IOSCO proposed guidance for regulation and supervision of the use of artificial intelligence and machine learning by market intermediaries and asset managers. The consultation proposes six measures to assist IOSCO members in creating appropriate regulatory frameworks to supervise market intermediaries and asset managers that use artificial intelligence and machine learning. Annexes to this consultation report offer information on the guidance published by supranational bodies (such as IMF and FSB) and discuss how various regulators worldwide are addressing the challenges created by artificial intelligence and machine learning. Comment period on this consultation will expire on October 26, 2020.
IOSCO surveyed and held round table discussions with market intermediaries and conducted outreach to asset managers to identify how artificial intelligence and machine learning are being used and the associated risks. IOSCO identified the use of artificial intelligence and machine learning by market intermediaries and asset managers as a key priority. The potential risks and harms that were identified in relation to the development, testing and deployment of artificial intelligence and machine learning include governance and oversight; algorithm development, testing and ongoing monitoring; data quality and bias; transparency and explainability; outsourcing; and ethical concerns. The report proposes the following six measures to assist IOSCO members in creating appropriate regulatory frameworks to supervise market intermediaries and asset managers that use artificial intelligence and machine learning:
- Regulators should consider requiring firms to have designated senior management responsible for the oversight of the development, testing, deployment, monitoring and controls of artificial intelligence and machine learning. This includes requiring firms to have a documented internal governance framework, with clear lines of accountability. Senior management should designate an appropriately senior individual (or groups of individuals), with the relevant skill set and knowledge to sign off on initial deployment and substantial updates of the technology.
- Regulators should require firms to adequately test and monitor the algorithms to validate the results of an artificial intelligence and machine learning technique on a continuous basis. The testing should be conducted in an environment that is segregated from the live environment prior to deployment to ensure that artificial intelligence and machine learning behave as expected in stressed and unstressed market conditions and operate in a way that complies with regulatory obligations.
- Regulators should require firms to have the adequate skills, expertise and experience to develop, test, deploy, monitor and oversee the controls over the artificial intelligence and machine learning that the firm utilizes. Compliance and risk management functions should be able to understand and challenge the algorithms that are produced and conduct due diligence on any third-party provider, including on the level of knowledge, expertise and experience present.
- Regulators should require firms to understand their reliance and manage their relationship with third party providers, including monitoring their performance and conducting oversight. To ensure adequate accountability, firms should have a clear service level agreement and contract in place clarifying the scope of the outsourced functions and the responsibility of the service provider. This agreement should contain clear performance indicators and should also clearly determine sanctions for poor performance.
- Regulators should consider what level of disclosure of the use of artificial intelligence and machine learning is required by firms. Regulators should consider requiring firms to disclose meaningful information to customers and clients around their use of artificial intelligence and machine learning that impact client outcomes. They should also consider what type of information may be required from firms to ensure they can have appropriate oversight of those firms.
- Regulators should consider requiring firms to have appropriate controls in place to ensure that the data that the performance of the artificial intelligence and machine learning is dependent on is of sufficient quality to prevent biases and is sufficiently broad for a well-founded application of artificial intelligence and machine learning.
The proposed guidance, if implemented, should help ensure that firms have adequate control frameworks to appropriately use artificial intelligence and machine learning. The use of artificial intelligence and machine learning will likely increase as the technology advances and it is plausible that the regulatory framework will need to evolve in tandem to address the associated emerging risks. Therefore, this report, including the definitions and guidance, may need to be reviewed and/or updated in the future.
Comment Due Date: October 26, 2020
Keywords: International, Banking, Securities, Artificial Intelligence, Machine Learning, Guidance, Fintech, Guidance, Fintech, Regtech, Governance, Big Data, IOSCO
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