Welcome to the Treasury Committee on Tuesday 4 November 2025. We are here to talk about AI in financial services. Our inquiry is near to concluding, and today’s session on it is expected to be our last. We thank all those who have contributed evidence orally or in written form. We are very pleased to have in front of us the Economic Secretary to the Treasury, Lucy Rigby KC MP. You are a former member of this Committee, so you know how we work, but we are not going to be a soft touch just because you were once of this parish. We are delighted to have you. You are the third Economic Secretary in just over a year and a half, so we hope you stay a little longer than the others. Lucy Rigby is joined by Catherine McCloskey, deputy director for financial services strategy at His Majesty’s Treasury, and by James Fairburn, deputy director for financial stability strategy and analysis at His Majesty’s Treasury—the titles at the Treasury just get longer, don’t they? Before we go into the main part of our session, Ms Rigby, let me ask what your priorities are in this role. Do they differ at all from those of your predecessors?

It is a pleasure to be here. May I congratulate the new members who have been recently elected to this Committee? You were always very clear, Chair, that this is the most prestigious Committee to be on. I am sorry, in one respect, that I am no longer on it. You asked about my priorities. My core priority is to deliver the financial services growth and competitiveness strategy, which my predecessor Emma Reynolds launched with the Chancellor in July, a couple of months before I came into the role. I do have priorities in addition to that strategy, notably financial inclusion; I am pleased to say that we will launch the Government’s financial inclusion strategy tomorrow. In addition, I highlight the co-ops and mutuals element of my brief; as you know, we have a manifesto pledge to double the size of that sector. But the core of my brief, as I say, is the delivery of the strategy. There are 63 things in it, not all of which are wholly within the purview of the Treasury to deliver alone; as you know, we work with the FCA and the Bank. As a whole, the package is the most ambitious set of reforms to financial services in a decade. The overarching aim is to make the UK the leading jurisdiction for financial services by 2035. The strategy has five pillars. The first, which is very important, is about having a competitive regulatory environment. I can go into some detail on that if you would like.

Well, we are just getting an introduction to your priorities.

Sure—I will canter through them. The second pillar is about our global leadership and partnerships that we are able to develop with other countries as a result of that. The third is about innovation and fintech leadership. The fourth is our retail investment campaign, because we want to build up a culture of retail investment in this country. The fifth, very importantly, is about skills. As a whole, the delivery of the strategy is my core priority. As you know, financial services deliver 9% of the country’s GVA and 1.2 million jobs right across this country, so financial services and the ability of the sector to grow are absolutely key to this Government’s growth priority, and I am very aware of that.

A couple of things come to mind. You wrote an article in The Times recently—in fact, you have talked about this several times—encouraging the public to invest not in cash, but in stocks and shares. Does that mean that you have made a decision on the future of the cash ISA, and on the limit on what people can put in a cash ISA?

No. We have been open about the fact that we are looking at the right balance of cash and stocks within ISAs, but decisions of that nature will be taken by the Chancellor in the Budget.

You may be aware—I hope you are—of the report that we put out recently.

I am.

We would agree that there is a need to improve investment appetite in this country, but we were also very clear that there needs to be clear education about how to do that. After years of warnings that say, “You might lose capital,” which is a bit like saying, “Smoking kills,” these things have an impact on the culture of our country. What plans do the Government have to improve education? Will it be letters from you in The Times? Not that those are not substantial in their own right, but do you have anything more substantial, for those who do not read articles in The Times by the Economic Secretary?

We do, yes. It is really important to think about the base we are starting from here. One of the reasons why we want to build up that retail investment culture is that at the moment the UK has the lowest level of retail investment in the G7, so people are missing out on the ability to make their money work harder for them. What we are absolutely not saying—it is really important to be clear about this—is that there is no role for cash savings. Of course there is; I know that in your report you were keen to emphasise that. We are definitely not saying that there is no role. However, the FCA has said that there are 14 million people in this country who have more than £10,000 saved up in cash. Given that one of the overarching aims of this Government is for people to be better off and for household finances to be more resilient, it makes sense for people to be aware of the opportunity to invest. I agree with the report in the sense that I think education is very important. We will be working with the FCA and industry to bring forward the system of targeted support from April next year, such that people can be made aware, in a safe way, of the benefits as well as the risks of investing.

In what timeframe might you start to see a step change in culture? What timeframe is the Treasury working on?

It is difficult to say.

You are doing something next year with targeted support in April, so that is the first big step.

That’s right.

You will be hoping for that to have an impact. How long do you think it will take to bite?

The honest answer is that I am not sure that we have put a metric on it—I do not think we have. We would probably expect the change to be gradual, as more and more people become aware of the benefits of investing. No one is talking about mandating investing; obviously it remains a matter of personal choice. At the moment—I generalise here—we know that only 9% of the country go and get financial advice. Frankly, investing tends to be the preserve of the wealthier few. We want more people to be aware of the benefits to give them the opportunity to have their money work harder for them.

I am tempted to go on for longer on this issue, but we will wait for the Budget and further measures. We would like to have you back to discuss the financial inclusion strategy. Thank you for the embargoed copy; we cannot discuss it today, because it will not be published until tomorrow, but the Committee will look into it.

I just want to raise a small point on the last issue. We see widespread speculation around a bubble with stocks, and a high concentration in a small number of stocks. Quite rightly, I think, you say that this will be a gradual process. Is there not a danger that there will be mixed messaging, whereby people feel encouraged by the Government to invest in stocks but anxious and uncertain about how to do so in such an uncertain environment? How will you ensure that you get the messaging right? That is key, particularly for people who have no experience of dealing with the stock market.

First, to reiterate the point that I made in response to the Chair’s question, we are not saying that there is no role for cash savings or that people should go out there and risk everything—we are definitely not saying that. The industry will be leading an awareness campaign alongside the targeted support piece. But what is undeniable is that, if you look at the picture over the longer term, investing means that you get more money through the door than if you were to save purely in cash. Obviously, cash can be eroded by inflation. The FTSE has grown by 60% in the last five years, but if you look at the longer term and account for ups and downs over that period, the data shows that investing will make you better off.

When we have had the chief executive of the FCA in, he has said that essentially he seeks cover from us politicians and from Ministers to allow a different risk culture. I do not disagree with anything that you have said, but surely the real challenge is that we have to come to terms with the fact that risks exist and that no Government and no FCA regulator can ever totally remove them. We cannot have it both ways. Collectively, in Parliament and as a Government, we need to level with people about that reality.

