In February 2022, the AI Public-Private Forum (AIPPF) published its Final Report (the Report) exploring the benefits and drawbacks of the increasing use of AI across financial services, as well as how the public and private sector can support safe adoption.

Founded by the Bank of England (BoE) and the Financial Conduct Authority (FCA) in October 2020, the AIPPF was created to facilitate discussion between the public sector, private sector and academia about safe use of AI. In recognition of the considerable hype around and complexity of the technology, it also aims to deepen our collective understanding of what we mean by AI and how it works.

What is AI?

As the Report admits: AI (and Machine Learning, a subset of AI) is difficult to define and, as such, a broad approach may be of benefit to firms and regulators. For the purposes of the Report, it settles on: "… a branch of computer science, dealing with models and systems for the performance of functions generally associated with human intelligence, such as reasoning and learning".

AI and financial services

To apply this to a more granular financial services context, within the process of granting a loan, AI might be used to: (i) market the loan, (ii) guide/make the loan decision, and (iii) model the regulatory capital requirement. However, financial services have long used complex mathematical and statistical modeling to make decisions and provide market insight. As AI can be seen as augmenting rather than replacing these traditional techniques, we might ask: what has really changed?

In short, AI can provide remarkably quicker, autonomous and more accurate models. This comes with a corresponding lack of transparency and explain-ability, as well as other systematic risks. 
Based on Annex I of the Report, the following table sets out the benefits and risks of three financial services use-cases:

Supporting safe adoption

Key suggestions of how firms can support safe adoption of AI suggested by the Report include:

• identifying and managing changes to AI models and reporting their performance to ensure that they are behaving as expected;
• establishing a centralized body within firms to set the AI governance standards (made of individuals with a diversity of skills and perspective across the functions and business units); and
• ensuring that there is an appropriate level of understanding and awareness of AI’s benefits and risks throughout the organization.

It was also proposed that creating an industry body for practitioners and professionalizing data science (including voluntary codes of conduct and establishing an auditing regime) could foster wider acceptance of and trust in AI systems.

What next?

With the rapid adoption of AI technology in the financial services set to continue, the AIPPF encourages firms and regulators alike to continue to monitor and support safe adoption of AI.
Discussions made clear that the private sector wants regulators to have a role in supporting the safe adoption of AI in UK financial services. As such, the BoE and FCA plan to publish a Discussion Paper after consultation with a wider set of financial services and technology stakeholders. The paper will ultimately look at how regulation of AI could work within the UK's existing framework (for example, how it could be applied to the Senior Managers and Certification Regime) or whether a new approach is required. 

The Discussion Paper is anticipated later this year.

Additional contributions were provided by Ellen Blakeney