Oral evidence: Work of the Financial Conduct Authority, HC 6

Oral evidence, 13 October 2026.

Witnesses

Nikhil Rathi, Jessica Rusu and Johan Sekora.

Chair

Welcome to the Treasury Select Committee on Tuesday 13 October 2026. Today, we are delighted to have the Financial Conduct Authority in front of us. We have regular sessions, of course, with the FCA. Today, we are looking particularly at one of the pillars of its review and its forward plan, which is being a smarter regulator. I am pleased to welcome, as ever, Nikhil Rathi, chief executive of the Financial Conduct Authority. He is joined today by Jessica Rusu, who is the chief data, information and intelligence officer at the FCA, and Johan Sekora, who is the chief operating officer at the FCA. Before we go into the main session, Mr Rathi, I just wanted to raise with you some of the challenges that the FCA has had in dealing with whistleblowers. In particular, the FCA has decided to appoint Lea Paterson, who is one of your new non-executive members of the board, to undertake a review of your interactions with the whistleblower Simon Andriesz, following his untimely death. First, why did you appoint somebody internal, or a member of the board, rather than using an external person to undertake the review?

Nikhil Rathi

It is a terribly sad situation. I have written to Mr Andriesz’s representative to pass on my condolences and those of the whole organisation. Mr Andriesz was a whistleblower. He had engaged with the FCA and a number of authorities, both in the UK and the United States, over a number of years. When a very sad situation such as this happens, it is important for us to reflect on how we have communicated and engaged with the individual in question. The board is independent of the executive. They are independent non-executive directors appointed by the Treasury. Lea Paterson is new to the organisation, having only joined the board on 1 October, and has relevant experience here. She will look at the way in which we communicated and whether there are any reflections for us. I would also note that whistleblowing work is some of the most sensitive work that the FCA undertakes. We receive around 1,300 whistleblowing reports every year. That is up 20% on the previous year.

Chair

Was that for 2025-26?

Nikhil Rathi

Yes, that is right. Dame Harriett will recall that I wrote to this Committee back in July 2023 about the Mr Odey case, which has now concluded before the Upper Tribunal. I will not get into the details of the case, but in that letter I explained how challenging it can be when we are dealing with some very serious allegations. We are not always able to speak publicly about the nature of the work that we are doing, nor are we necessarily able to communicate to the people who are making those allegations to us the nature of the investigations that we are undertaking. Over recent years, we have established an enhanced feedback mechanism following a pilot, where we seek to provide feedback to whistleblowers. Some 40% of whistleblowing allegations result in some supervisory action. Around 50% inform our wider work. There will always be cases, though, where, having examined the evidence and considered it carefully, it is not of a nature where we are going to be able to take regulatory action, or sometimes criminal action, which is what people are seeking from us.

Chair

Is the review limited to your interactions as an organisation with Mr Andriesz, or does it go wider than that?

Nikhil Rathi

It is focused on the interactions with Mr Andriesz, because this is a specific and very sad situation that has occurred. Of course, Lea will, I am sure, speak to a range of colleagues in the organisation, and she will be reporting to the board and reflecting on whether there is anything that we can learn more broadly.

Chair

Will she have access to all areas?

Nikhil Rathi

Yes.

Chair

Will your staff be required to provide true and forthright evidence to her?

Nikhil Rathi

Yes, absolutely. I am glad that you have asked me about my colleagues. As the leadership of the organisation—you have three of the executive team here—we also have a duty of care to our colleagues. They are on the frontline, often engaging with some very harrowing testimony from whistleblowers who contact them. We seek to provide them with support and counselling, so that they can conduct their job professionally, diligently, sympathetically and with compassion. Sadly, whether it is in our supervision hub, in our whistleblowing team or, indeed, more broadly, we receive contact from individuals who are in a situation where they are talking about self-harm, which is the very delicate and sensitive nature of some of the work that we do. We must make sure that we are compassionate with those who are approaching us, while also supporting our colleagues, when this correspondence can sometimes extend for many years.

Chair

Some of us here in Parliament receive that as well, to some extent, so we understand that and recognise that staff will be trying to do their very best in these difficult circumstances. Did the board consider bringing in anybody from outside, either on this particular case, in terms of the relationship with Mr Andriesz, or more generally on whistleblowing? Is that something that was discussed at the board?

Nikhil Rathi

It is the board that has asked for this review. It considered a range of options that may be appropriate. First and foremost, this is looking at how the organisation has interacted with an individual whistleblower. It is formally the responsibility of the board to conduct that oversight. If Lea would like external support in doing that, I am sure that will be made available to her, and she will, of course, be able and will speak to a range of external parties, invite feedback and make recommendations accordingly.

Chair

Is she going to be shaping the review and the team that she brings to do that work?

Nikhil Rathi

Yes.

Chair

Can she bring in outside expertise that is independent of the FCA?

Nikhil Rathi

Yes, absolutely. The board is able to access all the expertise that it needs to conduct its job.

Chair

Presumably, she is not getting a fee for this, because she is a member of the board; she is doing it as part of that role.

Nikhil Rathi

That is right. She is an independent non-executive director; it is part of the oversight function of the board.

Chair

As an independent director, she is paid by the FCA to do that job?

Nikhil Rathi

All independent non-execs receive a fee.

Chair

Just for the record, that is very clear. Will the findings of her review be made public?

Nikhil Rathi

Yes.

Chair

That will be in full and with supporting evidence. I presume that there will have to be some redactions or confidential appendices because of named individuals. Is that something that this Committee could have access to unredacted, except for the normal redactions of the names of lower-level officials?

Nikhil Rathi

It is hard for me to confirm that now, because it will be a matter for the board and the independent non-executive directors as to what is published. You will be aware that, in any whistleblowing circumstance, there are sometimes very sensitive issues that are being engaged, and very sensitive information, including very sensitive personal information, so the board will have to make a judgment as to what is published, but it is certainly the intention of the board—and Ashley, the chair, said so at the annual public meeting—to make sure that the findings are public, with an aim for early 2027. The board will absolutely share that with the Committee and take your further questions at that point.

Chair

Once that is published, the board still has the option of going for a wider, more independent review if it chooses to. Is it within Lea Paterson’s remit that she could recommend a further review, if she felt that she came across something that showed that there needed to be a wider review?

Nikhil Rathi

Lea is able to recommend anything that she feels appropriate, and the board will consider it. The board has a wide range of powers and options available to it. As I say, the work that we do on whistleblowing is some of the most significant and sensitive work that we do. We take every report that we receive seriously. It is engaged with carefully and thoughtfully. We also have an obligation to look at all evidence that we receive objectively and dispassionately. Sometimes, after detailed examination, we may not be the appropriate authority to take something forward, or, indeed, there may be action that has already been taken in another jurisdiction in relation to specific allegations. In terms of some of the most challenging situations for us, I talked about that particular non-financial misconduct case where the tribunal has now published its judgment. It is there and it speaks for itself, so I will not go into the details. In non-financial misconduct cases in general, for example, we are sometimes the last resort in terms of what whistleblowers are seeking from us. They have been to the police, and there has not been satisfaction there because an investigation has not proceeded. They do not feel that they have had satisfaction in the employment tribunal. While we can consider the matters and look at things within our remit, we are not necessarily going to be, in those types of cases, for example, the authority that is going to secure a criminal conviction or, indeed, an employment outcome. We sometimes have to take the careful and difficult decision to draw some correspondence to a close, sometimes after a number of years, and we know that can generate quite a lot of anger with the individuals concerned. That is also because we have, as I say, 1,300 cases and have to make sure that the resources are devoted to those cases where we think we can take some action and use our powers.

Chair

Thank you very much indeed for that. Before we move into the main session, I also just wanted to ask you about the Dobbs review. This was set up a decade ago following issues with Lloyds Bank 15 years ago. We wrote to Dame Linda recently, and she has written back and published on her website that, 10 years on, there is still no report and that she is continuing to go through the process that she is going through. After a decade, this was supposed to be a lessons learned report. After a decade, there are no lessons in the public domain that have been learned. Do you have any comments about this process that was supposed to improve things? We have had no information about what has gone wrong, a decade since the investigation was set up and 15 years after the events in question.

Nikhil Rathi

This was a review commissioned by the Lloyds Banking Group and its board, so it is independent of the FCA. In many respects, it engages activities that were outside the regulatory perimeter at the time. Nevertheless, we are very interested in the process and in the outcomes of the review. As I understand it, Dame Linda has said to you that the investigation stage is complete and the report is now being finalised. There will then be a period in which Lloyds needs to engage with the report before the findings are made public to this Committee, hopefully during the course of next year. It is clearly disappointing that an exercise such as this one takes the length of time that it does. I do not have anything to add beyond the explanations that Dame Linda has given to you as to the nature and complexity of the investigation into that many individual cases and the time that it took to gather the evidence that she sought.