I think that is right, but I think at the moment people are being made aware of just the risks, in a way that is off-putting. If we get the balance right, so people are made aware of the benefits as well as the risks, they can make an informed decision.

My question was along the same track, really; it was specifically about the timing of the retail investment campaign. You make a good case, rationally, for why people should invest, but people are quite behavioural in their responses a lot of the time. If the Government endorse a huge campaign that encourages people to invest, and the market goes at that moment and people feel very burned, it will take quite a lot of effort to get people to stick it out over the long run. People will probably instinctively recoil. Will that change the nature of the retail investment campaign? Is the talk of private credit markets bubbling, AI bubbles and everything that John Glen has just explained in your mind? Is the potential downturn on the horizon changing your thinking about how to approach the retail investment campaign?

No. As I referred to, this is about a longer-term approach, and indeed a balanced approach, to investing. We are not saying that everyone should go and stick all of their money in a particular type of stock. We would not say that, and I do not think any Government should say that. It is about giving more people the opportunity to invest by raising awareness. Over the longer term, we have been clear that people can have more resilient household finances and have their money work harder for them by virtue of choosing to invest some of their savings, if that is what they want. There is an interesting international comparison here. At the moment, we have the lowest level of retail investment in the G7; only 8% of UK wealth is in stocks. Compared with somewhere like Sweden, where 40% of wealth is in stocks, we really are very low. The proportion has actually decreased over time: at the beginning of the ’90s, one in five UK adults owned shares; the figure now is only one in 10. Whether you look back over our own history or compare us internationally, there is more that we can do on retail investment. It is good for the economy as well, which I am happy to come on to.

With those international comparisons, another thing that often sticks out is Britons’ obsession with putting their money into property instead. Are you thinking about the interaction between the two? This process is not only about making retail investing attractive; it is also about how retail investing compares with the safety and security of owning property, and the perceived obsession of Brits with owning their own home.

The candid answer is that we are looking at retail investment because we think it is the right thing to do, to offer people that opportunity to invest. That is what the retail investment campaign is about.

It sounds as if we might need to have you back on that issue.

Does the Minister agree with my view, as a former fund manager, that it is categorically not the Government’s job to call the stock market? If professional fund managers cannot get it right, there is no way the Government can. Surely the answer is to advise consumers when they are making investment decisions to invest gradually over a period of months, and to invest for the long term. If you hold shares for 15 years, it is almost impossible to beat that with any other investment class.

I think we are in danger of giving advice or guidance here.

I hope the Minister will consider these points.

We must be careful—I am sure the Minister’s letters were vetted before she wrote them. Any quick comment on that point, Minister?

I have considered it. For what it is worth, as I made clear in my answer to Mr Dean, this is not about the Government saying, “Invest in a particular stock.” No one is mandating investment. This is about making more people aware of the opportunity to invest. It sounds as though we agree, Mr Coghlan.

I am old enough to remember Lord Lawson having some problems with the listing of BP shares on the stock exchange. Has the Treasury thought about the scenario in which two years down the line there is a significant market correction—you may not be able to call it—not so much from a point of view of what you do about that, but how you communicate to people, or how the industry communicates to people, that stock investing is a long-term process? My concern, which picks up on Mr Glen and Mr Dean’s questions, is not the overall policy; it is the fact that early in the implementation of a policy, given where we are in the market cycle, we could have a correction that could be very damaging to a very important policy for the long-term good of the country. It is about scenario planning.

I think it is something that everyone needs to be aware of in pushing a culture of retail investment. That is why it is really important, with the FCA, what the exact rules look like when it comes to targeted support. It is also really important from an industry point of view, when firms are contacting consumers and making them aware of the risks and the benefits of investing, that that communication is done in a balanced way. It is right to be cognisant of those types of risk.

We have been talking about potential future events, but let’s move on to the big event today.

Having been through so many shocks since 2008, that does shine a light on why there has been a tilting of the market towards the cash ISA, just because of the unpredicted nature of 2008, covid and so on. As a newish Minister, what is your assessment of the impact of the Chancellor’s speech this morning on your functions within your portfolio?

The Chancellor’s speech this morning was about being transparent about the choices that she, and we, face at the upcoming Budget, and about the context for that Budget. As the Chancellor made clear, the choices that she will make will be fair choices that emphasise the continued stability of our economy. We all know that that is absolutely of core and utmost importance. What she was doing was setting out that wider context.

We will pick up on that point, and on Budget matters, with the Chancellor after 26 November, and clearly we have to talk to you about some things in your portfolio, so we hope you will be a regular visitor to this Committee. We need to move on to the important issue of AI in financial services. The Government have been very much leaning into AI, as did the previous Government. Could you briefly outline specifically how the Government’s approach to AI, and the regulation of AI, will particularly apply to financial services?

To start with the Government’s approach to AI across the board, rather than just in relation to my brief, the overall approach is rightly focused on the huge strategic economic opportunity that comes with the safe adoption of AI. That is the cross-Government approach, and that applies just as much in my portfolio. Financial services is the third highest sector of the economy when it comes to the adoption of AI, just behind IT and telecoms and legal services. The UK has an incredibly strong AI sector and an incredibly strong financial services sector. The dual strength in both those sectors will be extremely important to the growth of financial services, in some of the ways that I alluded to at the outset.

Would you give some specific examples of how you think AI could bring benefits both to the industry and consumers? We will come to consumers in more detail later.

It already is—that is the first point. As I said, it is the third highest adopter already. Many of those cases are around automation. We can take different sectors; it is interesting and instructive to do that. Starting with insurance, for example, a recent report by McKinsey found that Aviva had started using AI in relation to its claims processing, and had managed to cut consumer complaints by 65%, I think. That is a use in the insurance sector. Taking another sector, capital markets, the International Capital Market Association reported that AI has helped to reduce mistakes in settlement—settlement failures—by extracting key data from bond documentation. Automation is something that is right across the board, and can improve the productivity of financial services firms, as indeed it can in the wider economy. It is also worth making it very clear that fraud, and specifically fraud detection, is another key area in which AI has a clear use case. HSBC has been running a pilot with Google, which uses AI to help detect financial crime. Mastercard has been using AI to help prevent APP fraud. In relation to money laundering, there are good AI use cases and AI is already being used. There was a report recently that UK Finance found that the know-your-client time that is necessary in anti-money laundering checks has been reduced by 90% by using AI in automated document analysis.

