Artificial Intelligence – The Next ‘Giant Leap’ in Financial Services

Artificial Intelligence – The Next ‘Giant Leap’ in Financial Services

If we have learned one thing over the last couple of years, it is that the staggeringly fast uptake in the use of technology during and post-Covid will only continue. Artificial Intelligence (AI) now appears to be the next ‘giant leap’ in this process, with the Government announcing that it wants to see the UK recognised as an AI superpower and a global leader in its adoption.

Many PIMFA members are already using AI tools in their day-to-day operations and adoption of AI in financial services looks set to increase rapidly over the next few years, with the aim of improving efficiency, reducing costs, minimising risk and offering more and better client services, leading to improved consumer outcomes.

Whilst it is generally held that AI will not replace traditional human to human interaction and advice, it will support and supplement the dialogue and hopefully help to strengthen the bond between adviser and client, by being available to provide information and answer questions when the adviser is otherwise engaged, by recording information, carrying out data analysis, updating records and carrying out some of the admin tasks the adviser would otherwise carry out themselves.

However, whilst AI can be an effective and powerful ‘servant’, it also has the potential to be a bad ‘master’ if it is not fully understood and carefully managed by those who deploy it and it does come with risks that could negatively impact consumers, market integrity, and financial stability.

We are therefore keen to see a regulatory framework which allows firms to introduce AI components that will enhance their offerings to clients while ensuring appropriate levels of investor protection are maintained.

Earlier this year, the regulators asked the industry how they should regulate AI, in a joint Bank of England (BoE) and Financial Conduct Authority (FCA) Discussion Paper on Artificial Intelligence and Machine Learning (DP5/22). In our response, we highlighted that the continued success and growth of the Wealth Management and Financial Advice sector relies on establishing and maintaining a bond of trust between ‘trusted advisor’ and client.

The FCA’s discussion paper was followed in March this year by the Department of Science, Innovation and Technology (DSIT) and Office for Artificial Intelligence (OAI) policy paper, ‘A pro-innovation approach to AI regulation’

Whilst broadly supporting the AI White Paper and its proposed pro-innovation approach to AI regulation, we have also contributed to the International Regulatory Strategy Group’s (IRSG’s) response to the paper.

In this, we support a principles-based approach to regulation of AI and consider that the use of technical standards could be helpful in providing a framework for firms to develop consistent policies and procedures to support their use of AI.

In our view, there should be no need to introduce new layers of governance for AI; the existing governance frameworks are sufficient, but we would also welcome clear, consistent and timely guidance where appropriate.

From our members’ perspective, we also accept that firms will need to fully understand what any AI application is doing, how it is doing it and why, and be able to demonstrate that understanding to the regulator, identifying which components of their control frameworks and compliance processes are engaged in monitoring and managing the AI application’s activities, ensuring that it does not deviate from its stated objectives.

Further, firms using such tools also need to understand and address the risks they potentially pose and implement proportionate and efficient processes, controls and oversight to ensure they are being managed carefully and effectively and do not break that critically important bond of trust.

PIMFA will continue to advocate for an effective, flexible and agile regulatory framework which allows our industry to introduce AI components that will enhance their offerings to clients whilst always ensuring that the beneficial outcomes demanded by the new Consumer Duty remain at the forefront of the decision-making process.