AI Live Testing: Innovation in UK Financial Services

Vicky Pearce

Hello and welcome back to the B-Compliant AI podcast. Alright, so this week the FCA reported on their AI Live Testing initiative, which is clearly a big leap forward for innovation in the UK's financial services industry. Essentially, it's a program designed to help firms transition their mature AI models from proof of concept into real-world use. And the aim is that this is all done in a really carefully controlled and supported environment.

Rachel MacRae

Okay, so, like, is this just for anyone who’s got an AI project? Or are there any specific criteria for who can, well, jump on board?

Vicky Pearce

Good question. It's actually quite specific. To be eligible, firms need to be UK-based and have AI tools that are directly relevant to financial services. Plus, their models need to show some potential benefits, like improving consumer outcomes or contributing to economic growth. And, crucially, they’ve gotta have already completed extensive pre-deployment testing.

Rachel MacRae

So, no half-baked ideas or anything like that?

Vicky Pearce

Precisely. The FCA wants firms that are ready to go live but just need that extra level of support to make sure everything is done responsibly. This could include guidance on managing risks or navigating regulatory requirements, or even tailored waivers to help smooth the transition.

Rachel MacRae

Love that. But what's in it for the FCA? I mean, what are they really hoping to get out of all this?

Vicky Pearce

I think it's twofold, really. One, they want to encourage innovation, which, you know, benefits everyone in the long run. And two, they're looking to build a shared understanding of how AI can be deployed safely in financial markets. So, participating firms have to share data, insights, and collaborate openly with the FCA.

Rachel MacRae

Ah, so it's kind of a learning experience for everyone involved?

Vicky Pearce

Exactly. And they're focusing on some key areas—things like AI explainability, robustness, bias, governance, and the impact on vulnerable consumers. These are all critical concerns when you're using AI in something as sensitive as financial services.

Rachel MacRae

Can we just pause on that bias bit for a sec? Because, seriously, isn’t there a lot of, like, fear that AI could cement biases instead of fixing them?

Vicky Pearce

That’s a huge concern, yeah. The FCA is looking at how firms can monitor and manage their AI systems to ensure they're fair and transparent. For example, there's a case study in their paper that looks at using AI for things like loan loss provisioning. It raises questions around metrics for performance, fairness, and human oversight, which are all essential if you want people to actually trust these systems.

Rachel MacRae

Right, because if you don't get it right, you might end up, like, unintentionally penalising vulnerable consumers. And that’s... that’s not okay.

Vicky Pearce

Absolutely. The FCA is taking this seriously. They're making governance a key part of the initiative to ensure firms don’t just deploy AI and then wash their hands of responsibility. It all comes back to that outcomes-focused approach they’ve committed to, a way of working that evaluates the real-world impact of these tools.

Rachel MacRae

But wait, what happens if this all works? Like, are we looking at AI Live Testing as a permanent thing?

Vicky Pearce

Potentially, yes. It’s starting as a pilot, but it could very well become a permanent feature. They’re also tying it into their existing innovation initiatives, like the Regulatory Sandbox, so there’s already some solid infrastructure in place.

Rachel MacRae

Okay, got it!

Vicky Pearce

Alright, so now that we’ve covered the FCA's AI Live Testing initiative, let’s shift gears and talk about their decision to pause the Sustainability Disclosure Requirements, or SDR, for portfolio managers. Instead of moving ahead right now, they are focusing on a multi-firm review of model portfolio services to assess how firms are applying the Consumer Duty principles.

Rachel MacRae

Wait, so they’ve just hit the brakes? Why not just roll it out like they planned?

Vicky Pearce

Well, it’s partly because the industry raised concerns about the scope and practicality of applying the rules across different portfolio types. Firms wanted more clarity and, well, time to prepare, especially considering changes to other regulatory frameworks like the UK funds regime.

Rachel MacRae

Ah, so it’s less about scrapping it and more about... fine-tuning?

Vicky Pearce

Exactly. The FCA’s still committed to the principles behind SDR, but they’re taking this time to ensure the framework will actually deliver better outcomes for consumers without overwhelming firms. It’s a balanced approach, really.

Rachel MacRae

Makes sense. But what’s this review they’re doing instead? Like, what are they hoping to figure out?