Lots of positive things—okay.

There are lots and lots of very positive use cases for AI at the moment.

That is the innovation side, and then obviously there is the safety side. I know colleagues will be raising some specific issues. There is a risk if some information gets into the AI model that is wrong. Even with a human in the loop, that could potentially happen. What are the Government doing to make sure that there are safeguards in place? We have had a lot of evidence; you have probably been briefed on what we have heard. There is a lot of talk about having a human in the loop; there is a risk that if some wrong information gets into an AI model, it could create some perverse outcomes. What is the strategy from Government to make sure that the regulators, the Government and industry are able to mitigate those risks?

In relation to the case that you raise, I watched the evidence session prior to this with the Bank and the FCA, and I know that you were able to question the Bank on exactly that issue, alongside the herding risk. The response was in relation to AI being used in lower-materiality decisions. The PRA has a set of guidance around modelling, to which it obviously advises that banks adhere. I think it is right to say that that specific risk is being minimised by virtue of AI being used for lower-materiality decisions or modelling. To answer more broadly your question about what we are doing to mitigate the risks of AI, the key here is safe adoption. That is the only way to get to all the benefits that I have just outlined. Adoption has to take place in a safe way. Safe adoption was a feature of the Chancellor’s remit letters to the FCA, the PRA and the Bank: it was all about making sure that the Government’s growth priority was clear and that safe adoption of AI was part of that. At the Treasury, we are taking a whole range of actions, alongside the FCA and the Bank, to try to ensure that adoption is safe. That is how I think we get to growth. I think safety and innovation go hand in hand, because if we do not give people and firms the confidence to adopt AI—

We will delve into this in a bit more detail, but the Government announced that they were going to have a consultation on AI-specific legislation. When is that planned for, and what will be the Treasury’s role in it? Presumably that will be from another sponsoring Department.

Yes, that will be from DSIT.

Do you know what the timeframe is?

I don’t. I have had discussions with the relevant Minister at DSIT, Minister Narayan, but he has not made me aware of the timing of the consultation.

But the Treasury will be leaning into that, no doubt, because of your responsibilities in this area.

I think it is important because, as I can come on to, we think that the existing regulation governing the use of AI maintains the right balance. The regulation is principles-based, outcomes-based and flexible. As you heard from the Bank and the FCA on how that affects the FCA’s supervisory responsibilities—

If there is to be a consultation, are you feeding questions into what that consultation will be? Ms McCloskey?

Yes. We are involved in the preparatory work that DSIT is doing. They are engaging with us and other relevant Departments as they prepare to consult.

Obviously you need to talk to DSIT, but if we could get some information on that, it would be very helpful in our future work.

It appears that the current approach of the Bank of England and the FCA is to monitor AI developments for now, and then step in if something goes wrong. Do you agree with that characterisation of their approach?

Yes, we do. At the moment, it is right to be alive to the risks. By the way, I also think that one of the risks is not grasping the opportunity to adopt AI as quickly as we can. It is right to be aware of the risks, but our assessment is that the current framework of legislation, which is principles-based, outcomes-based and flexible, because it is technology-agnostic, is the right approach. We have had some feedback from industry, which would like more specific guidance on particular uses of AI, but as a whole, the current framework of regulation is the right one.

Do you think that the Bank of England and the FCA have the necessary powers and technical understanding of the technology and risks involved in the technology to regulate it effectively?

Yes. I refer again to the previous evidence session, where you asked both the Bank and the FCA that question directly. Our assessment is that they currently do, but that there should be a continuous—I think the Bank made this point—monitoring of what is needed to oversee properly the safe adoption of AI, including things such as skillsets within the Bank and the FCA.

And the Treasury?

And, indeed, the Treasury. I am not sure to what extent Catherine or James might want to comment further.

Quickly, on the regulators—I think Mr Mutton talked a bit about this when he appeared before you two weeks ago. The regulators have been increasingly focused on operational risks for some time. Artificial intelligence is, in some ways, a continuation of the need to update their skills to respond to those risks. It applies similarly to the Treasury. We have a team within the financial stability group that is focused on the resilience of firms, for example.

Before I ask my question, I want to acknowledge the role that Mr Fairburn and Ms McCloskey played while I was a Minister for four and a half years. It was remarkable. I would like to thank them publicly, particularly Ms McCloskey. I shall never forget what you did on the onshoring role with more than 50 SIs, so thank you very much.

That is a bonding exercise if ever there was one.

Could the Minister say a bit more about the dynamic between the Treasury, the FCA and the PRA? It is certainly true in public discourse that people think Ministers decide, and of course they do at one level. But in this particularly complex, fast-moving area, how would you describe the dynamic of decision making and responsibility between the Treasury—your officials and yourself—and the regulators?

“Dynamic” is the word you used, and by necessity that has to be the approach between those various groups. Obviously, frameworks exist for formal engagement between each of them. To highlight the AI Consortium, for example, that is joint between the Bank, the FCA and the Treasury, and I think James sits on it as an observer. Then, as you would expect, there is continuous engagement—in the same way that we engage regularly with industry on all these issues. That is a necessary feature of the framework of regulation we have, and particularly in this area, given that it is so fast-paced. As I said, this is about safe adoption and ensuring that we maintain a competitive edge. To come back to where I started, we want the UK to be the leading jurisdiction for financial services, and core to that is being the most technologically advanced jurisdiction.

Are there any meaningful disputes or differences of opinion between the Treasury, the FCA and the PRA on AI and regulation?

No, I think there is agreement as to the effectiveness of the current regulatory framework, which is not to say that, at some point in the future, friction in some of those relationships would necessarily be unhealthy—you might be able to speak to that better than I could. I don’t think that that would necessarily be unhealthy, and you would want those discussions to be ongoing and fruitful. But I think there is agreement, as a whole, as to the framework we have being effective, and I can go into more detail on things like the consumer duty—the specific bits of regulation.

The financial stability of the whole system depends on people feeling confident and trusting the regulatory environment. The other day, an outage at Amazon Web Services affected consumers’ ability to access one of our banks. We wrote to you—and we have just published your response—about those critical third parties. It is the Treasury’s job to designate a critical third party, but my understanding is that you have not used that power so far.

