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Global finance regulation body recommends monitoring AI’s use

Finance firms must keep a close eye on artificial intelligence, according to the Financial Stability Board (FSB), an international body that supports financial services regulators

The Financial Stability Board (FSB) has published a list of benefits and risks that the use of artificial intelligence (AI) could bring to the finance sector.

Almost every business sector faces disruption through artificial intelligence, and industry bodies in each sector need to prepare their members to avoid problems.

The FSB observes the global finance sector and provides guidance about regulations that are needed to protect it. For example, in 2016 it added financial technology (fintech) to its list of things to keep an eye on.

In its latest report, the FSB focused on the implications of the growing use of AI and machine learning in financial services. Financial services firms are looking at the use of AI to automate processes in the back office, as well as in the front office, as part of their trading strategies.

For example, CEO of Deutsche Bank John Cryan recently said a “big number of staff will eventually be replaced by robots” as the banks looks towards artificial intelligence technology.

“Financial institutions are increasingly using AI and machine learning in a range of applications across the financial system, including to assess credit quality, to price and market insurance contracts and to automate client interactions,” said the FSB.

It said finance companies are also using AI to support trading, including using them to make predictions about investments as well as to support regulatory compliance, surveillance and fraud detection.

“[Our] analysis reveals a number of potential benefits and risks for financial stability that should be monitored as the technology is adopted in the coming years and as more data becomes available,” said the report.

On the positive side, the FSB said more efficient processing of information using AI may contribute to a more efficient financial system. It added that AI and machine learning can support regulators and supervisors by improving regulatory compliance and supervisory effectiveness.

The technology could also make use of new and unexpected forms of interconnectedness between financial markets and institutions, according to the FSB.

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However, it warned that a “lack of interpretability or auditability of AI and machine learning methods could become a macro-level risk” and “opaque models may result in unintended consequences”.

“As with any new product or service, it will be important to assess uses of AI and machine learning in view of their risks, including adherence to relevant protocols on data privacy, conduct risks, and cyber security,” said the FSB.

Regulators in the finance sector have seen the damage that technology can do if it is unleashed. The use of technology to automate trading was partly blamed for the scale of the financial turmoil of 2008.

Investment firms use algorithmic software to automate share trading, enabling trades to be completed in microseconds – therefore, when problems occur, they quickly escalate.

Potential disruption caused by AI goes beyond financial services. Its increased use is also being watched closely by politicians who have identified it as a potential threat to political stability.

AI is likely to destroy traditional white-collar jobs at a faster rate than new jobs are created, unless governments and the private sector collaborate to manage the problem, said a report published in advance of the World Economic Forum in Davos.

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