Concerns Over AI in Finance
The European Commission has raised concerns about the impact of artificial intelligence (AI) in banking, insurance, and securities markets. According to a consultation issued on June 18, officials worry that excessive reliance on AI could lead to bias, panic, or poor advice. This comes as the EU finalizes the world’s first comprehensive AI Act, aimed at making emerging technologies safe and non-discriminatory.
Mairead McGuinness, EU Commissioner for Financial Services, emphasized, that the EU’s AI Act and existing financial sector rules provide a solid basis to allow for technological innovation. She urged stakeholders to share their perspectives on this rapidly changing technological landscape.
Balancing Innovation and Regulation
The new EU AI Act, set to take effect in May 2025, covers the economy broadly but imposes stricter oversight on high-risk sectors such as health, law enforcement, and recruitment. Financial applications, like credit assessments, are highlighted as needing more specific regulations.
Brussels officials have a history of caution regarding technology in finance. In 2022, the EU enacted the Digital Operational Resilience Act (DORA) to address concerns about banks’ use of unregulated cloud computing providers, which could lead to data breaches or market instability.
The Commission is particularly wary of “herding,” where multiple financiers rely on identical IT systems for business decisions, potentially leading to exaggerated price swings or market concentration. There is also the risk of AI systems providing incorrect information, which could have severe implications in financial markets.
The consultation document notes that general purpose AI can at times produce ‘hallucinations’, i.e. nonsensical or inaccurate replies. This issue, familiar to users of ChatGPT, could be problematic for robo-financiers who have a legal duty to offer accurate advice in their clients’ best interests.
Benefits and Risks
While AI can offer benefits such as detecting fraudulent trading activities, the Commission is concerned about the potential for poorly designed AI datasets to cause widespread discrimination. For instance, an AI pricing algorithm might inadvertently charge higher rates based on gender or race, without any human oversight to correct such biases.
The European Commission is seeking input on whether additional guidance is needed to align AI regulations with financial sector requirements. This initiative underscores the importance of balancing technological innovation with regulatory oversight to ensure AI is used responsibly in finance.
By addressing these concerns, the EU aims to foster a secure and equitable environment for AI deployment, particularly in high-stakes areas like finance, where the implications of errors can be profound.
