Your guide to this week in regulation

This week in our first article, the Financial Ombudsman Service (FOS) flags emerging risks from increased use of generative artificial intelligence in complaints, including impacts on accuracy, handling times and outcomes, and calls for clearer regulatory guidance and safeguards for vulnerable customers. In our next item, the Financial Conduct Authority (FCA) reports on operational resilience one year after the rules took full effect, highlighting progress in mapping and testing alongside continued exposure to severe but plausible disruption, including third‑party and cloud risks.

Cost and market structure remain in focus in our remaining items. The FCA and Prudential Regulation Authority (PRA) have confirmed the Financial Services Compensation Scheme management expenses levy limit for 2026/27, which firms should factor into budgeting and levy planning. The regulators have also launched a consultation on mortgage loan to income limits, following a recommendation from the Financial Policy Committee, and opened applications for a new transaction and post‑trade reporting taskforce to influence future reporting frameworks.

Ombudsman flags AI complaint risks

The FOS has published its response to the FCA Mills Review on the long-term impact of artificial intelligence in retail financial services, focusing on complaints handling and redress. The FOS reports a marked rise in consumers and professional representatives using generative AI in complaint submissions, with mixed results. Well used, AI can help consumers organise evidence and overcome language barriers. Used poorly, it can create long, inaccurate and incoherent submissions that slow resolution and increase escalation rates.

Key points for firms include:

• AI may have contributed to around a third of responses to initial assessments, increasing time spent checking accuracy
• Excessive AI use by professional representatives can drive operational strain and customer detriment, and,
• Firms’ own use of AI for triage and routing risks overlooking vulnerable customers if controls lack transparency and human oversight.

The FOS calls for clear FCA guidance on AI use, transparency on AI-influenced outcomes, and evidence that automated processes actively support vulnerable customers. Firms should review AI governance, complaint handling controls and escalation pathways in light of these expectations.

Read more on FOS response to Mills Review

Resilience one year on

The FCA has published insights from its review of firms’ operational resilience self‑assessments, almost a year after the transition period ended on 31 March 2025. The review draws on good and poor practice and reflects on how firms are embedding resilience under the FCA rules.

Key takeaways for senior managers include:

• Most firms have made strong progress on mapping, testing and governance, giving boards clearer sight of recovery capabilities within impact tolerances
• Recent outages and cyber incidents in 2025, including those affecting major cloud providers, have reinforced that severe disruption scenarios remain plausible and must feature in testing
• Firms are increasingly treating third‑party and supply chain resilience as core, with more rigorous testing and joint work with suppliers, and,
• Boards play a critical role and should use self‑assessments to prioritise investment and remediate vulnerabilities.

The FCA stresses that operational resilience is not static and should move beyond compliance. Firms should regularly reassess scenarios, strengthen board engagement and embed resilience into strategy, product design and day‑to‑day decision‑making to avoid intolerable harm to consumers and markets.

Read more on the operational resilience insights and observations

FSCS levy limit set for 2026/27

The PRA and FCA have finalised the Financial Services Compensation Scheme Management Expenses Levy Limit for 2026/27 at £113 million. The limit applies from 1 April 2026 to 31 March 2027 and affects all FSCS levy‑paying PRA and FCA authorised firms.

The limit covers:

• A £108 million management expenses budget for ongoing operating costs, including staff, IT, legal and outsourcing, and,
• A £5 million unlevied reserve, which allows the FSCS to respond quickly to unforeseen costs without further consultation.

Key points of interest for firms:

• The FSCS now expects an underspend of £2.5 million in 2025/26. Any confirmed underspend will offset levies for relevant classes in 2026/27
• Respondents broadly supported the proposals, including the continued inclusion of credit unions in funding the revolving credit facility, which the regulators view as benefiting all firms proportionately

Firms should factor the confirmed levy limit and potential offset into budgeting, and review how FSCS cost allocations affect their levy class ahead of the 2026/27 levy year.

Read more on PS26/4 FSCS management expenses levy limit

Read more on BoE FSCS management expenses levy limit

Mortgage LTI rules consultation

The FCA and PRA have opened consultation CP26/12 on proposed changes to the loan to income flow limit in mortgage lending, following a recommendation from the Financial Policy Committee. The proposal would allow individual lenders greater flexibility to write high loan to income mortgages, while keeping the overall market cap at 15 percent.

The regulators aim to clarify and refine how the framework operates, to ensure it remains proportionate, supports financial stability and continues to protect borrowers. The changes apply to all PRA authorised mortgage lenders and their subsidiaries, and to FCA authorised lenders that are not owned by PRA firms. The consultation sits alongside a wider review of mortgage rules and guidance for today’s market.

Key points likely to interest firms include:

• More flexibility in managing high loan to income lending at firm level, within an unchanged aggregate limit
• Clearer expectations on the application of the framework across different firm type

Firms affected by the loan to income rules may wish to review the proposals and submit views. The consultation closes on 1 July 2026 and responses should be emailed to CP6_26@bankofengland.co.uk.

Read more on mortgage LTI rules consultation

Reporting Taskforce open for membership

The FCA and Bank of England have launched a new Transaction and Post‑trade Reporting Taskforce and are inviting industry participants to apply for membership. The taskforce will shape the regulators’ long‑term approach to harmonising transaction and post‑trade reporting across UK MiFIR, UK EMIR and UK SFTR. It will bring together senior representatives from reporting firms, appointed in a personal capacity, for an initial term of 18 months.

The work will run through three co‑chaired groups:

• A policy group focused on aligning and simplifying data requirements across regimes
• A strategy group providing industry insight on how harmonisation can improve wholesale market activity
• An architecture group examining how modern technology and data can streamline reporting

Key takeaways for firms include the regulators’ clear intent to reduce duplication, improve data quality and design a more coherent reporting framework over time.

Read more on membership of Reporting Taskforce