Financial institutions that implement AI early in their transformation have the most to gain from its use but also face the largest risks, according to a new report released by Deloitte.
The report, Navigating Uncharted Waters released at the World Economic Forum describes how these companies, firms and regulators can overcome these risk.
The authors of the report say using AI responsibly is about more than mitigating risks; its use in financial services presents an opportunity to raise the ethical bar for the financial system as a whole. It also offers financial services a competitive edge against their peers and new market entrants.
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Matthew Blake, head of financial services at World Economic Forum said, “AI offers financial services providers the opportunity to build on the trust their customers place in them to enhance access, improve customer outcomes and bolster market efficiency.
“This can offer competitive advantages to individual financial firms while also improving the broader financial system if implemented appropriately.”
Rob Galaski, Partner, Deloitte Canada; Global Banking & Capital Markets Consulting leader said using AI in financial services will require an openness to a fundamentally new way of safeguarding the ecosystem, different from the tools of the past.
“To accelerate the pace of AI adoption in the industry, institutions need to take the lead in developing and proposing new frameworks that address new challenges, working with regulators along the way.”
Over a number of areas, AI brings in new complexities to old challenges in the financial services industry and according to Gartner the governance frameworks of the past will not adequately address these new concerns.
Some of these concerns include, explaining AI decisions, bias and fairness, systemic risk, fiduciary duty and algorithmic collusion.
For these concerns, the report outlines the key underlying root causes of the issue and highlights the most pressing challenges, identifies how those challenges might be addressed through new tools and governance frameworks, and what opportunities might be unlocked by doing so.
When it comes to explaining AI decisions some forms of AI are not interpretable even by their creators, posing concerns for financial institutions and regulators who are unsure how to trust solutions they cannot understand or explain.
Gartner says this uncertainty has left the implementation of cutting-edge AI tools at a standstill.
The Forum offers a solution, evolve past “one-size-fits-all” governance ideas to specific transparency requirements that consider the AI use case in question.
Bias and fairness is another concern for financial institutions, regulators and consumers. AI’s ability to rapidly process new and different types of data raise concerns that AI systems may develop unintended bias over time.
Despite these risks, AI also presents an opportunity to decrease unfair discrimination or exclusion.
With systemic risks, the widespread adoption of AI also has the potential to alter the dynamics of the interactions between human actors and machines in the financial system, creating new sources of systemic risk.
As the volume and velocity of interactions grow through automated agents, emerging risks may become increasingly difficult to detect, spread across various financial institutions, Fintechs, large technology companies, and other market participants.
As AI systems take on more tasks, they will increasingly interact with customers. This means companies have a fiduciary duty to always act in the best interests of the customer may soon arise, raising the question if AI systems can be held “responsible” for their actions – and if not, who should be held accountable.
AI system can act autonomously this may lead to algorithmic collusion without any instruction from their human creators, and perhaps even without any explicit, trackable communication.
This challenges the traditional regulatory constructs for detecting and prosecuting collusion and may require a revisiting of the existing legal frameworks.