Clifford Chance

In this update, we briefly examine some of the recent publications from the Financial Conduct Authority (FCA) that have implications for the regulation of the use of artificial intelligence in the insurance sector.

In-brief

As the financial services conduct regulator, the FCA plays an important role in regulating the use of artificial intelligence in the insurance life cycle. Last year marked the ten-year anniversary of the FCA's Innovation Services and the regulator continues to innovate its approach to understanding the ever-evolving AI landscape, including the notable opening of the AI Lab and proposals to launch a live AI testing service in Autumn 2025.

Recent FCA publications reinforce that the FCA remains a technology-neutral regulator and has no current plans for new, AI-specific regulation. This is welcome news for insurance market participants who continue to wrestle with bedding-in regulatory changes such as operational resilience requirements, the Consumer Duty and stricter requirements on the oversight of Appointed Representatives.

In January, the government published an independent report known as the AI Opportunities Action Plan. The Action Plan is a blueprint to "turbocharge AI" and is aimed at boosting growth and living standards in the UK. It has only one financial services-specific plan, although the broader recommendations will ultimately impact AI deployment in the private sector. The FCA's future approach to AI regulation in financial services will have to balance consumer and market protections with the promotion of UK economic growth, in alignment with the Action Plan.

Five-year plan

The recently published five-year strategy (covering 2025 to 2030) commits the FCA to a "tech-positive approach" to regulation, focusing on outcomes rather than imposing prescriptive new rules. The FCA repeated its observation that technology is both an opportunity and a challenge to financial markets, but demonstrated awareness that stifling innovation through over regulation is a genuine concern for market participants.

The five-year plan outlines four key priorities, including a plan to boost product innovation and support growth and competition through technology. It pledges to support new market entrants through tailored authorisation services and the establishment of a permanent presence in the US and Asia-Pacific for the first time, to work with businesses interested in operating in the UK.

A data revolution is also mentioned, through opening access to customer data to financial services providers. The initiative is expected to increase choice and personalised support for customers in the banking sector. This could eventually benefit the insurance sector too, depending on which firms will be able to access the data. A roadmap for Open Finance will be published by the FCA in the next twelve months, with small business lending being prioritised and the first "scheme" to be in place by the end of 2027.

Simplifying insurance regulation

To align with the five-year strategy, the FCA also launched a consultation to identify ways to simplify and streamline a handful of specific insurance rules, to reduce the regulatory burden on businesses. The focus is on tailoring the rules to the UK market to drive innovation, rather than focusing on the regulation of technology in the insurance sector. You can find further information here: The FCA Consults on Simplifying its Insurance Rules.

Live AI Testing

Also building on the five-year strategy is a consultation (closing 10 June 2025) on establishing a live AI testing environment for firms as part of the existing AI Lab. The plan is to launch in September 2025. Under the regime, the FCA will provide tailored regulatory support, for a limited period, to firms who are ready to deploy consumer or market-facing AI models.

In addition, in response to industry calls to experiment with developing technologies, the Digital Securities Sandbox has opened. It is aimed at the safe adoption of new technologies, including distributed ledger technology, in the operation of financial market infrastructures. It is also a test-case for a new form of policymaking, where the FCA (PRA and Bank of England) can observe activity in a live environment and then consider whether rule changes, or legislation is required to enable its adoption. Insurers and reinsurers using the capital markets to raise finance may benefit from the expected efficiencies that DLT will bring. Ultimately, the project should serve to inform how the regulators can best support large scale adoption of new technology in financial services.

The Future of AI regulation

The FCA's recent discussion paper on cryptoasset market regulation reconfirmed its technology-agnostic approach, saying "It is the substance of the activity firms are carrying out, not the technological mechanism through which it is provided, that determines whether it falls within [FCA] regulation".

This technology-neutral, outcomes based regulatory approach was also confirmed in a speech in April 2025, where the FCA said it believes that its existing frameworks, like the Consumer Duty and the SMCR regime give it "enough regulatory bite" without the need to write new, AI-specific rules. On the other hand, a recent survey by the FCA and Bank of England identified that the Consumer Duty is in the top three regulatory constraints on the adoption of AI by financial services firms, highlighting the tension between principles-based regulation that is not adapted for specific technologies.

At the start of this year, the government launched its AI Opportunities Action Plan, aiming to take forward fifty recommendations across multiple sectors in the UK and "backing AI to the hilt". The plan includes a proposal to appoint a financial services "AI Sector Champion" to work with industry and government and "develop AI adoption plans". There was little detail on this aspect of the action plan and more information is expected this summer. As the FCA remains accountable to HM Treasury and the UK Parliament, any developments in government policy on the regulation of technology will affect the FCA's approach to regulation. As such, the FCA must continue to balance consumer and market protection with its duty to support competition and the government's AI Opportunities Action Plan and economic growth objectives for the UK economy.