I think I said that in the letter, yes. We have not yet designated any company—that’s right.

What would it take to be designated as a critical third party?

The Treasury would have to go through the relevant assessments and take the relevant steps within them. I think I am right in saying that there would then need to be regulations. At that point it would become public that a third party was being designated. It is absolutely right that the critical third parties regime is the means by which we do these things. As you know, Dame Harriett, it came about because we take operational stability extremely seriously. As well as the programme of ongoing operational monitoring, we will have the benefit of being able to designate certain companies under the new regime.

Are you currently undertaking any assessments?

I will let my officials answer that question. However, when it comes to specifics and the naming of companies—I know you will appreciate this, Dame Harriett—that is commercially and market sensitive.

I am not expecting you to name anyone, but is this process under way for any potentially designatable critical third parties?

Maybe I can talk a little about the process we have published. We receive recommendations from the financial regulators.

Have you received any so far?

I don’t think we are going to comment on the process until we have made our first designation. The way it works is that we receive recommendations from the financial services regulator.

So you would have to be triggered by that? You could not initiate it?

That is right. We first receive recommendations, and then there is a period of engagement with the relevant third party supplier and the regulators. That includes giving the relevant firm an opportunity to send us formal representations. We will then consider all the evidence before a designation decision is taken. If the decision is to proceed, we will write to the firm to inform it of the decision and indicate—this is particularly important—which of its services will fall within the regime, and therefore the financial regulator’s purview. At that point, we will publish a legal instrument and lay that before Parliament.

Would you expect that in a year’s time there will be any critical third parties in our financial system?

From the point at which we begin engaging with the prospective critical third parties, we expect it to take about six months for us to go through that process.

So you expect there to be someone designated within six months?

If we were at the point at which we start the process of engagement, it would take about six months.

My question was slightly different: do you expect there to be any organisations designated by this time next year?

The short answer is yes, I suspect that there will be.

Given how fast artificial intelligence is changing and allowing opportunities for bad actors, including hackers and those who wish to bring down our financial system, are you confident that the Treasury, the Bank and the FCA combined have sufficient skills to make those kinds of assessments? Who would like to answer that one?

I am happy to, and James and Catherine can jump in afterwards if necessary. As I have referred to in relation to Mr Grady’s question, the answer from the banks and the FCA, whose judgment is important alongside ours, is that they have the right skills. However, because the technology is changing, the need for people with different skills is a continuous evolution. Part of being alive to the risks that stem from AI when it comes to financial stability, necessitates having those core skillsets.

Okay. In your work as Economic Secretary, are you using artificial intelligence at the moment?

I personally am not, when it comes to my brief. I know that my officials, rather than my private office, use AI, for example, in the production of some of my briefings. That is one way in which the Treasury is using AI. As a Department, we were one of the first adopters of an LLM, and we have our own LLM.

Could you just spell that out, for the benefit of our listeners?

Sorry: a large language model. It might be called the HMT LLM or something as intuitive as that.

HMT-GPT.

HMT-GPT—there we go. There are a number of ways in which the technology is used at the Treasury, including email triaging, chatbots and the use of Microsoft Copilot chat. As I say, we have our own LLM.

Presumably that is a closed system.

Yes.

Is that the main way that your officials are using artificial intelligence in the work of the Treasury?

I will bring Catherine in on this.

That is certainly one of the main ways. We use it for a lot of productivity and efficiency gains. As you would expect, we have a lot of information in the Treasury, and we can use AI to pull out the right information quicker. The closed system means that we can put in sensitive Treasury documents that we would not want going into the live public systems, and get information out of that in a secure way. We also use commercial programmes—for example, individuals use Microsoft Copilot to make their day-to-day work more efficient, summarising documents or finding the right information in a big email system or set of documents. Those are some of the day-to-day ways in which we are using AI.

Mr Fairburn, did you want to add anything to that?

Only that the trial reported that it is saving staff around three hours a week.

I want to go back to the critical third parties regime. The rules were under development for a while. This time last year, they finally published the rules, which came into effect from January this year, and still we have nobody in place. Presumably, we came up with those rules in the first place because we anticipated that some companies needed to go on to the regime. Are you happy about the fact that, a year on from the rules being published, nobody is on the regime?

It is important to say that we have a good pre-existing framework of monitoring risks when it comes to financial stability, as indeed does the Bank. We monitor all operational incidents very carefully. The recent outage in relation to AWS triggered the usual process, and that process was conducted, but the reason why the CTP regime was introduced is that something more is needed.

That is my point, though: we anticipated these problems; we did not need the outage to tell us that we needed some companies to go on to the regime. On 9 October, we heard from Amazon Web Services that they expect to be designated as a critical third party. Google Cloud says the same. They are waiting to be placed on to this regime, and apparently we cannot move fast enough. You cannot be happy with that.

We have had good engagement with a number of companies as part of the regime. As I said in answer to Dame Harriett, we expect some designations.

On the process, it was explained to us that we have to wait for recommendations from the financial service industry. Is that a problem? Should the Treasury not be able to act sooner if it thinks it is in the nation’s interest to do that?

I think I am right in saying—James will correct me—that it is recommendations from the regulator, not the industry.

Yes, it is from the financial regulator.

Are you happy with it being that way around? Shouldn’t the Government have the ability to act sooner if they feel that they need to do so?

There is potential for that, but I hesitate to answer the question directly. I will hand it to James.

That is because we benefit from the financial regulators’ supervision and ability to provide us with expert advice on which services they believe are critical from a financial stability point of view.

I hesitate to say this, but some of the information is out there. We know what percentage of cloud services is provided by how many companies, so some of it is strikingly obvious to the public. When we see some of the big failures in recent weeks, it makes us feel slow, or not quick enough, to respond to these developments in technology. The AWS outage the other week had an effect on HMRC services. It came out that that was due to an outage on a server based in north Virginia. Can you talk us through the implications of data that we hold in HMRC being held overseas and the risks to that data?

That is at the root of why it was felt necessary to introduce the critical third parties regime, which can designate companies no matter where they are based. Once they are designated, they come within the purview of the financial regulators, and the regulators can impose conditions on the provision of services, and indeed public censure. I think we would all judge that to be very important, but I want to come back to the fact that—this was specifically true in the AWS outage—the authorities response framework was activated. We have a very good existing framework of monitoring financial stability. Other countries do too, but we do it particularly well, as some of the Committee know very well. We also have excellent institutions, particularly the National Cyber Security Centre. Financial services is a sector in the critical national infrastructure framework.

