The unchecked rise of artificial intelligence means the level of risk facing the financial system is currently “on steroids”, according to the boss of the Financial Conduct Authority, who warned that excessive “tick-box” rulemaking would fail to keep pace with increasingly complex threats.

Speaking at a City of London dinner, Nikil Rathi said risks to Britain’s financial markets were graver than ever, urging regulators to avoid adopting “an analogue approach in a digital age”.

“The threats to market integrity are as serious as I have seen them,” the watchdog boss said. “Unprecedented volatility, concentration risks, new forms of market abuse and rampant cross-border financial crime: fast-emerging technologies are putting these on steroids.”

Rathi, who has run the UK’s largest financial watchdog since 2020, was speaking after several global regulators sounded the alarm over the threat that rapid advancements in frontier AI were posing to key infrastructure like payments, energy and markets.

AI breaches sparks FCA concerns

Recently, the likes of OpenAI, Meta and Google-owner Alphabet have all lost control of their most advanced models during testing, prompting a wave of concern over the safety of the technology. Several former engineers have warned that top AI laboratories are sacrificing safeguards in their race to develop more complex technology.

The developments prompted Bank of England governor Andrew Bailey to call on watchdogs to get a better grip on the rise of agentic AI or face materially higher risks to the financial system. Meanwhile the European Central Bank and Federal Reserve are also stepping up efforts to contain its threats.

Rathi said those efforts would fail if watchdogs chose to regulate with more regulation and legislation, which he said “responds too slowly” to the rapidly changing threat landscape. Instead, the FCA chief doubled down on previous calls to shift to a more fluid approach focused on results rather than rules.

“In the face of all today’s challenges, the temptation is to say, ‘Write more rules, but do it damned well faster,'” he said, adding: “But if policymaking is our only regulatory reflex, we’ll be stuck chasing yesterday’s market instead of embracing the one in front of us.”