Chair

Of course, she did not have the statutory power to compel witnesses. If it had been under section 166, you would have had more power. You are saying that it is outside the perimeter, and we understand that, but are there lessons to be learned more widely for the sector about an internal review versus your role as the FCA? People will have died along the way. Businesses will have gone. Any lessons learned will not really apply to the people who were affected in this case. Would you agree that this is a very unsatisfactory situation, without putting words into your mouth?

Nikhil Rathi

Whenever these situations arise, one of the challenges that we have is that there are multiple mechanisms for the system to seek to secure answers, and for affected individuals or firms to secure answers. In this case, there have been many court cases that have worked their way through the system. That can sometimes complicate other processes, because, when something is before the court, that process necessarily takes precedence. There have been multiple Select Committee inquiries, and the Select Committees have very wide-ranging powers if you feel that you need to access information. There has been some regulatory work, some work by boards and, indeed, some wider criminal cases related to HBOS in particular and some of the activities here. I recognise that that multiplicity of processes can, when you add it all up, lead to quite an unsatisfactory overall outcome, because each is looking at different things. That may be an issue that we can come on to when we talk about the smarter regulator pillar and how we ensure institutional effectiveness and answers in situations such as this, at speed, within the system and framework of review and judicial scrutiny that we have.

Chair

Thank you. That is a very fair comment.

John Glen

On 24 March, which was one of the last times you were before the Committee, we had a conversation about Palantir. I asked you about the effect of excluding Palantir from the process, and you said, “We think that we would have a lower-quality proof of concept relative to the winning bidder. That is the choice that you face”. I was wondering if you could update the Committee on what your experience has been with Palantir. We are very mindful of the fact that there has been a lot of public commentary around the effectiveness and availability of alternatives, and, crucially, whether you will have discretion to remove them in future, given the way that they are, by some, deemed to operate and create a function that cannot be removed. Would you like to comment on what you have done? I would acknowledge that you have done a lot since you came into office on the transformation programme, and this is the latest stage of it.

Nikhil Rathi

I will turn to Jessica in a minute, and she can go into more detail. The opportunities that the UK has in terms of growth and productivity with new technology are enormous. The financial and professional services industry could be right at the forefront of securing those, and we have been leaning in very hard to make sure that we can support innovation. What I would also say to the Committee this morning is that the risks to the integrity of the financial services system and, to use a shorthand, market integrity are right now as serious as I have ever seen them, driven also by the very same technology that is enabling opportunity, as well as by the shift in market structures, with 24/7 trading, digitisation, tokenisation and enormous cross-border flows of capital, and both of those trends being amplified by the activities of networks of financial criminals, money launderers and fraudsters operating across borders. Key to our work to tackle financial crime is our ability to join up the intelligence and data that we have within our organisation—and we are not perfect and, whenever things do not work out right at the FCA, that issue of joining up data and intelligence is right at the heart of it—with the data and intelligence that we receive from our partner organisations, that is available in the public domain and that we can secure from around the world. That is why we are investing enormously in our data and technology capabilities to be able to match the scale of the risk and the harm from crime, in particular, that we are seeing. I will now turn to Jessica, who can talk about the specifics of that proof of concept and where we are now.

Jessica Rusu

As Nikhil set out, we have been investing heavily in our data science, technology and infrastructure engineering departments over the last five years. We have now grown the data, technology and innovation function to over 600 colleagues. It is very important that we understand how much we have invested in data science, and yet how much further there is to go. In particular, financial crime has increased to £14 billion per annum, so the challenge that we face as a regulator is how much time and energy we want to invest in the creation of our own frontier AI models and where we have the opportunity to leverage vendors. In particular, we have over 100 technology suppliers that we work with. Approximately 35 of them are tier 1, 2 and 3 suppliers. It is really important to calibrate the decision around fragmentation of suppliers across multiple small vendors, as well as the benefits of scale. This particular proof of concept was seeking to evaluate the benefits of intelligence at scale, looking at the ability to integrate the data layer with the technology and intelligence layer. That proof of concept has now concluded. It is finished, and we are reflecting on the lessons that we have learned from that as well as our wider technology ambitions.

John Glen

Could you tell us about your reflections and instincts? Have you successfully retained full operational knowledge? What has happened with intellectual property in terms of running these tools yourself or independently? There is significant public debate about this matter.

Jessica Rusu

Yes, there is.

John Glen

It is important that we have clarity from you about what you have learned, and what your assessment is of Palantir specifically, from this proof of concept.

Jessica Rusu

In particular, the concept of sovereign data and the arrangements that we have for our own cloud data are really important. I gave evidence previously about this matter in terms of the data controls that were established for this particular proof of concept to make sure that we remained the data controller at all times, as well as the security and encryption keys remaining with the FCA throughout the entire proof of concept, as they would do under any supplier arrangement.

John Glen

This is a dynamic environment. There are lots of new options and providers available. Do you have any assessment yet of whether you will have a recurring commercial relationship with Palantir, or will you need to procure again in light of the developments that exist?

Jessica Rusu

If we decided to invest in an intelligence platform, we would, of course, go to open procurement. Typically, we warm up the market ahead of any procurement exercise. We outline very specifically what we want to see. We invite firms in to do demos with us. We have a pre-engagement phase, and then we go through a full procurement phase.

John Glen

Would it be fair to say that Palantir does not have a universal lock-in in terms of future work at the FCA?

Jessica Rusu

That is correct.

John Glen

Could I turn then to the Mills review? This was published in July with seven recommendations, one of which is about building an AI-enabled agentic supervisory model. Could you tell us about what concrete operational steps you have taken to implement that? I recognise that it is only three months ago, but these things are urgent.

Jessica Rusu

Becoming an agentic regulator is part of our overall ambition of being a smarter regulator. As I mentioned already, we have been investing heavily in our data science functions. As we transition to enabling AI across the organisation, we find that, in particular, AI handles unstructured text very well and supports our case officers in their decision making. As we consider the various ways in which we can use that for intelligence gathering and case optimisation, we have been able to look at ways to embed that in authorisation, supervision and enforcement work. As you can imagine, we handle a lot of intelligence in unstructured text, and it really speeds up the case officer’s analysis. At this point in time, we remain with a case officer, or sometimes what we call a human in the loop, with every decision, but our ambition is further than that, which is to automate wherever we can, to intervene at scale, and to shift left any harms that we can identify at the gateway.

John Glen

To put it simply, what you mean is that you could have AI dealing with some of the complaints and issues that come before the FCA instead of a human operative. Is that fair?

Nikhil Rathi

I will give you an example, and Jessica can expand on this. We get a billion rows of data a week in our market surveillance. The UK is home to some of the largest global markets in the world, across a range of asset classes. One of the first use cases for our agentic tools has been to clean that data, and to go back, potentially agentically, to the firms that are submitting, and say, “This does not reconcile. There seems to be an error here”, at pace and at speed, and potentially also interact with the firm’s own agents and automated platforms, so that our people, when they get to it, can get to the highest-risk issues significantly more quickly, and we use our resources significantly more efficiently.

John Glen

Further to the Mills review and its recommendations, what assessment have you made of what additional statutory powers you might need versus supervisory action? We have spoken before, and I will come on to it later, about the legislative blocker that sometimes seems to exist—and those are my words, not yours—from the Treasury. If you need new powers, have you identified those yet so that they can be fed into the system?

Nikhil Rathi

Our thinking is evolving on this issue. My approach, as I touched on last time I was with the Committee, is that it is very important that we use the powers that we have to the fullest extent that we can. Those powers are anchored in FSMA around the perimeter, but we have powers under the Enterprise Act and the Digital Markets, Competition and Consumers Act. We have money laundering powers that are being extended under the current Bill. I am not going to come here and suggest that we need lots more powers until we have really demonstrated that we have used our powers to the fullest extent. Later on, Jessica and I will be at the Digital Regulation Cooperation Forum, where the boards are meeting. It is working in tandem with everybody in the system—the CMA, Ofcom and the Information Commissioner all have powers in that context. We need to co-ordinate between us to make sure that we sometimes do the work, and another agency uses its powers on the back of our work. What is as important as powers—and there may well need to be discussions on some of the issues around national security, frontier AI and operational resilience—is that we are devoting a huge amount of resource to that as part of our overall work on market integrity. Where the Government decide to draw the line on what is relevant for national security—economic and national security are increasingly intertwined—we are looking at the questions of AI and advice. At some point, we may need a perimeter shift there, but it is not completely straightforward, because there is a particular blurry boundary there. The question of AI and advice goes beyond financial advice. It is also about medical advice. It is a societal choice as to how Government and Parliament wish to interact on those issues. That brings me to the bigger point that I make, which is that, more than anything, what we need on AI is that societal and parliamentary debate around risk, and where you would like to see us calibrate some of these choices as regulators.