You mentioned the existing frameworks; maybe officials want to come in on this. Do we have the ability now to get the cloud providers to disclose their security policies? I am thinking particularly about this incident and the fact that HMRC data is held overseas. Are we aware of what their security policies are now, and can we demand to see them?

We should perhaps come back with more detail on HMRC specifically. If they are using a provider, there is a contractual relationship, which presumably would give access to—

Do we have to wait for the third parties regime to be in place to start demanding that sort of information, or can we already demand information about security policies?

The third parties regime is specific to the provision of critical third services to financial services firms; it is not directly relevant to HMRC. I think maybe we should come back on that in writing.

If a firm reveals where its data is held, there is a big Belisha beacon target here. There might be some security reasons why it is not fully revealed publicly, but is there a bit of the Treasury that would get, or be able to get, that information where it relates to financial services companies, so that you have oversight of where the risks to the financial services sector lie?

I would be very, very surprised if that were not the case.

Perhaps you could write to us with the detail of how that happens, because I think Mr Dean has nailed a point here: there may be real security reasons and releasing the data could have a major impact, but we need to know that somebody knows. That is, I think, what he is driving at.

We can confirm that in writing.

My final question is not directly related to financial stability but to the UK’s position as a financial leader. You mentioned all the opportunities that AI presents, and you also said that we have a strong AI sector. That is true, but many of our best companies will end up being snapped up by a handful of US tech companies, so that presents a threat to the UK’s position as a world leader in financial services. More broadly, when you look at the developments in AI and how it all seems to be herding around a handful of companies, do you worry about the UK’s place in the world in terms of its financial sector leadership, because of the trend towards everything ending up in the pockets of a handful of companies?

There are a number of things there around concentration risk when it comes to AI and financial services, but the Government’s approach to both is to ensure British success. You mentioned the American money going in. There is a lot of emphasis in our FS growth strategy on capital markets. Some of the retail investment stuff that we have just been talking about is relevant to that, but on a much broader basis, our capital markets are extremely deep and very liquid as you well know. We have taken forward and will continue to take forward a series of reforms that will make sure that our capital markets continue to be world-leading, so they can serve some of the best British innovation, whether that is in fintechs or AI—well, increasingly fintechs are using AI, of course, so there is a big overlap between those two things.

Can I take it from that that you think it is important for Britain to have its own AI superpower on which financial services can rely? Do you think we should have sovereign AI capability?

We are developing our own sovereign capability. I say that outside the FS context, in a broader AI context. In the globalised world we live in—I say this in relation to FS, which is obviously extremely globalised, but so too is AI—we know we cannot be independent, but what we can be is more resilient and more secure. Both those things are important, and the development of sovereign capability goes to that.

73% of cloud services in the UK are provided by the three top providers—I think we can probably guess which ones they are—so there is quite a way to go before sovereign capability is achieved.

Well, cloud is not the same as AI, but I take the point that you are making, Chair.

There is a big area of overlap.

Yes, there is a concentration, as there is in many areas of tech.

I just want to double-check something that has been said. We were talking about designation, in answer to Dame Harriett’s questions, and it has been confirmed to me that nothing in the Act suggests that the Treasury cannot suggest or start a designation; it simply requires you to consult. Mr Fairburn and Ms Rigby, you very clearly said that the regulator would come up with the suggestion first, but there is nothing in the Act to stop the Treasury stepping in. For instance, with the Amazon Web Services outage the other week, you could have started the designation process. Am I right in my understanding of the law?

We should check.

If you could write to us about that, that would be very helpful. Thank you very much.

It is a really good question, and it has been at the forefront of my mind in the short time I have been doing this role. It is also something the FCA concerns itself with a good deal, given its supervisory and enforcement responsibilities. As I said, our view, which is shared by the FCA, is that the existing framework of regulation is right; we are keeping it under review, but we think it is right at the moment. Core to that, from a consumer point of view, is the consumer duty—the duty on financial services firms to ensure good outcomes for consumers, that consumers are provided with the necessary information and that consumer vulnerabilities are addressed. The consumer duty is a responsibility that all financial services firms have, whether they use AI or not. I mentioned being tech-agnostic earlier, and that is what I meant to say in a more granular way: that the consumer duty applies no matter how a service is delivered. What is key is that firms can be sure that consumers are getting the best outcomes.

The FCA is looking at consumers using large language models, including ChatGPT and its ilk, to look for financial advice.

I know the FCA is aware of the issue. I could not comment on whether it is from an enforcement point of view, but it is good and right that it is alive to that possibility. We know that consumers are using some of those tools.

Step one is making sure people are aware that if they do use those types of model, they are not getting regulated financial advice and the protections that would come with that. Our action on targeted support and firms exploring their use of this means that we can explore how you could use AI to provide advice that was protected by the existing regulatory framework, where there are models specifically designed by financial services firms to do that and that would fall within the perimeter. Those are two of the angles that we are looking at.

First of all, I should clarify that the Aviva example I mentioned was about the processing of claims. From Aviva’s point of view, it is about speeding up processing when people are claiming on their insurance. That is what led to the dramatic fall in customer complaints. That is a separate issue from your very good point about the potential for bias in insurance. It is very important that the consumer duty applies to insurance firms. The FCA’s guidance on the consumer duty actually uses algorithms and bias as an example of where firms need to be very cognisant of their consumer duty. In relation to insurance more broadly, there are clearly grounds on which, in the acquiring of insurance, it is permissible to discriminate, and by virtue of the Equality Act, there are grounds on which it is not permissible to discriminate, including ethnicity. You still have financial services-specific rules and regulations and more overarching things, including the Equality Act, that try to ensure that outcomes for consumers in insurance and financial services more broadly are fair. You are absolutely right, and I agree with the premise of the question in the sense that it is something we need to be cognisant of, and indeed it is important to financial inclusion as well.

