On 16th July 2019, Christopher Woolard, the Executive Director of Strategy and Competition at the Financial Conduct Authority (FCA), delivered a speech on the ethics behind Artificial Intelligence (AI) and the financial services sector.
The speech took place in the City of London for the Alan Turing Institute. The FCA has partnered with the Alan Turing Institute to explore the transparency and explainability of AI in the financial services sector. Through this partnership, the FCA is seeking to understand the practical challenges that AI and machine learning generally presents to its supervised firms. A joint publication and workshop will be occurring at the beginning of 2020.
During his speech Mr Woolard highlighted that regulated firms are responsible for the financial safety of their consumers. He posted the question: “can decisions that materially affect people’s lives be outsourced to a machine?”. He split his speech into three broad themes: continuity, public value and collaboration.
According to Mr Woolard, the use AI by regulated firms is largely limited to back office functions. Firms have learnt lessons from the financial crisis, including the dangers of putting too much faith in products and instruments that are not properly understood. The sector is trying to rebuild public trust and therefore there is a reluctance to adopt AI for front of office functions.
Mr Woolard did note however that some newer market entrants are less risk adverse than established institutions and are therefore more likely to use AI in providing value to customers. The FCA expects firms to balance innovation in the interests of consumers with consumer risk and protection.
Mr Woolard noted that the latest cohort of the FCA’s Regulatory Sandbox including some firms which were testing how machine learning can help businesses identify their customers digitally, bypassing the need to go into a branch and have a cashier check whether your ID is genuine.
The FCA does not have one universal approach to harm across financial services because harm takes different forms in different markets. Mr Woolard concluded that the FCA’s expectation is that firms using AI and machine learning demonstrate strong governance in respect to technological offerings – including considering ethical question around data.
According to Mr Woolard, there is a growing consensus around the idea that algorithmic decision-making needs to be ‘explainable’ and valuable to consumers.
Simple explanations like “we use your data for marketing purposes” are now almost meaningless to consumers. Building explainable use cases will be part of the role of the FCA and the Turing Institute in their joint partnership going forward.
Mr Woolard also mentioned the genuinely transformative power of data and innovation in the retail banking space. He noted the implementation of the Open Banking Initiative has enabled consumers to access their information and better compare offerings from different providers. Access to the rich datasets facilitated by Open Banking enabled AI to be used to provide consumers with choice and enhance competition in an industry that had resisted competition for years.
Mr Woolard said that it was important that regulators work with academics, industry and the public to develop a shared understanding of the role of AI in our society in coming years.
At an international level, the FCA is leading a workstream on machine learning and AI for the International Organisation of Securities Commissions (IOSCO).
Through its “Future of Regulation” project, the FCA is also taking a fundamental look at how the FCA undertakes conduct regulation. This involves taking a fresh look at the core components of the regulatory system, including reviewing the FCA’s Principles for Businesses, and considering how the FCA may be a more outcomes-based regulator.
Mr Woolard concluded that the FCA has a vital role to play in deciding the appropriate role of AI in the financial services sector. One of many actors, it is in a unique position as the conduct regulator of one of the world’s largest financial centres.
At this stage, the FCA’s existing rules are sufficient to both protect consumers and permit innovation in the financial services sector. However Mr Woolard noted the preparedness of the FCA to update the regulatory framework to shape an approach that benefits consumers that the financial system is ultimately there to serve.
He finished with a quote from Alan Turing himself: “We can only see a short distance ahead, but we can see plenty there that needs to be done”.