Impact of new regulatory guidance on AI innovation and compliance in finance

Following the FCA and ICO joint letter of 10 March 2025, which our article from 19 March 2025 covered, UK regulators have reinforced their position. The ICO and CMA’s joint statement of 26 March 2025 makes it clear: While AI promises transformative benefits for financial services, firms must embed compliance from the outset—or face serious consequences.

This latest guidance builds directly on the themes we explored last week, particularly around:

• data protection risks in AI-driven credit scoring and fraud detection;
• competition concerns as major banks leverage AI advantages; and
• consumer protection in an era of AI-powered financial advice.

Here’s what financial institutions need to know about these evolving regulatory expectations.

Why this guidance matters for financial services

The financial sector faces unique AI challenges:

• High-stakes decisions (loan approvals, investments) with legal and reputational risks.
• Extremely sensitive data (payment histories, biometrics) requiring strict protection.
• Concentration risks as major players dominate AI development.

The regulators’ message aligns with our previous analysis: “Innovation yes, but not at the expense of market fairness or consumer rights.”

Three key implications for financial firms

1. Data protection just got more stringent

• Training data audits are now essential—many “public” datasets contain unlawfully scraped financial information.
• Explainability requirements intensify—can you justify why your AI denied that mortgage?
• Synthetic data solutions gain appeal to reduce GDPR risks.

Case in point: The ICO recently fined a lender £2.4 million for using AI trained on improperly sourced transaction data.

2. Competition watchdogs are watching closely

The CMA warns against:

• Data hoarding by incumbent banks to block challenger firms.
• Algorithmic collusion where AI systems inadvertently create anti-competitive patterns.
• Black box pricing models that obscure discrimination risks.

Strategic move: Digital banks should demand fair access to payment data APIs that feed major banks’ AI models.

3. Consumer safeguards are non-negotiable

New expectations for:

• Real-time disclosure when AI interacts with customers.
• Human override options for significant financial decisions.
• Bias testing across all customer segments.

Compliance tip: The FCA now requires quarterly AI fairness reports for consumer credit providers.

Practical steps for compliance teams

Building on Flint Bishop’s previous recommendations, firms should now:

1. Conduct an AI regulatory gap analysis
   • Map all AI use cases against ICO/CMA/FCA expectations
   • Prioritise high-risk applications (e.g., robo-advice, fraud detection)
2. Strengthen model documentation
   • Maintain detailed records of:
   • Training data sources and legal basis
   • Bias mitigation steps
   • Human oversight protocols
3. Engage regulators early
   • Book an ICO innovation advice session
   • Participate in the FCA’s AI Sandbox programme
4. Review third-party AI providers
   • Audit vendor compliance (many fintechs lag on GDPR requirements)
   • Ensure contracts address liability for AI errors

The path forward: Responsible innovation wins

As we noted last week, the UK wants to be an AI finance hub—but only for firms that get the balance right. Those who:

• Proactively address regulatory concerns;
• Invest in explainable AI systems; and
• Champion fair data access;

…will gain competitive advantage while avoiding the eight-figure penalties we’re now seeing.

Your next steps

1. Revisit your AI strategy in light of this new guidance
2. Book a compliance health check—our team specialises in financial services AI regulation
3. Stay ahead—we’ll continue monitoring the evolving UK AI regulatory framework