We took some evidence from insurance companies and the regulators earlier, and they were quite relaxed about lots of the innovations that might come from the AI space that present ethical conundrums. I appreciate what you are saying about the consumer duty and the Equality Act setting a framework, but AI is also going to present some novel scenarios that the Government may want to intervene in. Health insurance is an example. We already have cases of providers linking it to Apple watches. I find it quite dystopian that your step count might affect your insurance premium each month and determine whether you pay more or less, and that your activity could be physically tracked, like having a black box in a car. As we step forward five, 10 or 15 years, the possibilities are endless and scary. Do you think the Government need to come in and set ethical boundaries for the use of AI in the financial industry?

First of all, I hope no one is monitoring my step count. I think those ethical boundaries are there by virtue of some—

Industry is very relaxed about this. It thinks that this is a positive development.

I do think it is very important to be cognisant of the risks and to continue to monitor them; I think that is right when it comes to the adoption of AI right across society, not just in relation to financial services. I am very optimistic about the huge benefits to be had from the quick and safe adoption of AI in the public and private sectors, not least when it comes to value for public money, but I am very cognisant of the ethical concerns. It is absolutely right that the Government and regulators are aware of exactly the kind of ethical concerns that you have raised.

Of course, the industry will sell that as a real plus for consumers. They will pitch it as, “If you just prove you’re healthy, you’ll get lower premiums,” but for everybody else who sits outside that, it is an issue. The other problem it presents is that it removes the bit that happens between the consumer and the insurance company, which tries to take into account how many situations there could possibly be and the likelihood of those situations happening. The more information the insurer has, the easier it is for it to decide which bets to take and to say, “We’re going to exclude all those people that we have enough information about to determine that they’re too high risk.” Are you concerned about that?

I am not overly concerned about that at the moment but, as I say, I do think it is something we should keep an eye on. The reason I say I am not overly concerned is not that I have my head in the sand. It is that we engage regularly with the FCA and have a framework of regulation—and not just about the consumer duty; we have the senior managers regime as well—that ensures we have good accountability when it comes to the use of AI as it stands in financial services.

You are talking about the process. On one level, that is part of what the Treasury is there to do, but there is a wider strategic issue. Once the data that Mr Dean has highlighted has been collected and someone gets put into the risk category, might we need data retention laws? Even if the regulators decide there needs to be a step back—that you have to have pooled insurance, for example, rather than just cutting out the risky people—that data would still exist and would still have been collected. Once the genie is out of the bottle, it would be quite difficult to unpick that and to instruct firms to delete data about someone because they have high blood pressure or whatever it may be. How are you making sure that you are thinking ahead about these future risks, rather than just trusting that you are keeping in touch with the FCA and the regulators generally?

I do not want to undercook the “just keeping in touch” piece, because when I say engagement, part of that is about horizon scanning. It is right and proper that we do that, and we need to do that on a very regular basis because, as you say, Chair, the technology moves incredibly quickly. Six months in the AI world is an absolute eternity in terms of the development of the technology.

Okay. I want to move on to the financial inclusion strategy, which will be published tomorrow. Thank you again for the embargoed copy. We obviously cannot go into detail on it, and we will hope to have you back in. Well, we will have you back in—I think, strictly speaking, you cannot refuse the invitation. I am sure you would not anyway, but I am just making it clear that we would like you back at some point. I want to ask about the process. You had a committee of people advising you on it. What was the balance on that committee between people from industry and people from consumer groups?

There was balance, so we had a range of consumer groups but trade bodies from industry there as well. I was obviously part of the committee, my predecessors as EST were, and we had Treasury officials as part of the group as well.

Was it more than one group? Did you have working groups on different aspects?

Yes, exactly. With each specific strand of the strategy—it covers a whole range of areas—there were working groups. For example, there was a working group on digital inclusion and access to banking, one on insurance, and other working groups too. Importantly, we also had the cross-cutting themes that went right across each of those.

Can you give us anything on the number of industry and the number of consumer groups? Perhaps one of your officials has that to hand.

I was going to say I could sit here and worry you with my maths by counting them on my fingers, but I should probably ask—

I’m afraid I don’t have the full numbers, but we can definitely get them.

Could you write to us on that?

We can, yes.

And who chose who led the groups? Was it led by industry, consumers or just whoever was voted in the room and emerged as the chair? How did that work? Did you appoint people to chair those groups?

I’m afraid that the appointment of the people leading the committees predated me.

Ms McCloskey, can you help on that?

I am afraid not. Again, we will have to cover that in writing. There was a mix, but we will confirm the details.

If you could come back to us on that, that would be helpful.

I know that there was a range. Not every working group was led by a consumer group or someone from industry or a trade body. There was a range.

We have heard that the mutual sector was not heavily engaged or involved in this process, and wasn’t on these committees. Is that true?

I don’t know where you would have heard that from, because—

That is why I am asking you. We don’t know. The strategy that we have seen—maybe the glossy one has a list of people involved, but this one does not, so I wondered whether you know who was involved.

Sorry, Chair. The reason I expressed some surprise was that the credit unions are a part of the strategy.

Credit unions were involved—or the sector was involved.

They were certainly part of the strategy.

What about building societies?

I’m sorry, Chair. I am hesitating, because I don’t want to mis-speak.

Maybe you could write to us on that. While we are on the subject of mutuals, I want to pick up on a point you made at the beginning about one of your areas of responsibility being to double the size of the co-op and mutual sector. Can you be clear: is that doubling the number or doubling the size? Would you be satisfied with a larger Nationwide and Skipton Building Society or whatever, or are you trying to engrain a culture where we have smaller co-ops like childminder co-ops, smaller local food co-ops or whatever?

You will appreciate that the overarching ambition is from the manifesto pledge, but this is not solely our area. We are in close contact with the Department for Business and Trade in relation to a range of aspects within that. One of the things that we are discussing with DBT at the moment is exactly how we quantify that and indeed then measure ourselves against that manifesto pledge.

So you are still working on that.

There are, as you know, very different bits within that. There are credit unions, but there are all sorts of other types of different co-ops.

Finally from me, we talked earlier about cash ISAs. The building society sector has been very concerned. Because of the limits on how much building societies can borrow from other markets, they rely on that retail borrowing to lend out more mortgages. Have you spoken to them about that and how is that being fed into the Treasury? What engagement have Ministers had with the building society sector?

We engage continuously with building societies as you would expect on a range of issues and we have in relation to ISAs. As I said, that is a continuous programme of engagement by virtue of the importance of building societies.

Okay. I will leave that there for now.