John Glen

I take your message about risk to every fringe event or opportunity to speak, and it is a reasonable one. Initiating and getting a conclusion on that debate is important. The last question that I have relates to what you said previously. In the March 2025 session, you committed to delivering a streamlined single digital interface for regulated firms interacting with the FCA. Of course, many colleagues on the Committee and in Parliament are lobbied, by smaller firms in particular, about the costs, bureaucracy and anxiety of an uncertain interface, which, though well intentioned, causes a lot of cost and additional strain. Could you say something about that single digital interface and where you have got to on your aspirations to provide it?

Jessica Rusu

We launched My FCA in March 2025. We have had really positive firm feedback. The intention of this one front door is so that firms can submit both their regular returns to us as well as their ad hoc collections in one place, and see fees, upcoming submission or deadlines that are relevant to them. That is the front door for the FCA in terms of its regulatory returns. We recently extended operating hours until midnight every night. That was another request that firms asked from us. We have also streamlined reporting requirements. We have decommissioned eight returns and reduced the frequency of some of them from quarterly to annual, et cetera. We have also reduced the volume of ad hoc requests by over 3,000, year over year. All in all, we estimate that we have reduced firms’ reporting requirements by about 50,000, which is about £27 million in firm benefit.

Nikhil Rathi

We are not done yet; there will be further changes, but I would underline that we also need data to do our job. I sometimes hear the messages that you receive from some of the small firms in your constituencies, but I would also draw to your attention that some of the most significant harms and risks that we have had to intervene against have sometimes been individual financial advisers and small firms that were perhaps not so willing to co-operate with us and give us data. We took 30 enforcement investigations on the British Steel pension scheme, which was a problematic advice issue. We intervened through a very significant joint operation with the Met police a few weeks ago, which involved 800 officers. We have intervened against up to 30 firms, many of which are quite small, where we suspect that there is potentially very serious organised criminality, and we will see what happens as that investigation proceeds. We want to be proportionate and careful with the admin burden, but we also need to be probing, particularly in this area of money laundering and financial crime, to protect the integrity of the system.

Chair

Before we move on, Ms Rusu, you just mentioned that you had reduced the number of ad hoc requests. There are 3,000 fewer ad hoc requests now for firms. In your annual report, you talk about an average cost of £3,700 per request, but that can vary widely. Do you have a figure for the highest and lowest costs? We have an average, but are you prioritising ones that are the highest cost to businesses?

Jessica Rusu

Every CBA is somewhat unique in the burden, but we do vet and challenge them very carefully. Every time there is a need to do an ad hoc collection, we check whether we can get outsourced information. For example, for consumer duty, we brought in an external data source called Defaqto that helps us analyse that information rather than requesting it from firms.

Chair

So you are trying to come up with other solutions, rather than going to the firms first? Are you then looking at the highest-cost requests, and is that what is driving you to go to third-party providers?

Jessica Rusu

Yes, absolutely. If we think that there is a disproportionate firm burden, we will push back on that request. We will analyse it. We will look at whether there is any other way that we can get that information. We have also increased the length of time that we give firms to respond up to eight weeks, because that is something else that helps to reduce the cost and the burden on firms.

Chair

You have not disaggregated the figures when you have reported them. You have done it as an average. Is that something that you could consider?

Jessica Rusu

I am sure that we could come back with some information about the range of costs.

Chair

As Mr Glen says, we all get lobbied a lot about the sometimes disproportionate costs for firms. Mr Rathi has explained very clearly why you still need to investigate. We are not suggesting that you do not, but it would just be helpful to have that, if you can get any information to us. In your general reporting, it would be quite useful for people to see that.

Jessica Rusu

The important point to make is that we have introduced 32 new data-sharing arrangements that help us offset the cost of that burden, which I estimate to be just under £1 million of burden savings to firms.

Bobby Dean

Ms Rusu, you spoke about the FCA’s ambitions in terms of using agentic AI, which I am sure is probably shared by regulated firms and consumers as well. Could I tease out a broader risk associated with agentic AI that a lot of people have? In terms of the way that these models work, they are not necessarily coded line by line and crafted specifically to do a job. In other pieces of software, there is a whole line of inputs, and we expect the outputs to be repeated as designed, whereas these models iterate over time and are almost growing. They have an internal logic that we do not see all the workings of. Is there a danger that, in pursuing agentic AI of this type and becoming potentially reliant on it in the future, when these models are updated by the core firms, whichever firm you go with, it creates a mind of its own and we start to lose grip on what we initially thought we got those agents to do? How do you protect yourself against that software update coming in, and your agents suddenly taking an internal logic in the future that is different from what you thought they were doing?

Jessica Rusu

That is the most important live debate around the evolution of AI and the idea that the agent can act on your behalf, so there are really important questions to work through. We have started to investigate some of those in our open finance work. For example, as you say, there is a field of study called KYA, or know your agent. Can you authenticate that particular agent? There are risk management frameworks, sometimes called harnesses, being evaluated for continuous conditional assurance of an agent. How do you understand the amount, the consent, and the revocation and duration of the consent? All those things are actively being worked through by industry. As you know, our AI lab is open, and applicants are actively welcome to apply with agentic solutions. We have at least three agentic payment solutions being worked through at the moment in the AI lab—for example, personal planning, personal inventory management, household management of groceries and food purchases. Other kinds of agentic solutions relate to continuous compliance checks, for example.

Bobby Dean

There is a challenge that might come back. I like the concept of know your agent, but is it possible to know it? We have seen test cases recently where the software is, essentially, trying to evade instruction and escape sandboxes, for example, or showing behaviours that look like manipulation. I am not saying that these things are sentient, but it has pursued its own internal logic, which obscures to the user what its intentions are. Do you feel confident that you are able to know your agents?

Jessica Rusu

Those are really important risks that are being evaluated by the frontier labs. There is a very live debate about the concept of testing and security around the release of frontier AI models, as you know. Many of the applications that firms are adopting are less action-oriented or less risk-oriented. One such use case is security patching. For example, a firm might identify an agent to continuously monitor for vulnerabilities, identify those patches and deploy them at pace. That is an example of an agentic operation that would operate within a security guardrail or harness, and many firms are building those kinds of applications. As you mentioned, there are very serious concerns about frontier AI models, the testing that they deploy on their agents, and then the wider adoption by the UK market and the global market.

Nikhil Rathi

As it stands right now, I do not think we have the assurances that you are asking for. That is one of the reasons why the AI Safety Institute is very engaged on these issues. It is not just individual agents. What you saw with some of those incidents, such as the Hugging Face incident—I do not know if the Committee has been briefed on that—is that it is about swarms of agents and how they interact with each other to perhaps move beyond the protocols that they were established for. That requires not only our AI security institutions to understand it, but it is heavily cross-border. That is why the work around this within the G20, under the UK’s presidency, is going to be so important. If there are going to be standards before such models are released, it is only going to work effectively if they are genuinely global and there is deep global co-operation around these models.

Bobby Dean

Could we move on to your supercharged sandbox? I know that is something the FCA has been testing for some time now. Could you explain to us what has been achieved by that process so far? Could you also pick up on the integrity bits of the sandbox that we have just been discussing? How can you have assurances that nothing will get out from your testing environment?

Jessica Rusu

The AI lab and the supercharged sandbox are pilot environments where firms can test, using synthetic datasets as well as some of their own real-world datasets. We have had a pretty significant uptake and interest in these, with about a 50% year-over-year increase in applications to our sandbox. We have run two cohorts thus far. We have learned a lot from those interactions about the good and poor practices for AI implementations. Alongside that, we have also done supervisory visits that are called AI live testing, where we go on-site to firms that invite us to look at the evaluation harnesses, risk management, product development and deployment approaches that they have taken internally. Through that effort, we have learned a lot about good and poor practices, which we can share in about a week’s time, when they will be published. In terms of the sandbox environment, these are very secure environments that are completely air-gapped both from the FCA and from any other system. The use cases that we tend to test are beneficial use cases that support consumer education or real-world applications such as compliance.

Bobby Dean

The latest cohorts of AI live testing started in January this year, and we expect an evaluation report early next year. There are some concerns about pace. If we are testing over the course of a year, but these models are iterating so quickly, are we getting the results quickly enough to inform live activity on the ground?

