Regulatory oversight: Charting the future of AI in financial services 

Regulatory Oversight? The future of AI in financial services.
Picture of Jonathan Middleton

Jonathan Middleton

Director, Financial Services

Artificial intelligence in financial services is driving a period of accelerated transformation in the sector. AI and ML are helping firms provide better products and services to customers, increase revenue, and drive innovation.
Understanding the implications of AI in financial services is essential to ensure that these technologies are used responsibly and ethically. Regulatory oversight, therefore, is an essential part of ensuring compliance and maintaining the integrity of data.
Governments as well as decision-makers in banks and financial services institutions are actively looking for ways to encourage the responsible use of AI and ML in financial services operations while minimising potential risks.
In this context, the Bank of England (the Bank), the Prudential Regulation Authority (PRA), and the Financial Conduct Authority (FCA) released a joint Discussion Paper asking for views by 10 February.

The potential risks and benefits of using AI in financial services operations

The paper explores the potential benefits and risks of using AI in financial services. It notes that consumers could benefit from access to products and services but face potential risks of bias and potential exclusion.
AI could also have benefits for consumers where they can choose products and services more efficiently due to higher competition, although the paper also notes potential risks to competition such as inadvertent collusion between AI models.
Firms could benefit from improved fraud detection and other efficiencies, but the paper also noted a prudential risk to firms. Regulators are also interested in how AI can help them achieve their regulatory objectives and functions.

Ways of maintaining regulatory oversight when embracing AI in financial services

One strategy being used by firms to take advantage of the benefits of AI and ML in banking and finance, while mitigating risk, is to bring their AI work into governance frameworks and processes, including hiring Data Ethics and AI leads as well as establishing Data Ethics boards.
A core part of establishing this regulatory oversight is using Digital Sandboxes as part of their product development and risk oversight functions. Digital Sandboxes provide firms with a secure environment to develop and test their products.
Using synthetic data and a Digital Sandbox through a proven Digital Transformation Platform, firms can test and iterate their products before releasing them to the public, developing AI and ML models that are more accurate and reliable, while minimising the risk of bias. Having this innovation visible through a single platform de-risks innovation and gives senior managers oversight across the firm.

How should decision-makers in the finance industry approach AI integration in operations?

AI and ML are transforming the financial services industry and understanding the implications of these technologies is essential. It is also imperative that banks and financial institutions make comprehensive plans to embrace AI solutions while addressing any potential risks to remain competitive in this rapidly evolving sector.
The joint Discussion Paper on Artificial Intelligence by UK regulators is a clear sign that the technology will have a major impact on financial services and that authorities are keen to support the responsible adoption and use of AI.
As the financial services industry responds and the regulators consider their next steps, it is clear firms will need to ensure they have the right tools and practices such as AI sandbox testing in place to manage risk, maintain regulatory oversight, and to ensure that AI is being used responsibly.

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