Financial services companies are likely to see increased regulation regarding their use of AI in the coming European Commission mandate, as policymakers try to balance the new technology’s benefits against risks to financial stability and consumer safety.
There is consensus in the industry that AI will drive a profound transformation in financial services by fostering innovation, improving risk management and reshaping capital markets in the EU. AI can also predict market trends and enhance investment decisions, among various other uses. Companies that don’t deploy AI risk falling behind.
At the same time, excessive use of AI in investment and risk-management decisions risks destabilising financial markets if, for example, the models fail to account for unpredictable events or if they reach decisions without human understanding and oversight.
Consumer rights are also at risk. Credit assessment and solvency evaluation decisions can have a major impact on people’s lives, and if those decisions are made by an AI without transparency, there’s a risk of discrimination.
EU leaders want to foster an innovative environment for AI to avoid Europe falling behind, as it did with the current generation of technology. “We must now focus our efforts on becoming a global leader in AI innovation,” Commission President Ursula von der Leyen told the European Parliament in July as she outlined the plan for her second term.
Von der Leyen has also asked Maria Luís Albuquerque, who is set to become the EU’s next financial services commissioner, to “assess artificial intelligence deployment in the financial sector” as part of her role, alongside broader requirements to ensure financial stability and consumer protection in the sector.
Digital competition with the US, China
At the same time, she called for measures to improve the sector’s competitiveness and pointed Albuquerque – along with all the commissioner-designates – to last month’s report by former European Central Bank chair Mario Draghi, which lamented the EU’s regulatory burden and noted that “Europe largely missed out on the digital revolution led by the internet.”
Financial institutions in other large markets, notably the US and China, have been making substantial investments in AI for applications including operational transparency, fraud prevention and regulatory reporting.
Europe’s AI offering is already at a structural disadvantage compared to the US due to linguistic fragmentation and a less developed venture capital scene. If the European financial services sector is to keep up, it will need to work closely with regulators and stay on top of every new development.
The controlled environment of ‘regulatory sandboxes’ offer a good opportunity for businesses to collaborate with regulators by experimenting with innovative products under supervision before releasing them to the market.
Through these and other channels of co-operations, companies and regulators can together ensure that AI applications are safe, equitable and transparent, while also fostering innovation. That should mitigate the risks while allowing Europe’s financial services companies to deploy AI technologies and remain globally competitive.