Jessica Rusu

I think so. The first cohort was at the start of this year, in January. The second cohort started in the summer and is in flight. We will have the results of that cohort through the end of the year. The important thing is that this is real testing, and it takes time to do real engineering work. These are not conferences. These are development environments where the firm has the opportunity to develop and deploy products and test them in a real-world scenario, and it does take time to do that testing properly.

Nikhil Rathi

I would make one point around pace. We are going to have to grapple with the way in which this technology is moving so quickly. I do not think that any institution is going to be able to keep up with every single latest development. We talked about procurement earlier. Those procurement cycles take a certain amount of time. Just from start to end of procurement, the technology can be different from what you started out with. Not every single financial services firm is going to adopt the latest model. A significant number of firms will be seeking to maximise the benefit from the models that they have already, because that can generate significant benefit, significant productivity and significant security enhancements. The same goes for the FCA. We are not going to be adopting the latest technology every single month. It is not feasible for us to do so, but that does not mean that we cannot still generate huge benefits for our organisation from maximising what we have. That is going to be a feature of this work for years to come, given that this frontier is moving every few weeks.

Bobby Dean

We have spoken before on this Committee about the critical third parties regime. We had Amazon Web Services, Google Cloud, Microsoft and Oracle added in July. You previously told us that you are going to work with the Bank on scenario planning, testing and incident exercises. Have you started this work, and can you give us an update?

Nikhil Rathi

We welcomed the designation a couple of months ago. We are working very intensively with the Bank of England and the PRA on this, now that we can get it up and running, making sure that we have the right frameworks for data sharing with the critical third parties. The frontier AI evolution has intensified the focus on this work. We are generally getting good co-operation, as always, when there is a new regime in place. There are a couple of teething issues that you have to work through with each of the individual firms as we get to understand their business models and their different protocols. We are working through those, but we are glad to have the regime up and running now, and we hope that it will give us the opportunity to expand the range of critical third parties over time, because, while we started with the number that you described, it will not be the limit in terms of what we need to focus on.

Bobby Dean

You mentioned teething issues. Is there anything that the Committee should be keeping its eye on?

Nikhil Rathi

The key point that I would make is that these are not traditional financial services firms. You asked earlier about data. Data sharing and reporting is a pain point for small and large financial services firms. We seek access to some quite sensitive data, including commercially sensitive data, from a range of institutions that we regulate, so that we can understand how the market is operating and where conduct issues may be arising. What you will see with some of these critical third parties is that, as global institutions, they will have a certain commercial model that operates in the UK, but there are significant interdependencies in the way that the model manifests itself in the UK with relationships that they have outside the UK. How we get a full understanding of those interconnections is clearly something that is going to be work in progress. That is the point I would make.

Jim Dickson

Specifically on frontier AI and the cyber-security side of the work that you are currently doing on AI, you wrote to us in July and said that you had been learning from firms that have access to frontier models. Can I ask what you have learned and what you are doing to share those learnings with financial services providers that do not have access to those models but still might be affected by them?

Jessica Rusu

We have access to Glasswing-type protocols for testing, and we are collaborating across industry on those lessons learned. Those developments get shared across the industry. For example, if there is an open-source code defect or any kind of vulnerability that is identified, those are shared, not by us but through the cyber-security institute and onward. Those are things that are active and functioning well in terms of evaluating the frontier models. Of course, the point is pace, so as those models continue to be deployed at pace, it is keeping up with the scale of identifying those kinds of vulnerabilities.

Nikhil Rathi

The other point I would make is that we have a vast array of firms that we regulate. Another 40,000 to 50,000 are coming in, subject to the legislation on single professional services supervision and money laundering. Not all of them are going to be able to invest in this technology in the way that you have heard from Jessica about some of the largest firms, so the other message that we would be giving is that cyber insurance is absolutely fundamental. Businesses, large and small, must consider their insurance footprint, just as they would think about employers’ liability and other forms of insurance. It is an absolutely core requirement, and the cyber insurance market is anchored in the UK, in Lloyd’s of London. It is active and open, and the one message that I would give to every small business is that they should consider making sure they are insured.

Jim Dickson

That is clearly an important message, but in an attempt to increase resilience so that there is a minimal call on the insurance side of the equation, how do you think firms will behave in terms of sharing intelligence about resilience of the system as a whole, rather than just their own individual operations, and are you encouraging that?

Jessica Rusu

We are encouraging firms to report where they have had a significant AI incident, or any technology-related incident. They must report those to us. Of course, we do not want to be inundated with every hallucination, but the point is that any significant operational issue should be reported.

Nikhil Rathi

In my letter to the Committee, I added a sentence that noted that we would take a pragmatic view on competition questions, because sometimes, on this question of information sharing, there has been a nervousness around some of those concerns. We have concurrent competition powers with the CMA. Clearly, where it is an issue of integrity and resilience, we can see the broader interest there, so we try to make sure that that message is out there as well.

Jim Dickson

In terms of your relationships with the AI providers, you have told us that you have had an opportunity to meet them and understand the models that they are providing to financial services industry players. What has that told you about the way in which the AI environment is changing, and what risks emerge from that?

Jessica Rusu

The relationship with AI model providers is one where, first, they are very eager to support Government services, and public services in particular. There is an opportunity, as you can imagine, for these frontier AI firms to see that their products and services are helpful, and that they do things for the medical industry, not just finance, for example, and so there have been a lot of positive signs on that front. As you can imagine, it is also important for us to have a varied supplier base. For our own internal efforts, we work across a number of frontier AI models so that we do not have concentration risk and can pivot to where we need to and have that kind of choice.

Jim Dickson

Which providers have you met?

Jessica Rusu

I probably should not disclose particulars, but it is a pretty small group.

Nikhil Rathi

We have been in contact with all the key players. The bigger picture here, which you will have seen in the Bank of England’s latest financial stability report, is that the scale of capital investment in AI hyperscalers is extraordinary. We are talking about in excess of $2 trillion globally through a combination of debt, equity and so-called supplier financing. The business models of these different institutions are something completely new in terms of anything that we have ever seen before. There is a lot of work going on internationally to understand the business models and the incentives. There is a really open question, including in terms of what you see in the markets and the volatility around some of their securities, as to the path to monetisation of this enormous, unprecedented level of capital expenditure globally, so that is also relevant. There is a macro question to understand what is going to happen, and then there are the individual models and firms.

Chair

Turning to your annual report, a number of things jump out. One is that the losses and special payments disclosure shows that losses in the past year have increased from £448,000 to £540,000, even though the number of incidents of losses has fallen. Can you just explain, Mr Sekora, what has caused the increase?

Johan Sekora

I apologise. I am relatively new to the organisation, so I will be a little careful. Nikhil, do you want to cover this one?

Nikhil Rathi

I do not know the answer to that question, so we will have to come back to you. You have picked up a very precise point. Having listened to the description, it is probably to do with credit losses, where some people have not paid their invoices and we have to chase after them. We will come back to you on that one.

Chair

You can write to us on that; that is fine. You promised new metrics to assess the first year of the new strategy, but you have been measuring it in this report using the old metrics. When will you have new metrics to measure the strategy, and what will be the difference that firms and others will be able to see? How will we be able to register what that difference will mean?

Johan Sekora

We are now in the second year of the strategy, and we have set the metrics up front in the early strategy. We are continuously evaluating how we best measure the outcome in terms of benefits to the firms that we supervise, the efficiency that we are creating internally, and how we are driving, as Jessica described, the AI journey. This is very much work in progress, and we are hoping that, by the end of this year, we will have a much sounder amount of data so that we can support that growth. There is a very dynamic environment going on at the moment where we are seeing some benefits coming through, but some of them are quite intangible. For example, we are seeing an uptick in financial crime. Are the efforts that we are making in that area enough, or do we need to make additional efforts there? There is a bit of an evolving curve as we speak.

Chair

How will you make sure that people can compare one year with another as you are changing the way that you are measuring things?

Johan Sekora

It will be simple, in that we will add on top of the ones that we have already, so there will be metrics that will be added to it.

Chair

With all the technology available to you, I suppose that is quite straightforward to do, and not confusing.

Johan Sekora

It is always subject to making sure that we can create that correlation between the underlying data and the effect that it has. In some cases, we can influence the outcomes, but in other parts it is more diffuse, in terms of whether it is our action that has given the outcome that we seek.

Chair

We will keep an eye on that one in future years. One of the other key issues that really jumped out is the abnormal share price movements issue. Last year, 41% of all UK takeover announcements followed abnormal share price movements, which was a record high. Your data also showed an increase in unusual trading volume ahead of sensitive market announcements. I raised this with you, Mr Rathi, in terms of oil prices ahead of President Trump’s speeches around the issue. Should the FCA be taking stronger enforcement action to prevent insider trading?

