AI regulation in the financial sector

The adoption of artificial intelligence (AI) systems and techniques has grown considerably in the financial services sector, driven by the increase in available data and the improvement of computing capacity. AI has the potential to transform traditional business models in the sector by contributing to greater efficiency and profitability through the reduction of friction costs and improvements in productivity. On the other hand, there are concerns that AI could amplify existing risks and/or give rise to new risks. It is therefore considered that AI needs to be subject to the appropriate regulations to ensure that AI’s ‘invisible hand’ is used for the benefit of our society.

This article discusses how financial institutions should address AI risks and how AI needs to be regulated, introducing developments on AI regulation at the international as well as financial sector levels. More specifically, it outlines international initiatives in AI regulation, including the following.

• The OECD AI Principles (May 2019)
• The UNESCO’s ‘Recommendation on the Ethics of Artificial Intelligence’ (November 2021)
• The agreements from the G7 Hiroshima Summit (May 2023)

It also provides an overview of key jurisdictional developments, such as:

• The EU’s AI Act (adopted in June 2023); and
• The U.K.’s draft framework for AI regulation and Japan’s interim discussions on AI (May 2023).

Moreover, it introduces regulatory actions taken in the financial sector by standard-setting organisations and regulatory authorities, including:

• The Basel Committee on Banking Supervision (BCBS);
• The European Insurance and Occupational Pensions Authority (EIOPA); and
• The International Organization of Securities Commissions (IOSCO).
  

By discussing how financial institutions address risks associated with AI, this article highlights the importance for financial institutions using AI to maintain their accountability while noting the necessity for appropriate regulation and supervision.

This article is intended to be read in conjunction with the report ‘Artificial Intelligence (AI) state of play in insurance regulation’ (Center for Regulatory Strategy US, Deloitte).