FCA pressed by Lords over regulating ChatGPT

The issue was raised during a House of Lords Financial Services Regulation Committee hearing this morning (2 September), after a peer said they had found AI useful in helping him understand insurance.

David Geale, executive director of consumers, payments and competition at the FCA, said the regulator does not currently regulate AI platforms such as ChatGPT but acknowledged the Mills Review had recommended the regulatory perimeter should be reviewed.

“We do not regulate the AI companies, as things stand. That is not within our perimeter. I would agree with you, they can be a useful tool and helpful in terms of helping people with questions to ask,” he said.

“I think people should certainly take a step back and think about if they are using it for some form of recommendation. That is when it starts to get blurry in terms of they shouldn’t be given specific advice.

“But at the moment, these are outside of our perimeter.”

AI taking over

We do not regulate the AI companies, as things stand. That is not within our perimeter. I would agree with you, they can be a useful tool and helpful in terms of helping people with questions to ask.

David Geale, FCA

The peer pointed out that ChatGPT was effectively taking over some of the functions currently performed by price comparison websites, which are regulated by the FCA.

Asked whether companies such as OpenAI, creator of ChatGPT, should consequently be brought within the FCA’s perimeter, Geale said the key distinction was that consumers cannot currently transact through AI.

“Price comparison websites, you can transact through those in terms of they earn something from what you are doing with that. At the moment, you can’t execute through the AI,” Geale said.

“As we get into things like agentic AI, that may well become possible. I think there is a question of how does that develop, moving forward, but as it stands it is not within our regulatory perimeter.

“It is something we need to monitor very closely.”

Agentic AI refers to systems capable of taking actions on a user’s behalf rather than simply generating information or answering questions.

Geale was also challenged by the peer over whether the FCA’s view underestimated how extensively consumers were already using AI when making financial decisions.

“The important thing is consumers understand what they are doing and they understand the limitations of AI, but again we can only put requirements on regulated firms,” said Geale.

“We can’t put requirements on AI firms that aren’t necessarily doing it by way of regulated business.”

When a peer said AI had told them whether an insurance policy was suitable for their needs and how it compared with other products, Geale was asked whether this should be monitored by the FCA.

“We don’t set our own perimeter in terms of what do we regulate and what do we not. That is a matter for parliament, not us,” said Geale, who earlier in the hearing gave the FCA a score of six to seven out of 10 when asked how effective he believed the regulator was as a watchdog.

“We are certainly not claiming it is job done. We have done a number of things,” he said.

Consumer understanding

The committee also questioned the FCA on consumer understanding of financial products, including insurance.

Chris Knight, the new director of insurance at the FCA, said poor consumer understanding can manifest itself through areas including Financial Ombudsman Service complaints and underinsurance.

He said the Consumer Duty requires firms to consider why such problems are occurring and whether a lack of understanding is contributing to them.

The FCA is working with around a dozen firms to examine how they improve consumer understanding, with the findings expected to feed into a report on good and bad practice, he added.

The regulator is also working with consumer groups and the Association of British Insurers on consumer understanding more broadly, including in relation to storm claims, Knight said.

“It is a real key area of focus and a real outcome that we are looking to drive through our activity,” Knight said.

Geale described the Consumer Duty as an “incredibly useful tool” when asked whether it had delivered meaningful change for consumers.

He cited changes in areas including gap insurance and travel insurance, where firms unable to provide cover must now direct consumers towards a directory.

However, the FCA stated it continues to focus on whether consumers receive and understand key information, including the APR charged on premium finance.

Geale said enforcement investigations could take time because the FCA needed to investigate issues properly but stressed that supervision was also an important route to securing faster outcomes.

“We can raise an issue with the firm and they will sort it voluntarily quite quickly,” he said.

“For example, we have engaged with 241 communications directly to firms. We have had 41 Section 165s, which are data requests where we compel firms to provide us with specific bits of data so we can identify problems.

“We’ve introduced 26 voluntary requirements, which is where we ask firms to sign a form of restriction that forces them to do an activity or stop an activity, for example.

“We have a number of Section 166s, which is a skilled person report where we require somebody independent to go in and either look at an issue or carry out an activity if we are not satisfied.

“They have resulted in a number of different areas of customer redress. We have had 11 incidents of customer redress and these are just not as public as what we are seeking to do is achieve the right outcome at pace. That isn’t always an enforcement investigation.”