Nikhil Rathi

We are concerned about that metric. As we explained in the annual report, we changed the basis of calculations. There is not a completely like-for-like comparison with last year, because the new method of evaluation is going to lead to modestly structurally higher figures than we have seen previously. The underlying point, though, is that there is too much speculation around these takeovers, which is contributing to abnormal price movements. Some of that may be media speculation that is inaccurate and leads to abnormal price movements. Some of it may be leaking of inside information. We are taking increasingly assertive action, including with the Takeover Panel, in terms of sell-side institutions, but also the army of advisers and others who get involved in these situations and who may be privy to information that could be made available inappropriately.

Chair

You say “inappropriately”. Are you suggesting that some of it is accidental rather than deliberate insider trading information, or perhaps a jigsawing together of information?

Nikhil Rathi

There may sometimes be leaks because a participant in a corporate finance transaction considers that there may be some tactical advantage around leaking in terms of securing a better price or some commercial advantage. That may not necessarily be insider trading. Insider trading is using inside information to secure private gain. On inside information, we have been taking record numbers of prosecutions and have had quite a successful run in the criminal courts during the course of this year, with a number of prison sentences and a record number of fines, which in two cases alone amounted to over £11 million. We are being proactive here, but there is always more to do. To tie this back to what I said at the start on market integrity risk, we now see a big opportunity evolving for the UK in terms of digital assets and tokenisation, given that we are a global hub. We also see the potential for price formation of securities, whether they are equities, oil prices, Government bonds or other securities, happening 24/7 in markets around the world, and sometimes in jurisdictions that are not traditional jurisdictions, may I say, of financial activity. The big challenge for global regulators such as us is how we get our arms around what is really happening and who is trading across the globe.

Chair

You said at the beginning that, in 2025-26, you had 1,300 whistleblowers, which was up 20% on the previous year. Do you have a rough idea of what proportion of those are about inside information?

Nikhil Rathi

I do not have that data to hand. We publish our figures quarterly. I can ask and come back to you, Chair.

Chair

As you say, it is a more complicated landscape now.

Nikhil Rathi

It is a more complicated landscape.

Chair

However good you are, someone who is a whistleblower is probably very useful to you.

Nikhil Rathi

On most insider trading, it is generally not happening just in our jurisdiction. Given the nature of markets, you will find that this is criminal activity. As we speak this morning—we will be saying more about this later—there is a very major operation going on, which we have partnered on with the police, against some very serious suspected criminal activity in this regard. We are active on it, and we work increasingly with partners. It is challenging, because we are sometimes dealing with organised criminal groups who are highly sophisticated and highly professional, and for whom this is a very profitable business model in our market as well as many others around the world.

Chair

Thank you. I just wanted to touch on some of the views that firms have of you and the costs. We touched on this earlier, Ms Rusu. Some 38% of firms agreed that the FCA is effective at supporting the development of digital markets and new technologies in financial products and services, which is quite a low figure. Is there any explanation that you can give for why that is so low and what you are going to do about it?

Jessica Rusu

There was a lot of work that went into the creation of the digital assets regime and, in particular, the crypto regime, which was opened just recently. There will necessarily be a range of views around innovation, but our perspective is that rubber-stamping innovative firms is not the right approach. We want to take a considered and evaluative approach, which is why we have set out a lot of information for firms that are, for example, crypto issuers that can now apply to and go through our authorisations gateway. We offer pre-application support service meetings to help those firms understand exactly everything they can do to provide us with the right information and to be successful. My perspective is not that it is an innovation barrier. It is about readiness to be authorised and to have the right controls in place.

Chair

The Financial Regulators Complaints Commissioner’s annual report came out, so it is important that, as a Committee, we touch on that as well. There was this odd dispute between it and the FCA. It reports that you did not accept three of its 34 recommendations. You reported that you did not accept two. I am just puzzled as to why there was a discrepancy. Surely, that is something that should have been resolved before both of you published.

Nikhil Rathi

I will have to write back to you on that specific point to understand what the discrepancy is.

Chair

It is quite niche, but it seemed a bit odd that the complaints commissioner is saying one thing and you are saying another. If you can write to us on that, that would be very helpful.

Dame Harriett Baldwin

Everyone is aware that I have this bee in my bonnet about the fact that the financial advice sector has been virtually regulated out of existence, and that 90% of our constituents cannot afford or are not prepared to pay up front for financial advice. We see a lot of problems in terms of people taking very low risk in their portfolios, keeping too much cash, and getting scammed, which I put down partly to the fact that financial advice has become a lot less accessible. I know that, as a regulator, you have tried to address this by bringing in simplified advice and targeted support, so can you update the Committee on whether that is making any difference?

Nikhil Rathi

It is a major issue. We have embarked on bold reforms, also in partnership with the Treasury, around targeted support. That is now live, and we are encouraged. We have over 10 firms already authorised. We offer pre-application support. What is interesting about that is the range of firms that have come through that gateway. Some large retail banks are coming back into the market, having previously pulled back from financial advice, right through to insurance companies and some fintechs. We will now see which of those services garner the commercial interest of the public in terms of taking up more of these services. We have also sought to make other forms of advice more accessible, including mortgage advice and making the digital journeys more freely available. We are looking at the work on pensions as well. Overall, the regulatory framework has shifted very significantly. There is then the issue that I am sure you will come on to, which is what role AI will play in those models.

Dame Harriett Baldwin

That was going to be my next question, but 10 firms does not sound like a huge revolution, does it, in terms of reaching our constituents?

Nikhil Rathi

Many of them are large firms. Those that have confirmed will have tens of millions of customers, so they will be rolling that out to their market. There is a significant number behind them. We have moved very quickly, so it is really up to the firms themselves to decide when they are ready to offer their commercial proposition. The gateway has been open since April.

Dame Harriett Baldwin

What would success look like for you, then? Would it be for everyone in this country to get access to some targeted support?

Nikhil Rathi

Everybody should have access to the information they need to navigate their financial lives with confidence. In some cases, that might be very simple information because they may not have significant savings, where they need targeted support and financial advice. There are several million people who do not even have a few hundred pounds of cash savings. The support that they need, maybe through workplace savings schemes or other schemes, is to start to build up the buffer that they need for unexpected life events. There are also millions of people who have more than £10,000 in cash that could be invested. There is a range. We would like everybody to have access to the support they need. We would like to see the amount held in cash, that is uninvested and not needed for liquidity purposes, come down and a greater portion of that in long-term investments. Some of that is about tax and education; it goes beyond simply regulation. We would also like to see the level of exposure to scams and fraud come down as well, as people look towards more regulated products.

Dame Harriett Baldwin

I hear what you are saying, but there is evidence that lots of people are using AI to write their financial plan instead. Have you really moved fast enough to keep up with what is happening in the real world?

Nikhil Rathi

If you look at regulation around the world, the Sheldon Mills review was quite groundbreaking in terms of how we engaged on this topic and laid out all the evidence. We did extensive survey work with consumers to understand their inclination to use advice and AI models. As Jessica can explain, we are experimenting with a number of these firms in our innovation services. We are awaiting the provisional licensing regime that will come through the Bill to enable us to license providers who may wish to experiment here, short of full FSMA authorisation. The question that we get asked—we get different views on this from different interests—is whether these models should be regulated. Should these models come under FCA purview? That is ultimately a question for Government and Parliament. At the moment, where a model is providing information but is not providing an individualised recommendation that is leading to a transaction by way of business, it does not fall fully within the regulated perimeter, whether that is for financial advice, insurance or other markets. It is going to be a very live discussion. Where do you draw that boundary?

John Glen

Can I just ask a question? My understanding is that the regulatory standard for targeted support is driving better outcomes rather than individual suitability. Consumer organisations will be concerned that, although in aggregate the overall outcomes might be better, there is a trade-off with individual suitability. How would you respond to that?

Nikhil Rathi

That is why I talk about risk appetite with the Committee. We could probably see a very significant benefit to perhaps—let me put in a rough number—90% of the population who are accessing it, but there may be 10% who do not get the optimal product, which they would get from a customised piece of advice. The trade-off that we are making quite openly—we are making it here; we are making it in our mortgage reforms—is that the benefit for 90% is an overall benefit to the market and the delivery of our outcomes and objectives, recognising that we are not going to deliver a regime that is perfect for every single individual’s circumstances. An individual can always pay for advice if they wish to and get that individual customised service, but they may choose not to.

John Glen

They will not, given the cost of it, if they have below £100,000.