Vicky Pearce

They’re looking at how firms manage model portfolios and if they’re meeting Consumer Duty standards. The idea is to ensure investors are getting good outcomes. And whatever findings come out of this review will shape the next steps for SDR.

Rachel MacRae

Right, but they’re not letting firms off the hook completely, are they?

Vicky Pearce

Oh, definitely not. The anti-greenwashing rule is already in effect, and firms have to comply with it in their sustainability claims. So, there’s still a lot of responsibility on businesses to be transparent and accurate.

Rachel MacRae

Of course, I mean, the anti-greenwashing rule should have been a consideration of firms by this point.

Vicky Pearce

It should yes. Greenwashing erodes trust, so this rule’s really important to hold firms accountable. But I think the bigger picture here is that the FCA’s taking a measured approach — pausing SDR implementation doesn’t mean they’re backing away, just that they’re recalibrating.

Rachel MacRae

Okay, so they’re playing the long game. Got it. What does this all mean for portfolio managers in the meantime?

Vicky Pearce

It means they’ll need to stay focused on maintaining compliance with the current rules, like anti-greenwashing, and keep an eye on the outcomes of this multi-firm review. The FCA’s clearly still committed to improving sustainability standards, so this pause isn’t a free pass to hold off on progress entirely.

Vicky Pearce

So Rachel, now that we’ve unpacked the FCA’s pause on SDR for portfolio managers, let’s shift to another hot topic—their discussion on regulating cryptoasset activities. They’ve laid out what looks like a pretty comprehensive framework to bring some order to what’s essentially been the Wild West of finance.

Rachel MacRae

Okay, so, like, what’s the big deal here? I mean, crypto’s been knocking about for ages, hasn’t it? Why now?

Vicky Pearce

Good question. This isn’t the FCA jumping on a trend—it’s about responding to a sector that’s grown so quickly it's, well, outpaced the rules. They’re focusing on consumer protection, market integrity, and building sustainable systems—big ticket items, really. And with things like crypto lending, DeFi, and staking gaining traction, the FCA’s making sure the groundwork is there before the risks spiral.

Rachel MacRae

Right, but they aren’t regulating, like, advisers doing crypto yet, are they?

Vicky Pearce

Not yet, no. For now, they’re targeting firms like exchanges and intermediaries. But, and this is key, the direction of travel suggests that they are considering a formal regime for crypto advice down the line.

Rachel MacRae

Basically, uh, don’t get caught with your pants down, right?

Vicky Pearce

Exactly. It’s still unregulated for now, but advisory firms need to stay cautious. The FCA will likely clarify this in its planned consultations later this year, so there’s definitely more to come on this front.

Rachel MacRae

Alright, but what’s in it for the FCA, though? Like, surely they’re not just doing this out of, you know, the kindness of their regulatory hearts.

Vicky Pearce

Ha, no, they’re not. By formalising oversight, they’re aiming to boost consumer confidence and attract responsible innovation to the UK. It’s like saying—look, we’re open for business, but only if you’re playing by the rules.

Rachel MacRae

And if you don’t play fair?

Vicky Pearce

Then you don’t get to play at all. It’s a clear message. The FCA’s balancing between fostering innovation and ensuring that no one’s getting hurt in the process. Take crypto lending, for instance. Without proper rules, it could lead to unchecked risks for consumers.

Rachel MacRae

It’s like digital detoxing after, uh, years of chaos, right?

Vicky Pearce

Exactly. This framework isn’t just a set of rules—it’s about creating a more stable, trustworthy landscape for everyone involved. And whether that’s, you know, retail investors or big players, the FCA’s trying to make the space safer and more accountable.

Rachel MacRae

Well, it sounds like this is just the beginning, yeah?

Vicky Pearce

Oh, absolutely. We’re at the tip of the iceberg here. Crypto’s evolving fast, but so are the regulatory conversations around it. The key takeaway is to stay informed and, well, be prepared for what’s coming next.

Rachel MacRae

Right. And on that note, I think we’ve wrapped up quite a bit for today.

Vicky Pearce

We have indeed. That’s all for now, folks. Thanks for tuning in, and we’ll catch you next time!