• Evolving risks: We know that bad actors will exploit the same advantages of technological innovation and that firms and the regulators will need to shift their approach and levels of resilience accordingly. The extent of what we do not yet know, the speed at which things can change, and the growing web of interdependencies, demand a broad, forward-looking and nimble approach. 

2030

The questions on which the FCA is seeking input correspond to the four themes mentioned above and which:

• Ground us in reality rather than science fiction: AI is becoming capable of more (autonomous decision-making and continuous learning are real), systems are becoming more interconnected, and the supply chain is evolving. How will we navigate the path ahead? The FCA asks five questions focused on the maturing technology that stakeholders perceive to have the most transformative potential, the direction of agentic AI, the connectivity between AI and other digital technologies, and the positioning of the UK on the AI global stage.
• Force us to consider the future of market forces and structure: AI is changing and will continue to change market structures, business models and competition drivers. We cannot know for sure, but we can predict agents selecting and transacting on behalf of customers, and driving a complete re-shaping of costs, pricing and value. How will competition change and who will benefit? The FCA asks four questions directing our future-gazing abilities into market concentration, barriers to entry, costs, underlying market dynamics, the evolution of customer relationships and the future shape of the regulatory perimeter.
• Help to visualise the futuristic consumer: The consumer of the future is likely to be using AI as part of their everyday financial life and this has the potential to dramatically alter the interface between consumers and firms, shift consumer expectations, and change financial journeys. We could have tackled the challenges of financial literacy, digital exclusion, and vulnerability, and changed the meaning of ‘good outcome’. The FCA directs six questions to the heart of consumer issues, addressing the potential benefits and harms through the consumer lens (including AI-driven fraud), inclusion and exclusion, evolving consumer expectations, understanding, literacy and vulnerability, and the all-important question of trust.
• Encourage us to address the regulatory approach: The FCA is clear in its position on remaining “an outcomes-based regulator – one that enables innovation, manages risks, and protects consumers as AI becomes more embedded across retail financial services” and re-states that it has no intention to “recommend major changes to regulation or law.” The FCA points to the following as the foundational levers of AI capable financial services regulation, the Consumer Duty, the Advice Guidance Boundary reform, the Senior Managers and Certification Regime, and the Critical Third parties regime. The FCA confirms that the “task is not to rewrite these frameworks, but to consider how the way we apply them may need to adapt as AI changes the pace, scale and nature of markets, firms and consumer experiences” and notes that “Clear expectations on accountability, auditability and the safe deployment of high risk AI could be increasingly important.” The FCA asks five questions that focus on the opportunities and challenges for outcomes-based regulation in an AI-driven financial services ecosystem, the suitability and adaptability of the regulatory levers identified, how its supervision and enforcement approach would need to evolve, how it could support growth and competition, and how and from where it could draw inspiration for its approach (including for example, other regulators and international organisations). 

We will continue to monitor and update on important developments in this space. You can read more updates like this by subscribing to our monthly financial services regulation update by clicking here, clicking here for our AI blog, and here for our AI newsletter. 

If you would like to discuss how current or future regulations impact what you do with AI, please contact me, Tom Whittaker, or Martin Cook. You can meet our financial services experts here and our AI experts here.

........The FCA has.....outlined its approach to AI, confirming it does not plan to introduce extra regulations. Instead, it will rely on existing frameworks, which are principles-based and focused on outcomes and mitigate many of the risks associated with AI. It has combined this approach with proactive industry engagement and support, developing its groundbreaking Supercharged Sandbox supported by NVIDIA and launching a new AI Live Testing service for firms – a practical, hands-on way to build trust, reduce risk, and accelerate safe and responsible innovation. Together, this range of policy, technical and supervisory approaches support the financial services industry to responsibly adopt AI.

https://www.fca.org.uk/publications/calls-input/review-long-term-impact-ai-retail-financial-services-mills-review