Nikhil Rathi

Yes, although technology is now evolving and you are starting to see different providers come into the market. We will see how that market evolves in the coming months and years.

Dame Harriett Baldwin

If I may, I will move on to a different topic: the insurance sector. The Committee will be doing a special session on insurance because we are picking up from our postbags that a lot of insurers are responding to the competitive marketplace by reducing coverage and putting more exceptions in their policies. We are also hearing from insurance companies that they are using AI very extensively to do pricing that reflects things as unusual as which browser you use to look for your insurance policy. In terms of insurance, we are also concerned about the fact that there is this poverty premium where people have to pay their premium over a whole year as opposed to up front and the interest rates charged can be as high as 25%. Could you comment on all three of those issues on insurance, Mr Rathi?

Nikhil Rathi

We look forward to your inquiry. We will engage fully with it. There has been a parallel inquiry on insurance in the Lords Financial Services Regulation Committee. We have been giving evidence there, too. That demonstrates the interest that there is in these issues across Parliament. The consumer duty has been an important bedrock of our work. I know there is debate about the extent to which we should rely on the duty versus introducing lots of new standards. What we are seeing in terms of the overall trust index on insurance published by organisations like Fairer Finance or the Chartered Insurance Institute is that in some segments trust has been going up. In car and travel, it has improved; in pet and home, it is more stable. In terms of that outcome measure, we have seen that improve. In some specific cases where we have intervened, such as one home emergency cover situation, we have seen the number of complaints go down by 61%. There is an active programme of work on home and travel in particular. We have been looking at the claims data. One area that we have called out explicitly is that only 31% of claims are accepted for storm damage, which, to us, points to there being a problem with how that product is understood, as well as potentially problems in the claims journey. We have been working closely with the ABI on that. We want to see some improvements there. We have published our work on premium finance. We steered away from seeking to impose a particular cap, because we think that could have unintended consequences. This is a product that is needed by people who are not able to pay a large annual premium and want to budget over a month. We intervened with a number of firms. A number of the firms that we intervened with have reduced the overall cost of that product to their consumers. Aside from fairly active supervisory engagement, including on claims handling, where we are doing detailed work with 300 firms where we have seen issues around the process of claims handling and where technology is being used more, we also have six open enforcement investigations into the insurance market across a range of issues. If we had been able to be more open about our enforcement investigations, a couple of those cases may have been ones where we would have announced the names of the firms. We will see where they go.

Dame Harriett Baldwin

Is the consumer duty being observed by the majority of insurance firms?

Nikhil Rathi

We are seeing that in the majority. As I said, we have a number of open enforcement investigations where we are concerned about compliance with the consumer duty. Those investigations will proceed, and we will see what the outcomes are. Where we have specific concerns, we have called those out. In the home market, we have called it out in claims handling. We have made individual interventions in certain situations. For example, in motor insurance claims handling we felt that in some claims, particularly around used cars, the valuation that was being offered as a settlement of the insurance claim did not reflect the market valuation. We have called that out and we have made certain large firms remediate and pay tens of millions of pounds of compensation back to customers where we have been concerned. We are active in this market. We are monitoring. It is by no means work done.

Chair

Just on this point about the consumer duty, a lot of firms now require digital engagement for forms and information to be provided. That can be quite exclusive for a proportion of the population for all sorts of access reasons. Is that something that is on your radar? Are you looking at that?

Nikhil Rathi

Absolutely, yes. Vulnerability is a core component of the consumer duty. It is one limb of it. We expect every firm to provide a channel of engagement that is appropriate to its customer base. Some customers will want digital only. Some customers will want other forms of contact. It is important that the right channel of engagement is available. If there are specific issues where there has not been an appropriate channel of engagement, either in the provision of the insurance product or through the claim, that is an issue that we would want to look at. The other issue that we have seen on insurance is people who bought the product digitally but are not able to cancel it digitally. They are put through sludge practices, which make it very hard. If you do not want to carry on, how do you go about cancelling?

Chair

You have to find a phone number.

Nikhil Rathi

You have to find a phone number, and then you have to wait or write to them. If you want to acquire the customer digitally, you have to allow the customer to leave digitally as well.

Chair

The Committee is considering what work we will do in this area. That has given us a bit of food for thought.

Bobby Dean

Mr Rathi, I want to talk about the Financial Ombudsman Service reforms. We had a discussion in July specifically about the referral mechanism and, in particular, the use of the word “must” in the current draft primary legislation. We have since had changes to the Administration; it has gone through the Lords and is soon to be discussed by the Commons. Have you been given any further assurances about that? Do you remain concerned, and do you hope that the legislative process will sort out your concerns?

Nikhil Rathi

Overall, we support the direction of travel on the reforms that are before Parliament. We have worked well with the Treasury and the Financial Ombudsman Service. They are part of a package of reforms. Some have been taken forward outside legislation, for example in relation to professional representatives and the framework of co-operation that we have with the Financial Ombudsman Service. We have highlighted this issue. I highlighted it to the Committee. We remain concerned. The issue from our perspective is that it was only really just a few hours before the legislation was published that we learned that it was going to say “must” rather than “may”. Quite an important change was made at that point. We think that could have some quite significant operational consequences. It could slow down the system. I am also not sure that it is great for industry to have that volume of referrals. We think it may potentially be as many as between 1,000 and 3,000. That is before you take any account of what may happen as AI is used to try to figure out all the ways in which rules are ambiguous and then press the Financial Ombudsman Service to refer those to the FCA. We think that the primary legislation should change. The ideal change for us would be to go back to what we had understood it to be, which was “may”. We understand from Treasury officials, although we have not heard this yet from the Economic Secretary or the Chancellor, that there is real reluctance to make that change. We have shared some language as to how the clause could be amended otherwise. That would all be damage limitation, in our view, in trying to make sure that the referral mechanism is an orderly mechanism.

Bobby Dean

To be clear, is it your sense that there was an understanding that the word “may” would be more productive and would stop this idea of there being a back-door appeals mechanism? Perhaps due to industry lobbying, that change to “must” came quite late in the day. Are you very concerned about the implications of that and how it might be exploited?

Nikhil Rathi

Yes. Let me explain how I think about these issues from the perspective of the leadership of the FCA. At the start, I talked about the challenges that we are facing when it comes to the integrity of the financial services system. As an organisation, we need to be operationally focused on the biggest risks out there. There is going to be enormous operational pressure on us and other institutions. Many of our partner institutions are facing budget challenges right now. Therefore, we are concerned that this is something that is going to create a lot of operational challenge, as we have seen in the past when legislation has come through. I am a former Treasury official, so I know what it feels like when you legislate from afar and you do not always understand the operational consequences of what you are doing. You can look at pension freedoms or the Consumer Credit Act. Look at the sheer operational consequences of those changes. Look at the operational consequences of inaction when it comes to the exemption on high net worth and the level of fraud that we see around the use of that exemption. What we are asking for is to please take seriously the genuine operational issues that will arise from this. This has not been completely considered in full. The cost-benefit analysis is not very detailed on this aspect at all. I am not even sure it is industry lobbying. I am not sure I am hearing that this is what some parts of industry are asking for. It seems that there was an initial proposal in the first consultation, which came from some of the options analysis around whether the FOS should be a subsidiary of the FCA. There was not huge support for that from any quarter. We are worried that this could result in that happening, to a degree, by the back door.

Bobby Dean

Mr Sekora, the word “operations” probably got you interested in this. Could you outline the operational difficulties that the word “must” might present to the organisation?

Johan Sekora

There will be several, because any new process that we introduce to the organisation, unless we can drive a higher level of automation through it, becomes very resource-consuming. Where we are trying to go as an organisation now is to take our existing processes and create a higher level of automation. We use AI and so on. This would run counter to that. We will get a new process that creates volume, which we will then need to capacitate by adding resources that could, as Nikhil says, be spent better elsewhere. It is about how we prioritise operational volumes in the right way.

John Glen

Mr Rathi, you just referred to your previous life in the Treasury. I wanted to ask you about the dynamic of work between yourselves and the Treasury. When I was Economic Secretary, I had a secondee from the FCA. There is often a question asked about the dynamic between the FCA and the Treasury. I am not talking about the tension between them, but about the efficiency of delivering legislation. I just wondered whether you have any comments on that. I know it is a sensitive subject, but at the same time we are trying to get to the heart of some of the blockages to some of the things that you need to do. Anecdotally, I have heard that a lot of people have left aspects of the Treasury in terms of financial services. I just wondered whether you would like to say anything on that.

