Featured Product

    Christopher Woolard of FCA on AI and Future of Regulation

    July 16, 2019

    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

    Related Articles
    News

    EBA Updates List of Validation Rules for Reporting by Banks

    EBA issued a revised list of validation rules with respect to the implementing technical standards on supervisory reporting.

    September 10, 2020 WebPage Regulatory News
    News

    EBA Responds to EC Call for Advice to Strengthen AML/CFT Framework

    EBA published its response to the call for advice of EC on ways to strengthen the EU legal framework on anti-money laundering and countering the financing of terrorism (AML/CFT).

    September 10, 2020 WebPage Regulatory News
    News

    NGFS Advocates Environmental Risk Analysis for Financial Sector

    NGFS published a paper on the overview of environmental risk analysis by financial institutions and an occasional paper on the case studies on environmental risk analysis methodologies.

    September 10, 2020 WebPage Regulatory News
    News

    MAS Issues Guidelines to Promote Senior Management Accountability

    MAS published the guidelines on individual accountability and conduct at financial institutions.

    September 10, 2020 WebPage Regulatory News
    News

    APRA Formalizes Capital Treatment and Reporting of COVID-19 Loans

    APRA published final versions of the prudential standard APS 220 on credit quality and the reporting standard ARS 923.2 on repayment deferrals.

    September 09, 2020 WebPage Regulatory News
    News

    SRB Chair Discusses Path to Harmonized Liquidation Regime for Banks

    SRB published two articles, with one article discussing the framework in place to safeguard financial stability amid crisis and the other article outlining the path to a harmonized and predictable liquidation regime.

    September 09, 2020 WebPage Regulatory News
    News

    FSB Workshop Discusses Preliminary Findings of Too-Big-To-Fail Reforms

    FSB hosted a virtual workshop as part of the consultation process for its evaluation of the too-big-to-fail reforms.

    September 09, 2020 WebPage Regulatory News
    News

    ECB Updates List of Supervised Entities in EU in September 2020

    ECB updated the list of supervised entities in EU, with the number of significant supervised entities being 115.

    September 08, 2020 WebPage Regulatory News
    News

    OSFI Identifies Focus Areas to Strengthen Third-Party Risk Management

    OSFI published the key findings of a study on third-party risk management.

    September 08, 2020 WebPage Regulatory News
    News

    FSB Extends Implementation Timeline for Framework on SFTs

    FSB is extending the implementation timeline, by one year, for the minimum haircut standards for non-centrally cleared securities financing transactions or SFTs.

    September 07, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5796