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  • Julien Haye

Responsible Innovation and Development of Artificial Intelligence in Finance

Artificial Intelligence in Finance
"It falls on all of us, as innovators, leaders and regulators of our financial systems, to ensure that we act as stewards to shape the role of AI in the financial services industry." - Jessica Rusu

In this article, I am exploring the potential areas of focus and takeaways on risk and compliance management from a pivotal speech given on Artificial Intelligence (AI) in Finance by Jessica Rusu, FCA Chief Data, Information and Intelligence Officer, at the City and Financial Global AI Regulation Summit 2023. In her speech, she underscored the critical juncture we're at regarding the adoption of AI in financial services. And this carries significant implications for risk and compliance management in the financial services industry. Here are the key consequences.


Increased Focus on Digital Infrastructure and Resilience


The emphasis on building strong digital infrastructure addresses the potential risks associated with AI deployments, particularly those reliant on cloud services and third-party providers. In addition, firms need to assess and manage risks associated with Critical Third Parties (CTPs) and align their infrastructure with regulatory expectations.


In practical terms, financial institutions need to invest in and enhance their technological infrastructure to ensure it can handle the complexities and demands of AI applications. This includes considerations for data storage, processing power, network capabilities, and cybersecurity measures.


Expectations of Regulatory Compliance


Non-compliance with existing frameworks, such as the Senior Managers & Certification Regime (SM&CR), poses operational risks. More specifically, the complexity introduced by the swift evolution of AI technology, makes it challenging to precisely define roles within regulatory frameworks like the SM&CR. As AI applications diversify, roles related to AI may not fit neatly into traditional categories, leading to ambiguity in defining specific responsibilities. The expectation of resilience includes adherence to established regulatory frameworks. With that, firms must prioritise compliance with SM&CR and Consumer Duty to ensure operational resilience and consumer protection.



Consumer Risks and Artificial Intelligence Scams


The rising threat of AI scams, including deepfakes and biometric theft, poses significant risks to both consumers and firms. Failure to address these risks may result in financial losses and reputational damage. As a consequence, firms need to implement measures to protect consumers from AI-driven scams while adhering to regulatory guidelines for consumer protection.


Data Considerations: Ethical Usage and Quality


Inadequate attention to ethical data usage may lead to biases, model drift, and the black box effect, amplifying existing risks associated with AI. Firms must prioritise ethical data practices, ensuring data quality, governance, and accountability in AI processes to comply with regulatory expectations.


As a side note, by leveraging AI itself, financial institutions can not only detect and mitigate risks but also foster a culture of responsible AI use. The synergy between ethical data practices and AI-driven solutions ensures that financial firms not only meet regulatory expectations but also contribute to building a more transparent and trustworthy AI ecosystem.



Beneficial Regulation for Innovative Outcomes


In the absence of beneficial regulation, there is a risk of hindering innovation or fostering unsafe AI practices. Striking a balance between regulation and innovation is crucial. With that in mind, firms must align their innovation efforts with regulatory frameworks to ensure that AI-driven innovations are safe, compliant, and aligned with consumer protection standards.


Encouraging Collaboration for Responsible Artificial Intelligence Adoption in Finance


Lack of collaboration and information sharing may result in fragmented risk management approaches, potentially leaving gaps in addressing emerging AI-related risks. Thus, firms are encouraged to engage in collaborative efforts, both domestically and internationally, to share insights, best practices, and collectively address the challenges associated with AI adoption.


Summary of Jessica Rusu’s Speech


Jessica Rusu underscored the pivotal role of responsible adoption, collaboration, and regulatory frameworks in shaping the trajectory of AI in the financial services industry. The digital coin toss of AI's fate hangs in the balance, awaiting the concerted efforts of innovators, leaders, and regulators to ensure a positive outcome.


AI Beyond the Surface

Rusu broadened the conversation beyond AI, connecting it with broader issues such as digital infrastructure, resilience, consumer safety, and data quality. She stressed that responsible AI adoption requires a holistic approach that considers these interconnected aspects.


Building Digital Infrastructure: The Foundation for Artificial Intelligence

The importance of strong digital infrastructure was highlighted, especially in the context of cloud-based AI deployments. The FCA is actively addressing risks related to Critical Third Parties (CTPs) to ensure stability and resilience in the financial system.


Expectations of Resilience

Rusu reinforced the FCA's technology-neutral stance but emphasized the importance of firms adhering to existing frameworks. The Senior Managers & Certification Regime (SM&CR) and Consumer Duty remain crucial for ensuring resilience and safety in the adoption of AI.


Consumer Risks and Artificial Intelligence Scams

The rising threat of AI scams, including deepfake technology and biometric theft, was acknowledged. Rusu urged a focus on consumer protection, emphasizing the need for responsible AI adoption to prevent harm to individuals and firms.


Data Considerations: Ethical Usage and Quality

Rusu addressed the ethical dimensions of data usage in AI, questioning whether the ability to process data should always translate into action. She stressed the importance of responsible AI, linking it directly to data quality, governance, and accountability.


Role of Regulation and Governance

While FCA maintains a technology-agnostic stance, existing regulations like SM&CR and Consumer Duty provide a framework for responsible AI implementation. The emphasis is on collaboration with regulated firms to address risks and encourage positive outcomes.


Beneficial Regulation for Innovative Outcomes

Rusu highlighted the potential benefits of AI in financial markets, citing examples from the GFIN Greenwashing TechSprint. She emphasized that beneficial regulation is key to unlocking AI's potential in enhancing products, efficiency, revenue, and innovation.


FCA's Use of Artificial Intelligence: Fighting Fraud and Ensuring Compliance

The FCA is actively using AI to combat fraud, employing advanced analytics and machine learning to protect consumers and markets. Rusu shared examples of how AI is leveraged within the organization to enhance regulatory processes.


Encouraging Collaboration for Responsible Artificial Intelligence Adoption

Rusu concluded by stressing the importance of collaboration, both domestically and internationally, in ensuring the safe and responsible adoption of AI in the UK financial markets. The proverbial coin of AI is still in the air, and its outcome can be shaped through collective efforts.

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