Economic Secretary, you will have received a number of letters from MPs about the closure of funeral plans of C Mutual and Maiden Life. I don’t want your response to that, because you have to consider the letters, but there is a more fundamental point here. I have a constituent, for instance, who has paid about £8,700 for £4,000-worth of cover. That constituent is 88. There are thousands of people across Britain in that space. They are working-class people. They worry about funerals. They worry about paupers’ funerals. It is a real worry. Surely any financial inclusion strategy, and Government more generally, has to address two points. First, the industry has to treat vulnerable consumers like this 88-year-old constituent fairly. It has to do so for ethical reasons, but also because you will not get people to do the right thing and save—save for their funerals and save for a rainy day—if you have sharp confidence tricks like that and they do not have confidence in the sector.

Thank you for raising the issue. I have received a number of letters and have spoken to a number of our colleagues about exactly this issue. I know how many people are affected and the demographics of who is affected. I have raised this matter with officials at the Treasury. Ultimately, it is a matter for the FCA to decide, but we are in touch with the FCA and making it aware of the circumstances of your constituents and others in other constituencies. I am aware that some of the people who have been left without cover now consider themselves uninsurable and are very concerned about that as well as the money that they have paid to policies that no longer exist. I am very much aware of the issue. In addition to being in touch with the FCA about it, I am holding a meeting with some of our colleagues who have grave concerns about this for good reason. You are more than welcome to join if I have not already invited you.

You have invited me; I have accepted the invitation. Thank you.

In October, the Treasury announced that all professional body anti-money laundering supervisors will be subsumed into the FCA. How long will that transition take? Are you concerned that it will further overstretch the FCA?

No, we are not concerned that it will further overstretch the FCA. This step has been taken because of the recognition of the importance of anti-money laundering to cracking down on fraud and corruption more broadly, and the recognition that the FCA is the authority best suited to do that supervision. As you know, at the moment, there are a number of different professional bodies so the AML landscape is quite fragmented. The idea is to bring everyone within the FCA’s expert supervision with a view to enhancing the quality of anti-money laundering regulation. I do not have to go into the benefits of cracking down on corruption more broadly.

But Parjinder Basra, the chair of the regulatory board of the Institute of Chartered Accountants in England and Wales—for full disclosure, I am a former member—said that this change would “increase the regulatory burden and costs to firms, making business growth more challenging”. No accountancy or legal stakeholder who responded to your consultation chose this as their preferred option. Why has the Treasury ignored those sectors? I assume that you do not agree with the chair of the ICAEW—if not, why not?

It is important to be clear that it is not a case of ignoring concerns at all. A decision has been taken in the round that the FCA is the best central home for AML. That means that professions like those you mention, and my former profession of solicitor, will have their regulatory home body switched from the Solicitors Regulation Authority, in my case, over to the FCA. We have been clear that we want to ensure that there is no additional regulatory burden over the medium to long term. Overall, we think that the streamlining works in the interests of all types of business. We hope that it is sufficiently apparent that having a single home at the FCA is good for not only cracking down on money laundering, but efficiency of regulation—not just efficiency from the FCA’s point of view, but efficiency for those that are being regulated.

I guess at the moment the jury is very much out on those professional bodies. In 2026, it will have been 10 years since the Treasury’s Office of Financial Sanctions Implementation was established. Are any changes needed to OFSI and HM Treasury’s financial sanctions implementation powers?

As you know from its annual report, OFSI has made great strides forward, when it comes to its objectives. In the last year alone, it has issued sanctions of nearly £1 million-worth of sanctions. When I talk about great strides forward, I do not just mean in relation to amounts of money by way of sanctions; importantly, I also mean the guidance being provided to businesses on compliance. As is clear from the annual report, we think that OFSI has made great strides forward. Many of the achievements are there in the report, which we encourage people to engage with—it sounds as though you already have.

A new consolidated UK sanctions list will go live in January 2026. What preparations has the Treasury made for potential disruption to firms’ sanctions screening?

As I alluded to, OFSI is making sure that the guidance that is out there for businesses is full and comprehensive, such that compliance can be more efficient and easier. I would say that that is the key way in which preparation is being conducted.

The Government’s financial services growth and competitiveness strategy is underpinned by a need for financial stability, but it also calls for deregulation. We have seen some moves in that regard, with the FCA offering greater flexibility on mortgages; we have also seen moves forward with things like the permanent digital sandbox. But when I speak to the CEOs of big and medium-sized banks, they tell me that the PRA and FCA are too slow to bring forward the really necessary changes. The legacy of the global financial crisis has left a very strong regulatory regime, but one where the level of comfort is now so secure that the banks are not actually doing what they should be doing. How do you respond to that challenge?

May I first make a point that I should have made in relation to Mr Coghlan’s point? I want to thank all the civil servants who are part of OFSI. As I am sure you know, nearly £30 billion of frozen Russian assets have been actioned by OFSI. That is a critical part of harming Russia’s war effort in Ukraine. I just wanted to highlight that as a specific achievement of OFSI. In relation to the FCA and the PRA, the Chancellor has been clear in her remit letters that the focus is growth. The growth objectives are critically important. A range of measures are being taken by both bodies, but most notably by the FCA; they are very much growth-focused, ensuring that as part of the wider landscape we are regulating for growth as well as for risk. For example, the Chancellor and I were in Leeds a fortnight ago for the launch of the FCA and PRA scale-up unit, a specific unit to assist British tech start-ups on their way up the ladder with engaging with regulation and, importantly, growth. There are a whole range of other ways in which regulation is being made more proportionate and more targeted, with growth as the overarching aim. It is really important to be clear that this is not about deregulation; it is about making sure that regulation is more proportionate.

I recognise that, and those steps are welcome. If we look at the implementation of Basel 3.1, Sam Woods told this Committee that overall the package is capital-neutral at an aggregate level. However, that obscures wide differences around how it impacts mid-tier banks. Would it not be helpful to ask the PRA to set out the effect of Basel 3.1 over the different key subsectors of banks? I recognise that we have done a great job in this country over the last decade with new start-up banks—the scale-up is definitely the right thing to do—but the key thing is surely what capital they have to hold. The danger is that Sam Woods, the brilliant man that he is, will hide the reality that under the aggregate headline of neutral effect there will be negative outcomes for some of the smaller and mid-tier banks that stop them growing to be meaningful competitors to the large banks. Do you agree?

