Some thoughts on the FCA CEO’s recent speech entitled “Our emerging regulatory approach to Big Tech and Artificial Intelligence.”
Summary of the FCA’s Approach
Here is a short recap, although the speech is a short 5-minute read:
The FCA welcomes the government’s call for the UK to be the global hub of AI regulation and will open their AI sandbox to firms wanting to test the latest innovations.
Big Tech’s role as the gatekeepers of data in financial services will be under increased scrutiny.
The FCA’s outcomes and principles-based approach to the regulation, including the Senior Managers Regime and Consumer Duty, should mean firms have scope to innovate while protecting consumers and market integrity.
They will only intervene with new rules or guidance where necessary.
The FCA will regulate firms that are designated as Critical Third Parties where they underpin financial services and can impact stability and confidence in our markets.
What are the specific risks that the FCA is concerned about with the use of AI in financial services?
Data bias: AI models are trained on data, and if this data is biased, then the model and its outputs will be biased as well. This can lead to discrimination against certain groups of people, or to the model making inaccurate predictions.
Cybersecurity: AI systems can be vulnerable to cyberattacks, which could allow attackers to manipulate the system or steal data.
Hallucination bias: Occurs when AI models invent fake use cases or reference materials.
Explainability: AI models are often not very explainable, which can make it difficult for users to understand how the model works and why it makes the decisions that it does. This can make it difficult to trust the model and to hold the model accountable for its decisions.
Accountability: If an AI system makes a mistake that causes harm, it can be difficult to determine who is responsible for the harm. This is because AI systems are often made up of complex algorithms and code, and it can be difficult to track down the specific code that caused the mistake.
The FCA is working to address these risks through a number of initiatives, including:
Providing guidance to firms on how to use AI safely and responsibly.
Working with other regulators to develop international standards for the use of AI in financial services.
Researching the potential risks and benefits of AI in financial services.
How will the FCA's AI sandbox help to promote innovation while protecting consumers?
The FCA's AI sandbox is a regulatory framework that allows firms to test innovative AI-powered products and services in a controlled environment. This allows firms to experiment with new technologies and ideas without putting consumers at risk.
The FCA's AI sandbox has a number of features that help to promote innovation while protecting consumers. These features include:
A reduced regulatory burden: Firms that participate in the AI sandbox are subject to a reduced regulatory burden. This allows them to focus on developing and testing their products and services without having to worry about complying with all of the FCA's regulations.
Access to data: The FCA provides participating firms with access to data that they would not otherwise have access to. This data can be used to train AI models and to test the accuracy and reliability of these models.
Since its launch in 2019, the sandbox has helped over 100 firms to test their AI-powered products and services. This helps to ensure that the UK financial services sector remains competitive and innovative as Big Tech and AI evolve at pace.
Support is available
Firms should feel free to call upon us at Leaman Crellin to help them finalize the AI sandbox application. Many firms new to the process may miss out key pieces of information and lead to a rejection. Having our set of experienced eyes look over the application will only increase the odds of a positive response from the FCA and an effective collaboration with the FCA going forward.
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