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 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 competition where consumers can choose products and services more efficiently, 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.
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, and establishing Data Ethics boards. A core part of establishing this 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, 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 risk of bias. Having this innovation visible through a single platform de-risks innovation and gives senior managers oversight across the firm.
AI and ML are transforming the financial services industry and understanding the implications of these technologies is essential. 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 tools in place to manage risk and ensure they are using AI responsibly.