Nikhil Rathi

We work very productively with the Treasury. If you look at what has been achieved over the last five to 10 years, including prior to my time as CEO of the FCA, the transition of the entire financial services rulebook from the EU acquis into legislation and then into our firm-facing rules was an enormous exercise. There has been a huge amount of productive co-operation. Last year, we delivered 50 measures supporting growth and competitiveness, many of those in close working with the Treasury. That is my starting point. It is incredibly important that the system works together. None of us has time for institutional chicanery and all of the things that can get in the way. The points that I made last time to the Committee stand. What do I think we need in the system? We need pace in the system. We are by no means perfect, and we are looking at how we can go faster. The policymaking process is lengthy. For example, at the instigation of previous Treasury Committees, we produce a perimeter report that recommends changes. If you were to judge us, as an outcomes-based regulator, on the success of our perimeter report, we would not be doing very well because we are not very persuasive in getting the changes that we need. Certainly, even if we do persuade that the changes are needed, it takes years for those to happen.

John Glen

What you are really saying is that there is not the capacity to do things as quickly as you would like.

Nikhil Rathi

That is one of the challenges. It can be quite hard to make a case for changes around consumer protection and market integrity that reaches the threshold of legislative change. There is clearly system capacity. There is legislative time capacity. You will be familiar with how much space there is in this House to move things forward.

John Glen

Have you seconded people from the FCA into the Treasury?

Nikhil Rathi

We have, and we have secondees.

John Glen

Do you have more than previously?

Nikhil Rathi

I would have to check the numbers. Certainly, during the Brexit period it was very high because there was so much work going on. It has abated somewhat since then. I would also make this point. When I was appointed and reappointed, you asked me whether I would be open with you if there were any disagreements with the Treasury. Of course I would be. If you think about the issues that we need to be considering as a system, you hear this discussion around the deficit of trust in institutions that the public has across the board. It varies for different institutions. To me, that is a question around institutional effectiveness. Do our citizens feel like they can get things out of us at the speed and pace that they quite legitimately expect? We are looking at how technology can help us deliver that. When you look at the overall accountability framework and the judicial framework, we have something like 40 to 45 accountability mechanisms. Across the landscape of our work at the FCA, we have 80-plus “have regards”. To go back to Mr Dean’s question on the referral mechanism, if you watch the passage of legislation—much of it is created in the Treasury and then ratified by Parliament—every single one adds more mechanisms. The idea is that we can deliver an operational objective through a bureaucratic device. Each one of those mechanisms has to have a process around it and can be judicially challenged. At the back end, when we want to enforce, if we want a criminal trial, we now have to wait three years in the courts before we get a trial date. For the civil cases, it is different. That is the system question that does not get enough attention. That is why we are very concerned about the referral mechanism: because we think that is just adding to system blockage, which does not deliver for consumers or for the industry, frankly.

Chair

That is a very useful critique of the legislative process.

Nikhil Rathi

I have had a bit of experience with it.

Chair

It was delicately put.

John Glen

Can I ask you about expertise? We have discussed some really complicated topics. The world is moving very quickly. Are you convinced that the Treasury and indeed the FCA have enough cutting-edge industry understanding of what is happening in terms of some of these changes with AI and in other respects? There is a massive premium to be paid. A number of former officials pop up working for banks at the appropriate time, after a process, et cetera. Does that not mean there is a risk that you do not have the right expertise in the FCA and the Treasury to deal appropriately and swiftly enough with the things that you need to deal with?

Nikhil Rathi

You have three people before you who have all worked in the financial services industry. We are sometimes criticised for that. Johan has vast international experience. He relocated his whole family from Sweden to come and become chief operating officer of the FCA. He used to run the tackling of financial crime for large Swedish institutions, and he has vast experience with money laundering; Jessica worked in fintech, and in financial services beforehand. One of the best professional decisions I made, notwithstanding that I was doing well at the Treasury, was to step out and get some commercial operational experience to build some of that understanding.

John Glen

Is that true in the ranks below you?

Nikhil Rathi

Over half our directors have commercial and professional experience outside. I am vastly impressed by the expertise of our colleagues all the way through our organisation on the technical issues, the legal and legislative framework and the technology. We publish a lot of work on emerging technology. Do we have all the expertise we need? No, absolutely not.

John Glen

When you interact with the Treasury, are you satisfied in the same way?

Nikhil Rathi

That is a really sensitive question.

John Glen

I know, but I have to ask it. That is what we are here for.

Nikhil Rathi

I would say it is very challenging.

Chair

Let us be honest. There is a high turnover of officials at the Treasury. There is a young cohort that comes in and moves through quickly. It is a legitimate question. You do not need to be too delicate in answering. It is not a criticism of their abilities; it is just the system, partly.

Nikhil Rathi

Part of our role and part of the Bank of England’s role is to assist the Treasury on technical matters, because we are market-facing. We are the people in the system who are supposed to contribute that expertise.

John Glen

Given that change is going to come from the Treasury Minister to Parliament, and then Parliament is going to ratify it, surely it would be in the interests of our country to have more expertise closer to that legislation-generating function within the Economic Secretary’s office.

Nikhil Rathi

Yes. We are lucky to have an Economic Secretary who has consumer protection expertise, financial services expertise and financial crime expertise. I have been very lucky with previous Economic Secretaries as well.

John Glen

Thank you.

Nikhil Rathi

The Chancellor had a very generous meeting with regulators and the Business Secretary last week. Ministers are really listening. What is the expertise that I would like to see a focus on? It would be really understanding the operational consequences of legislative decisions and rule making. That is fundamental. The issue in the United Kingdom, in my view, is a deficit of operational execution. Let us not make our lives more difficult at a moment when the opportunities are great and the risks are enormous. We shoot ourselves in the foot time after time after time.

Chair

Legislation does not solve things.

Nikhil Rathi

We need depth of technology expertise, but that is where the AI Security Institute and the AI Economics Institute that have been established are very important. No single Department is going to have that expertise. That expertise is for the entire collective. You need to get the mechanisms right so that it is shared systematically across the system and into Parliament as well.

John Glen

Are you saying that it could be improved?

Nikhil Rathi

Absolutely, yes. The knowledge sharing, intelligence sharing and data sharing can all be improved structurally and systematically.

Ms Minns

Can I move us on to non-financial misconduct? You will be familiar with the Committee’s 2024 report Sexism in the City. That found a very stark gender pay gap; widespread sexual harassment, bullying and misogyny across the industry; a broken system of whistleblowing; and widespread misuse of NDAs. In response to that report, you said you would be prioritising non-financial misconduct. I understand that you published some new rules at the beginning of last month on the issue. Are the FCA’s rules and guidance ever going to be sufficient to change the working culture in this sector?

Nikhil Rathi

No, not on their own. We took the step—it was heavily contested, as the Committee heard—to publish guidance on non-financial misconduct to extend the coverage of our rules beyond the banking sector to a broader population of firms because some of the most severe cases that we had seen were in the investment management industry or in other sectors beyond the banking sector. We want to be very clear about what our role is. We are not going to be the organisation that can oversee every potential employment grievance in relation to non-financial misconduct. Some of the conduct that is of most serious concern is a criminal matter, which is for the police to investigate. We did say that this is relevant to fitness and propriety. The way in which these issues are overseen is important and the way in which whistleblowing allegations on these issues are overseen is important, particularly when there can be such an asymmetry of power between the people against whom the allegations are being made and the individuals who are making the allegations. We have taken a number of cases in this arena, more than any other financial regulator around the world, with significant numbers of prohibitions. If we need to, we are not afraid to go after, based on the evidence, the most senior people in the industry and prohibit them. No, we cannot do it on our own. There has been other legislation that has come through and come into force, for all employers, around the prevention of harassment. At the end, the tone on this comes from the leadership of organisations.

Ms Minns

When you published the guidance last month, I understand that you said that it was essentially your policy work on it being brought to a close and you would now be looking at how firms tackled it in practice. What does that look like? What are you looking for from firms?

Nikhil Rathi

We are looking at how they address whistleblowing allegations when they come. It is important to stress that getting a higher number of whistleblowing allegations may not, in and of itself, demonstrate that there is an issue. It might demonstrate that the speak-up culture is working and that previously individuals who felt they could not talk about their experiences are now able to use the systems within firms to do so. We are not automatically going to say, “That is a problem”. What we want to understand is, when those issues arise, how they are dealt with through the governance of the organisation. We have been periodically collecting data on that. We get our own intelligence coming in, including through our whistleblower channels. As I say, these are some of the most harrowing and sensitive cases that we deal with, and some of the most difficult work that colleagues at the FCA have to encounter, which gives us some insight into some of the most severe situations.

Ms Minns

I am glad you brought up your monitoring. Can you tell the Committee how many whistleblower disclosures you have received this year relating to non-financial misconduct?