I think it is really important that the capital review is ongoing. We have been clear that we want to see what comes out of that. The same is also true of the ringfencing review. We want there to be meaningful things that come out of that.

The Skeoch review, which was the last time we did a review into ringfencing, basically found that Sam Woods would say that he has all the tools to deal with bank resolution if one goes under, but somehow we hold on to the ringfencing for historic attachment to the comfort from the last crisis. I urge you as a Minister to be quite robust in challenging the logic, because there does not seem to be one any more.

For ringfencing as a whole?

Yes.

The Chancellor has been clear that the ringfence will continue to exist, but that she wants the change that stems from the review to be meaningful. She set out a range of ways in which that change could be meaningful, including services being offered by both the investment and the retail banks. But the review is the review, and it will produce results.

There is another question that I wanted to ask. This Committee has looked hard at trying to find meaningful things that can be taken away, in terms of reporting obligations to regulators that are superfluous and do not lead to any actions. I remember being briefed on the potential modernisation of the Consumer Credit Act, and that process happening, reducing the anti-money laundering costs and loosening KYC requirements on small transactions. Are those matters that you are looking at? If not, will you look at them? Otherwise, it is difficult to see how the headlines around appropriate deregulation, without taking on undue risk, are actually meaningful to the industry.

I know that you are aware that the Government have a target across the board of cutting regulation by 25%. There are specific ways in which that target is being realised. For example, in the senior managers regime, we have said that we want to reduce that burden by 50%. I can talk more about the reporting requirements that the Chancellor announced when we were at the regional investment summit in Birmingham the other day, but we are very clear that the reforms that are being made to the regulatory landscape have to be meaningful, not least because we are in a global race when it comes to financial services. You raise banking. Competition is very, very fierce, so we have to have a competitive regulatory environment.

I do not doubt the high-level narrative, which you have articulated well. All I am trying to say is that there are specific, actionable things that need to be done urgently if we are to be competitive with the US. I urge you to get your officials to give you a list of things to take to the PRA and FCA, because they will not offer them to you.

Some free advice there from the longest-serving Economic Secretary since the second world war.

I gave it with the greatest respect. I did not mean in any way to—

No, no—not at all. You raised the Consumer Credit Act. We will come forward with a financial services Bill, and that Bill will have an awful lot of content, not least because, as I said, there are 63 things in the strategy that we need to drive forward.

On the topic of this week’s session on the senior managers and certification regime, one issue that came up was having a new senior management function dedicated to AI. Do you rule that in or out?

It is not necessary from the point of view of ensuring that there is someone within financial services firms who is responsible for the use of AI. In the regulation as it stands, there is nothing to stop additional categories being added.

That basically means that if anything goes wrong on your watch, you are responsible, and this could just be added into it.

A high proportion of FS firms do actually have a single person who is responsible for AI. Some do not and some do, but you do not need that, from the point of view of a regulatory framework, to ensure that there is someone who is responsible, because senior managers are responsible for the outcomes in the way that we have talked about.

You talked about reducing the burdens on regulation. We had a hearing about the Payment Systems Regulator being abolished, but the legislation to abolish it has not come through. Can you tell us how that will reduce burdens on businesses?

It will, as the PSR moves into the FCA. You are right that we have not brought forward the legislation in relation to it yet.

When is that likely to come?

I cannot make commitments for the future parliamentary timetable, but where we are able to get efficiencies before the statutory changes take place, that is already happening in some cases. For example, instead of having separate meetings with the FCA and the PSR, they may be able to have one meeting.

Well, maybe. When we questioned them, they had got the phone call from an official—it might have been one of you—the night before their hearing in front of the Treasury Committee on the Wednesday, and the Prime Minister spoke of it in a speech on the Thursday as an example of a bonfire of the regulators. But they share a premises with the FCA, they already share a payroll with the FCA, and they have confirmed there would be no staff redundancies and that staff would just be perhaps deployed differently, some of them in other FCA teams. So all we can alight on that they might save money on is a board, which, from memory, costs about £100,000 a year to run. There is talk about a little bit less friction as they talk to people, but they will still have to talk to people in different teams in the FCA, so I am not quite sure what the benefit is. When we will see the proof that that particular closure is a regulatory benefit to business?

I suspect when we bring forward the plans, including from a structural and other point of view.

Is it a priority in the next King’s Speech?

I am wary of going near parliamentary time.

I am just asking because in 2026 we will have the next King’s Speech, and it will then take a year for all that to go through, with the best will in the world, so the earliest we could get legislation actually abolishing the Payment Systems Regulator would be by the spring of 2027, on a very fair wind. That is taking quite a positive outlook.

I am keener than anyone to ensure we get parliamentary time for this, and indeed to make all of these reforms a priority.

My point is that it is not a quick fix, even if you think it is going to deliver anything. It is going to take time.

I will make this as an overarching comment for everything in the strategy, and there is a timeline of deliverables at the back of it: I am determined to deliver this as quickly as is feasible, because I recognise the importance to the wider economy and to the point we were just making about the scale of international competition in this area.

You have made that very clear. Thank you, Minister, for coming in front of us today. We hope you will be a regular visitor to this Committee.

It sounds like I will.

It sounds like you will, yes. There is a lot going on in your area that interests us, so it was good to explore with you today your priorities, including the financial inclusion strategy as far as we could touch on that, and your points about encouraging retail investment. We have discussed the critical third parties regime and the timeline for firms to be brought into that. Thank you for agreeing to write to us with more information; we look forward to seeing that. I hope that you can commit, Minister, that you will write to us when you are making a designation so that we get that information in real time. I do appreciate that beforehand it may be commercially sensitive. We are very confidential as a Committee; as you would expect, we do not leak. If you could commit to telling us when you are making a designation, that would be helpful.

There is market sensitivity as well as commercial sensitivity.

Absolutely. We appreciate our role in that, so we would not expect to receive market-sensitive information—that would not be appropriate—but receiving it in timely fashion would be helpful. We have also had a good discussion about the risks to consumers from AI, including misleading financial advice that could be made available, and we have discussed financial exclusion in insurance, as Mr Dean highlighted. Thank you very much for that canter through a lot of issues—more than were originally planned, but with a new Minister we did not want to lose the opportunity to discuss other issues. I thank Catherine McCloskey and James Fairburn as well.