All Things AI – Is the fourth industrial revolution looming?
Average read time: 3 minutes.
Artificial Intelligence ("AI") has been hitting news headlines for some time now and there is a reason the topic is not going away. In the financial sector, in particular, constant innovation has led to a variety of applications of AI and offered considerable benefits for the industry. Examples include: (1) automation of processes to enable greater business efficiency, increased productivity and cost savings, (2) improved customer experience through personalisation, and (3) better risk mitigation.
Such innovation has forced the Financial Conduct Authority, the financial regulatory body, to adapt and find a new home for this complex and versatile technology within the current regulatory framework. Unsurprisingly, this has met with difficulty. How do you regulate technology that is constantly changing and is not yet fully understood?
Recent Michelmores' articles have addressed examples of AI's application in the legal and financial sectors and how regulators have attempted to manage these - see our Fintech page for background here. This brief update is prompted by the publication of a report by the International Regulatory Strategy Group ("IRSG") in collaboration with Accenture – "Towards an AI-powered UK: financial and related professional services". The report takes stock of the current regulatory framework governing AI and its application, identifies further opportunities and underlines the understanding of how AI will benefit industry participants and consumers. The full report can be viewed here, but below is a brief summary of the key points.
- The benefit and potential of AI's application in the financial and professional services sectors are acknowledged, together with recognition that companies are wrestling to incorporate this nascent and fast developing technology into their businesses.
- The report identifies four key themes and recommends best practices that firms will need to consider to "develop and deploy fair and transparent AI systems that respect security and privacy-in-design principles, underpinned by strong governance framework to maintain the integrity of the financial system". These four key themes are:
- AI fairness, transparency and consumer protection
- Data privacy and security
- Ecosystem resilience
- The report notes that the UK's current regulatory framework is fit for purpose, but as the technology becomes more transformative and sophisticated further policy will be needed. UK policymakers will play a key role in encouraging the growth and adoption of AI in UK-based financial and related professional services industries. Packaged as an "innovation-friendly business ecosystem", the report sends the message to regulators that "flexibility is key" to allow AI and its applications to flourish. This means adopting a principle-based and outcome-focused approach to regulation, which avoids the imposition of prescriptive rules. It is widely understood that this is an area where the usual closely and carefully-defined-terms approach used in blackletter law may not fit. Policymakers need to enlist the help of participants in the industry to adopt a more collaborative approach – together they have the opportunity to shape appropriate policy and industry initiatives to harness the potential that AI promises, whilst addressing the risks and challenges it may bring.
We already see this approach by creation of the regulatory sandbox, a "regulatory light" environment allowing businesses in the scheme to innovate and the regulator to regulate with flexibility.
Don't miss our upcoming publication "Where there is risk there is opportunity: Crypto-assets & ICOs – a gold mine or a minefield?" due in November 2019 and keep your eyes peeled for bite-size knowledge updates on the Open Banking Initiative and the Regulatory Sandbox. For general information on this topic or if you share this interest with us, please do get in touch with our specialist Regulatory or Technology & Innovation teams – we would love to hear from you.