Financial regulation is struggling to keep up with the rapid development of artificial intelligence, according to European policymakers, who are grappling with how to support its adoption while containing risks to market integrity and stability.
Nikhil Rathi, CEO of the UK’s Financial Conduct Authority, said the traditional rule-making cycle “doesn’t work” in an era of rapid technological change, particularly as the development of agentic AI accelerates.
“Technology is changing incredibly fast and we need to think differently about some of the innovations we’re seeing in AI,” Rathi told CNBC’s “Squawk Box Europe” on Thursday.
Rathi highlighted the UK’s Financial Stability Board’s efforts in cutting-edge AI, as well as the creation of the AI Safety Institute in the UK, as part of a broader effort to help policymakers, regulators and businesses better understand risks and adopt technology safely.
Christine Lagarde, President of the European Central Bank, said that AI is a source of productivity and gains. But, in an interview given to the French newspaper The Echoesshe also warned that the technology also poses a “major risk.”
“For a decade now, we have been talking about cybersecurity risks, hacking, data theft, etc.,” Lagarde said. “But as AI models accelerate and deepen, we face a much greater risk, because it is happening very, very quickly, and because the defenses – and the necessary funding – have not yet been found.”
His comments come after the impact of AI on productivity and market integrity became a key discussion topic at the ECB’s annual meeting in Sintra, Portugal – Europe’s version of the Jackson Hole symposium – this week.
Sarah Breeden, deputy governor of the Bank of England, said agentic AI could amplify volatility during periods of market stress.
In his Sintra speech on Tuesday, Breeden said that, for now, commercial companies are primarily using autonomous AI for lower-risk operational tasks, such as research. “But that could change quickly,” she said.
Guardrails and circuit breakers?The increased use of agentic AI in financial markets could require greater oversight, she said, such as guardrails “analogous to circuit breakers or kill switches” that would “limit or stop market-wide trading if faulty AI models cause a market collapse.”
But top bankers and regulators also recognize that Europe is lagging behind in investing in AI and developing pioneering companies that are driving breakthroughs.
Boris Vujčić, vice-president of the European Central Bank, said: “Europe now finds itself in a situation where… it must, of course, develop its own capabilities in the field of AI. There has also been a lot of talk about issues of sovereignty in the field of AI. Europe has shown in the past that it is capable of adapting new technologies…[to] stimulate productivity growth. [But] it hasn’t always been on the border.
Rathi said market authorities ultimately need to strike a better balance in the face of rapidly evolving technology.
He said that while technological innovation offers exciting opportunities for the UK, particularly in relation to the country’s productivity and growth challenges, it is essential that markets are not exposed to risks that regulators cannot yet fully monitor.
“The reality is that some of these technologies now evolve in weeks or even months, and the traditional rule-making cycle just doesn’t work that way. So we need to think about new tools and a different way of working with the market in a more collaborative way, for example on financial crime and AI risks, to be able to ensure that we deliver on our objective of market integrity,” he said.
He added: “We don’t want to stand in the way of adoption, but we need to be transparent about the risks.”
