Financial services underestimating AI risks
(25 October 2019 – Hong Kong) Although artificial intelligence (AI) is viewed as a powerful new investment and client development opportunity, it could also be a minefield if the safeguards are insufficient according to a new study by the World Economic Forum (WEF).
The integration of AI into the financial system is happening at different speeds and with mixed results, complicating the challenge.
The WEF paper, ‘Navigating Uncharted Waters’, warned that AI would create ‘a fundamentally different kind of financial system’ that could undermine the framework of traditional financial markets. If companies and regulators fail to get on top of the technology, investors will be put at risk. The WEF study assessed whether AI algorithms could destabilise the financial system and suggests that systematic risk may be more difficult to anticipate and react to, in a world where numerous highly complex and opaque models are interacting with each other in real time.
The WEF report suggests that ‘algorithmic bias’ may go undetected since some forms of AI lack transparency on the inferences being drawn from the underlying data. This challenge has been highlighted by two robo advice services recently shut down after a review by the Australian Securities and Investments Commission (ASIC). The review concluded that the client due diligence offered by Sydney-based Lime Financial Services was insufficient and that the robo-advice given was inappropriate. As a result the firm announced the closure of the services. "The advice provided through these digital advice tools must meet the same legal obligations required of human advisers” ASIC said in a statement.
“As AI becomes more integrated with the financial system, it is vitally important that financial service companies adapt their internal governance, compliance and operational structure, to not only optimise the value added through AI, but also identify, ring-fence and resolve any potential risks. If we take it to the extreme, regulating an AI brain is as difficult as regulating the thought process of a human, which is an activity that has its first line of defence within the company” said BNP Paribas Asset Management Head of Multi-Assets Quant Solutions and Client Advisory, Paul Sandhu.