Financial regulation is struggling to keep pace with the rapid development of artificial intelligence, according to European policymakers, who are grappling with how to support adoption while containing risks to market integrity and stability. Nikhil Rathi, CEO of the U.K.'s Financial Conduct Authority, said the traditional cycle of rulemaking "doesn't work" in an era of fast-moving technological change, particularly as agentic AI development accelerates. "Technology moves incredibly fast, and we need to think differently about some of the innovations that we are seeing on AI," Rathi told CNBC's "Squawk Box Europe" on Thursday. Rathi highlighted the efforts of Britain's Financial Stability Board on frontier AI, as well as the creation of the AI Safety Institute in the U.K., as part of a broader drive to help policymakers, regulators and businesses better understand the risks and adopt the technology safely. Christine Lagarde, president of the European Central Bank, said AI is a source of productivity and gains. But, in an interview with France's Les Échos , she also warned that the technology also poses a "major risk." "For about a decade now we have been talking about cybersecurity risks, hacking, data theft and so on," Lagarde said. "But with the acceleration and deepening of AI models, we are confronted with a much more serious risk, because it is happening very, very quickly, and because the means of defense and the funding required for them have yet to be found." Her comments came after AI's impact on productivity and market integrity emerged as a key talking point at the ECB's annual meeting in Sintra, Portugal Europe's version of the Jackson Hole symposium this week. Sarah Breeden, deputy governor of the Bank of England, said agentic AI could amplify volatility during bouts of market stress. In her Sintra speech Tuesday, Breeden said that, for now, trading firms mainly use autonomous AI for lower-risk operational tasks, such as research. "But that could change quickly," she said. Increased use of agentic AI in financial markets may require greater oversight, she said, such as guardrails "analogous to circuit breakers or kill switches" that would "limit or stop trading market-wide if faulty AI models cause market meltdown." But top bankers and regulators also recognize that Europe is lagging in AI investment and the development of frontier companies driving breakthroughs. Boris Vujčić, vice-president of the European Central Bank, said: "Europe is now in a situation where it has to, of course, develop its own capabilities in the AI sphere. There has also been a lot of talk about sovereignty issues in the AI sphere. Europe has in the past shown it is capable of adapting new technologies [to] lift productivity growth. [But] it has not always been at the frontier." Rathi said market authorities ultimately need to strike a better balance on such rapidly-evolving technology. He said that while tech innovation offers exciting opportunities for the U.K., particularly when it comes to the country's productivity and growth challenges, it is critical that markets are not exposed to risks...
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