It is almost impossible to scroll through a news feed, or for those of us that still enjoy paper copies, pick up a newspaper without seeing a mention of Artificial Intelligence. It really is set to revolutionise the way companies operate, the way we live, work and play. 

The Financial Conduct Authority (FCA) this week released its AI Update which sets out its approach to ensure safe and responsible deployment of AI in UK financial markets. 

The financial services industry has been an early adopter of AI, with mature or maturing adoption by some players across a range of use cases. Algorithmic trading has long been established, and firms are now using or exploring AI in applications such as credit risk, fraud detection, and underwriting. With the advent of generative AI and an increasing range of AI tools available to firms, AI could certainly transform both retail and wholesale financial markets by reducing risks and creating efficiencies. As ever though striking the balance between caution and optimism is crucial. 

The optimism

The FCA and Bank of England (BoE) jointly published the "AI Discussion Paper (AI DP) 2022 which sets out their views on the potential benefits of AI in the financial services industry. Whilst a few years old now, it serves as a useful summary of the key areas. 

They highlighted the following 5 key areas: 

• Consumer Protection: By using AI to process large volumes of data it should be possible to quickly identify needs and better match products to consumers. 
• Competition: Using consumer facing AI solutions will allow better competition by providing consumers with faster, clearer access to products and comparisons thereof. It can also be used to optimise financial products and simplify some more complex financial products. 
• Safety and soundness: Better decision-making tools for financial services firms in turn means safer, more robust, decision making. 
• Insurance policies: AI can be used to support investment choices (for life insurance) and claims management. It can also harness information from wearable devices to provide more tailored products and pricing. 
• Financial stability: All of these items taken together can support individual financial institutions, which in turn may support the entire financial system. Modelling financial risks and identifying trends is also a powerful use-case for AI. 

The caution 

Regulators are concerned that additional data could be used in negative ways to discriminate, exclude and over-price, including by exploiting inertia, price discrimination or by amplifying historical biases in input data. Whether a particular application of AI is actually beneficial to consumers will depend on how it is used. The EU’s AI Act is set to bring in a range of obligations that are likely to apply from the end of 2024, which look to address these risks. Meanwhile, the UK plans to regulate AI through cross-sectoral principles applied by existing regulators. 

In this new world of AI use-cases everyone need to not only be aware of the risks of misuse, but also the risks of misinformation. 

The SEC Enforcement Director warned against so called “AI-Washing” in a recent compliance and enforcement conference, which means making unfounded claims about AI capability that could mislead investors and consumers. Given the risks of potential misuse of AI it surely also begs the question of whether it could be argued that failing to disclose actual use of AI could also mislead investors and consumers. 

Next steps 

As we continue on this AI-journey it is important to ensure you have the right team supporting you. Complex regulatory, information technology and financial services legal issues are all at play here and financial institutions will want to ensure timely, accurate and succinct support and advice.