The Financial Conduct Authority has published a consultation paper outlining proposed transparency requirements for artificial intelligence systems used in lending, insurance, and investment advice, marking one of the first concrete regulatory moves targeting algorithmic decision-making in the UK financial sector.
The proposals, released on Thursday, would require banks, insurers, and fintech firms to provide clear explanations when AI models influence credit decisions, premium calculations, or investment recommendations. Firms would also need to maintain audit trails of model training data and document any known biases identified during testing.
“We are not trying to slow down innovation,” said Dr. Sarah Chen, head of AI policy at the FCA, speaking at a City roundtable. “But consumers deserve to know when a machine has made a decision about their mortgage, and they deserve to understand the basis for that decision.”
The consultation follows a twelve-month review that examined AI adoption across 68 regulated firms. The review found that while 73 percent of large institutions now use some form of machine learning in customer-facing processes, fewer than one in five could produce a plain-English explanation of how those models reached specific outcomes.
Industry reaction has been measured. UK Finance, the banking trade body, welcomed the consultation but warned against prescriptive rules that could stifle beneficial applications of the technology. A spokesperson said the sector was “broadly aligned” with the transparency goals but cautioned that some deep-learning models are inherently difficult to explain in simple terms.
Consumer advocacy groups have broadly welcomed the proposals. Which? described the consultation as “a long-overdue step toward algorithmic accountability” and urged the FCA to extend similar requirements to credit scoring and insurance pricing models that rely on third-party data brokers.
The consultation runs until October and will be followed by draft rules expected in early 2027. The FCA said it would coordinate with the Bank of England and the Prudential Regulation Authority to ensure a consistent approach across the regulatory landscape.