Christopher Woolard of FCA spoke at a conference in London, focusing on the issue of whether decisions that materially affect lives of people can be outsourced to a machine and what this might mean for the future of regulation. He mentioned that, as a regulator, FCA considers the use of artificial intelligence, also commonly referred to as AI, in financial services from the three main perspectives of continuity, public value, and collaboration. He reinforced that regulators, academics, industry, and the public need to work together to develop a shared understanding that will determine the approach to be taken to answer the questions artificial intelligence poses in the years ahead. These developments involve "big and complex questions" that "go beyond the day-to-day operations of FCA and other regulators," with the key question being "how can we ensure the regulatory framework adapts to the changing economic, demographic, and political environment in which it operates?"
Highlighting the results of a joint survey by FCA and BoE to assess the state of play on artificial intelligence, Mr. Woolard mentioned that the use of artificial intelligence in the firms it regulates is best described as nascent. The technology is employed largely for back-office functions, with customer-facing technology largely in the exploration stage. He also highlighted that the risks presented by artificial intelligence will be different in each of the contexts in which it is deployed. After all, the risks around algorithmic trading will be totally different from those that occur when artificial intelligence is used for credit ratings purposes or to determine the premium on an insurance product. FCA does not have one universal approach to harm across financial services because harm takes different forms in different markets and, therefore, has to be dealt with on a case-by-case basis; it will be the same with artificial intelligence too. He added, if firms are deploying artificial intelligence and machine learning, they need to ensure they have a solid understanding of the technology and the governance around it.
Next, he highlighted the growing consensus around the idea that algorithmic decision-making needs to be "explainable." For example, if a mortgage or life insurance policy is denied to a consumer, the reasons for denial need to be explained. However, the question is what should be the extent and level of explainability (to a consumer or an informed expert) and what takes precedence—the accuracy of prediction or the abilit to explain it. The challenge is that explanations are not a natural by-product of complex machine learning algorithms. It is possible to "build in" an explanation by using a more interpretable algorithm, but this may dull the predictive edge of the technology. This is why FCA has partnered with The Alan Turing Institute to explore the transparency and explainability of artificial intelligence in the financial sector, said Mr. Woolard. Through this project, FCA wants to move the debate from the high-level discussion of principles (which most now agree on) toward a better understanding of the practical challenges on the ground that machine learning presents.
With regard to collaboration, he emphasized that these innovations cannot be developed in isolation and the problems that artificial intelligence and machine learning have the potential to solve are cross-border, cross-sector, sometimes cross-agency. He also highlighted that, at an international level, FCA is leading a workstream on machine learning and artificial intelligence for IOSCO, exploring issues around trust and ethics and what a framework for financial services might look like. It is also looking inward and asking whether it can do anything differently as a regulator to ensure that it is ready for the challenges of the future. he added that, at a basic level, firms using this technology must keep one key question in mind, not just "is this legal?’"but "is this morally right?" Regulators have a range of powers and tools to tackle these issues now but, with the increasing use of technology, those tools may need to be updated for a fully digital age. "This is something we will be thinking about in our own work on the ‘Future of Regulation.'" FCA is taking a fundamental look at how it carries out conduct regulation and shapes the regulatory framework going forward, in what it calls its "Future of Regulation" project.
Related Link: Speech
Keywords: Europe, UK, Banking, Insurance, Securities, Artificial Intelligence, Machine Learning, Regtech, Future of Regulation, FCA
EBA published a report analyzing the impact of the unwind mechanism of the liquidity coverage ratio (LCR) for a sample of European banks over a three-year period, from the end of 2016 to the first quarter of 2020.
In response to questions from a member of the European Parliament, the ECB President Christine Lagarde issued a letter clarifying the possibility of amending the AnaCredit Regulation and making targeted longer-term refinancing operations (TLTROs) dependent on the climate-related impact of bank loans.
IASB started the post-implementation review of the classification and measurement requirements in IFRS 9 on financial instruments and added the review as a project to its work plan.
FSB published a report that examines progress in implementing policy measures to enhance the resolvability of systemically important financial institutions.
EBA published a report on the benchmarking of national loan enforcement frameworks across 27 EU member states, in response to the call for advice from EC.
FSB published a letter from its Chair Randal K. Quarles, along with two reports exploring various aspects of the market turmoil resulting from the COVID-19 event.
RBNZ launched a consultation on the details for implementing the final Capital Review decisions announced in December 2019.
The Trustees of the IFRS Foundation, which are responsible for the governance and oversight of IASB, have announced the appointment of Dr. Andreas Barckow as the IASB Chair, effective July 2021.
HKMA issued a letter to consult the banking industry on a full set of proposed draft amendments to the Banking (Capital) Rules for implementing the Basel standard on capital requirements for banks’ equity investments in funds in Hong Kong.
ESRB published an opinion assessing the decision of Swedish Financial Supervisory Authority (FSA) to extend the application period of a stricter measure for residential mortgage lending, in accordance with Article 458 of the Capital Requirements Regulation (CRR).