Nikhil Rathi

I cannot give you the exact number for this year—I would have to check that—but it is typically one or two a month. As I say, all of those are looked at carefully. I will repeat what I said earlier. Sometimes people come to us as the last resort when they have not been able to get the satisfaction that they wanted from the police or another authority. These can be the challenging cases where, when we look objectively and dispassionately at the evidence, it is not always possible for us to take the kind of action they want us to take. We always seek to explain that, but I am not sure that we are always going to satisfy everybody who comes to us. The other significant issue that I would just draw your attention to, Ms Minns—it is early days because it has only just come into force on 1 September—is regulatory referencing. This is an issue that was a perennial problem in the financial services sector. When there were known non-financial misconduct concerns about an individual in one firm and they left as a result of a resignation or a settlement agreement, the new employer did not know about the history of this alleged behaviour, or indeed the history of disciplinary action, at previous employers. That now needs to be included in regulatory references, which go from one firm to another, so we can tackle that movement around the industry that was previously going unaddressed.

Ms Minns

Just quickly, where is sexual misconduct trending? Is it up, down or the same?

Nikhil Rathi

I do not have explicit data. It goes a little bit to what we were asked earlier about data collection. We have to be quite proportionate about the data that we collect and how much we collect. We have done periodic surveys, but we are not doing systematic data collection as part of our standard regulatory reporting on every type of allegation. We are also not the only authority here, and there is also going to be a new—I cannot remember the precise name in legislation—fair work regulator that will look at compliance with employment law across all employers in the UK. I know this will be one of the areas that they will be looking at. It is important that we do not duplicate what is happening in other regulatory bodies.

Ms Minns

That is very helpful. I will just move us on to another topic, which is investment platform fees. Your review of disclosure documents for investment products found that only 6% were written in plain English and none of them met the benchmark for intelligibility. The Financial Services Consumer Panel argued that these disclosures should be tested with real consumers. What are the current arrangements for testing disclosures with consumers?

Nikhil Rathi

We do not have mandated rules on testing disclosures with consumers. Different firms will take different approaches. Through our work here and elsewhere, we are increasingly seeking to highlight what is good and poor practice and where testing has led to improvements to encourage others to follow.

Ms Minns

That would be a no to targets.

Nikhil Rathi

We would not be setting a target for the entire industry on testing with consumers. We have to be quite careful before trying to mandate that. How would we implement that target? Different firms will have different approaches. We want to make sure that there is a degree of flexibility in the system.

John Glen

Could I turn to CP26/24, the rules around disclosure on cash interest? I have the actual rules for website disclosure, pre-sale disclosure and post-sale disclosure. As I understand it, the proposed FCA rules require firms to disclose the rate of interest paid to customers but not necessarily the amount of interest retained by the platform. I am personally very supportive of your point that there are trade-offs between risk and reward and so on and an inevitable risk with financial products, but I do feel that there is a practice now, particularly in a higher interest rate environment, where platforms are receiving a higher interest rate on cash within someone’s portfolio and allocating to the customer a portion of that interest, but they are not obliged to be totally transparent about what they retain. They use that retained surplus of interest to cross-subsidise a lower platform fee, thereby giving the impression that they have a lower fee. Unless these rules are really clear, you are in a situation where different platforms are potentially going to misrepresent the actual fees they are taking. If part of the costs they are taking from consumers is retained interest on the cash element—for some investors, that will be a significant part of their portfolio—we do not really have transparency, do we? The counter would be that this is more bureaucracy, complication and all the rest of it, but to me this is just a basic transparency issue. Consumers should be able to see what they are actually paying and what interest the platforms are retaining, and therefore stopping them from having. How would you respond to that?

Nikhil Rathi

I know that Dame Harriett is always interested in my file and I was trying to resist accessing it, but on this one I feel I have to because you are going straight to a consultation. The briefing tells me that we are considering carefully the feedback to the consultation and intend to publish by the end of the year. That is not very helpful to you. Double-dipping is not acceptable. Retaining some interest and then also charging a fee for holding cash is not acceptable. We have dealt with that using the consumer duty. This issue of disclosure of retained interest is one of the most contentious in the consultation. Opinion is split in terms of the feedback that we have had. When we proposed the rules, we were not convinced that it was particularly going to enhance consumer decision making. What should consumers know? Consumers should know the interest rate they are getting and the fee they are paying for the managed service or the execution-only service they are party to. We will look at all the feedback. This also ties to wider work that is going on, including some that the Treasury has been looking at, about the incentives for holding cash in some types of accounts and whether the tax incentives are in the right place. We will look at what comes out of that as well, as we think about the final steps.

John Glen

With sincere respect, I do not think that second point is so relevant. If you have a definition of fees that covers only one form of charging, the platform fee, but does not cover the requirement to disclose the level of charges that are taken through retained cash interest, it is not transparent. That seems like basic logic to me. Just make it clear. The other thing that they say is that, when some of these big platforms take all their cash, they hold it in different environments, and therefore it is difficult to compute where the interest is at different points in the different spread of accounts. That is a red herring too. In the end, we just want to know about the growth rate, the interest, the fund manager’s expertise and what the fee is to the consumer in cash terms. I will leave it there.

Nikhil Rathi

I see the strength of your perspective.

Chair

“Transparency” is the key word there.

John Glen

Transparency is my motive, nothing else.

Dame Harriett Baldwin

Can I test the thickness of your folder with a couple of other questions that are unrelated? Have you seen the report from Peel Hunt that says that Britain is “being bought, not built”? It says that, over the last three years, 166 UK firms have been taken over to the tune of £180 billion, and 11 have IPO-ed to the tune of £6 billion. That looks like regulatory failure to me, to some extent. What do you think, Mr Rathi?

Nikhil Rathi

I am aware of that report. On the listings regime, we have reformed radically in the last few years. We have a Listing Authority Advisory Panel, which brings together a number of practitioners. I am not hearing from the market that there is friction in the listing or regulatory regime. When we received feedback on the IPO research window, for example, we moved within months to amend that. We have reformed the prospectus regime as well. Sometimes with these issues it is quite easy to say that it is regulatory failure. This is a system-wide issue. What drives the pipeline of IPOs? The underlying growth in the economy, the dynamism of the economy, the speed with which businesses are created and the path from private into public. We have established the PISCES regime, which allows intermittent trading. As you know—and it is not for me to comment on them—there are debates around tax and the pensions system. There is also the realistic issue about the UK’s position in the global economy. Going back 20 or 30 years, UK business was a very significant share of global business. If you look at the top of the FTSE 100 now, most of them will be earning most of their revenues from outside the United Kingdom. Inevitably, that leads to a degree of mind and management, including capital injections, coming from outside the United Kingdom too.

Dame Harriett Baldwin

Is no regulatory change needed at all?

Nikhil Rathi

We have put through enormous volumes of regulatory change. If you are hearing specifics about the listing regime, I would be interested to hear those. We are not hearing from the market that people want us to do anything more. If you look at the reports that are coming from industry participants, the focus tends to be on tax and the pensions system.

Dame Harriett Baldwin

My second unrelated topic is around the use that you are making of the Cost Benefit Analysis Panel. Have any recommendations come from that panel that have made you think, “Hang on a minute. Why are we doing this? It looks like the costs really exceed the benefit”?

Nikhil Rathi

It does challenge us. For example, you asked about the equity consolidated tape at a previous Committee hearing. When we went for a second consultation on it, we put it back into the Cost Benefit Analysis Panel to get its feedback on an updated impact assessment. Last year, 13 out of 32 of our CBAs went to the panel, which is broadly in line with what we anticipated. It has given us some interesting feedback, for example, on how we can make sure that our analysis ties to the objectives of the FCA and the objectives of our work. We will absolutely look very carefully at that.

Dame Harriett Baldwin

Are you likely to change anything?

Nikhil Rathi

We will. We are looking at it, and there may well be improvements that we can make. Whenever we publish final rules that have been to the CBA panel, we explain where we have made changes in response to feedback and where we have not. That is all transparent in terms of the rule-making process. Where there are more cross-cutting recommendations, we will absolutely look at areas where we may want to make some amendments.

Chair

I thank our witnesses very much indeed. We have had a useful discussion on a number of subjects, including AI, which is a fast-growing issue, insurance, insider trading and digital engagement with firms. I thank Nikhil Rathi, the chief executive of the FCA, Jessica Rusu, the chief data, information and intelligence officer at the FCA, and Johan Sekora, in his first outing as chief operating officer at the FCA, for their time. The transcript of this session will be available on the website uncorrected in the next couple of days. Thanks to our colleagues at Hansard, and thanks to our colleagues at Bow Tie for the broadcasting.