Artificial intelligence is causing significant changes in the financial services sector. From fraud detection to tailored financial solutions, AI’s promise to improve productivity and the user experience is clear. Customers can expect increased security, personalised investing methods, and faster loan approvals with AI. Similarly, financial institutions profit from increased efficiency, better risk management, and a competitive advantage.
Acknowledging this evolving landscape, the Financial Conduct Authority has a proactive stance for overseeing the implementation of AI in the UK financial sector. While the FCA is dedicated to fostering innovation, it also prioritises the ethical application of this powerful technology. This blog post covers the FCA’s recent recommendations for UK financial services firms that use artificial intelligence to ensure development and consumer protection.
The FCA's Five Principles for Responsible AI
Safety, Security, and Robustness in AI Deployment
The FCA emphasises the need for safety, security, and robustness in the use of AI systems in UK financial services. This principle is mirrored in a variety of laws and guidelines for enterprises, including the Principles for Business, which require organisations to execute their operations with proper skill, care, and diligence.
Regulation SYSC 7 mandates firms to implement robust systems and controls to protect their data and maintain operational integrity throughout the AI life cycle, emphasising the need for firms to identify, manage, and address risks associated with AI systems, ensuring safe functioning at all stages.
For risk controls, general organisational requirements, and business continuity, the Senior Management Arrangements, Systems, and Controls (SYSC) sourcebook provides guidelines and recommendations. SYSC 15A (Operational Resilience) is designed to ensure that businesses can respond to, recover from, learn from, and avoid future operational interruptions.
SYSC 4.1 of the SYSC sourcebook mandates firms to establish and maintain business continuity mechanisms, including comprehensive plans for resource requirements, recovery priorities, communication, escalation, information integrity, and regular testing, to align with changing circumstances and emerging risks.
Firms must guarantee that their Important Business Services (IBSs) are under Impact Tolerance (IToLs) in extreme but reasonable situations. SYSC 8 and SYSC 13 (for insurers) offer specific guidelines and guidance on outsourcing, including operational risk.
The FCA is also evaluating the role of essential third-party suppliers in the financial industry. The Bank, PRA, and FCA are actively reviewing its approach to Critical Third Parties (CTPs). These rules and expectations aim to control potential risks to the stability or confidence in the UK financial system if CTP fails or disrupts its services to financial businesses or Financial Market Infrastructures.
Adoption of AI may result in the rise of third-party AI service providers that are crucial to the finance sector. If HM Treasury designates these systemic AI providers, they may be subject to the proposed CTP framework.
The FCA is also concerned about competition threats from Big Tech corporations concentrating third-party technology services like cloud services and AI model development. This may enable them to negotiate ‘take-it-or-leave-it’ agreements with financial services firms, with incumbents having little bargaining power on the conditions, influencing downstream financial services market competition.
Fairness in AI Usage
The FCA has issued rules on the fair use of AI technologies. It emphasises that AI systems should not violate legal rights, discriminate unfairly, or result in unfair market outcomes. The FCA’s regulatory approach to consumer protection, which includes the Consumer Duty, urges businesses to operate in good faith, avoid causing harm, and consider the diverse requirements of their customers, particularly vulnerable and protected populations.
Firms should not limit access to acceptable products or services, and they should not employ AI in ways that entrench bias or result in worse outcomes for specific populations without objective clarification.
Principle 8 emphasises ‘managing conflicts of interest’ within firms, particularly when using AI systems in financial services, requiring fair, transparent, and responsible handling of conflicts. Principle 9 ensures the ‘suitability of advice and discretionary decisions’ for clients, preferring their interests and needs, especially when incorporating AI technologies into decision-making processes.
Firms should also consider equitable treatment of vulnerable clients and have quality assurance methods in place to identify and mitigate AI-related risks. The safe and responsible use of AI also requires adherence to the FCA Threshold Conditions and certain consumer protection regulations and guidelines in the FCA Handbook.
Transparency and Explainability
The Financial Conduct Authority has established rules for adequate openness and explainability for employing AI technologies. Although the regulatory structure does not address these elements, the FCA’s consumer protection principles apply to financial services enterprises adopting AI.
Companies must comply with the Consumer Duty by treating retail customers in good faith and being honest, fair, and open. It is also anticipated that firms will satisfy the information requirements of retail customers and furnish them with the requisite information to enable them to make informed and efficient decisions. Principle 7 demands firms to regard clients’ information needs and communicate, fairly, and non-misleadingly.
Regarding data protection, UK GDPR mandates data controllers to inform individuals about processing activities, including AI-based decision-making, and provide them with clear explanations of potential implications.
Accountability and Governance
The FCA’s regulatory framework establishes rules and guidelines for firms’ governance and accountability framework that incorporates high-level rules and principles, such as the FCA’s Threshold Conditions and Principles for Businesses. The SYSC sourcebook contains provisions on systems and controls, corporate governance processes, and accountability structures.
FCA emphasises the importance of robust governance arrangements for AI systems, including clear organisational structures, risk identification, management, monitoring, reporting processes, and internal control mechanisms.
It also discusses the roles of Senior Management Functions (SMFs), particularly SMF24 and SMF4, in overseeing AI technology use, regulatory compliance, and risk management, ensuring the safe and responsible deployment of AI systems.
The Senior Managers and Certification Regime (SM&CR) signifies senior management accountability for responsible AI use, requiring all Senior Managers to have a Statement of Responsibilities and adhere to the Senior Manager Conduct Rules.
Under Consumer Duty regulation, companies have to integrate their obligation to provide favourable outcomes for their customers into their strategies, governance, and leadership. The first annual report is expected on July 31, 2024, and may contain a discussion of existing or prospective applications of AI technology affecting retail consumer outcomes.
Contestability and Redress
According to FCA rules, users, impacted third parties, and actors along the AI life cycle should be able to challenge AI decisions or outcomes that are detrimental or pose a material risk of harm. Firms that utilise AI must ensure compliance with consumer protection regulations, and if their use of AI results in a violation of these regulations, there are systems in place for responsibility and restitution.
Firms are expected to maintain their own complaint handling systems, and consumers can file complaints with the Financial Ombudsman Service for an independent examination and potential remedy. However, voluntary or statutory firm-led redress schemes like the Financial Services Compensation Scheme may offer remedies depending on the infringement. Data subjects have the right to resist automated decisions that have legal or significant consequences.
The FCA's Roadmap for Responsible AI in UK Finance
FCA has announced a comprehensive plan to address the changing landscape of artificial intelligence (AI) in the UK financial markets.
Deeper Understanding of AI Use in UK Financial Markets
The FCA is committed to acquiring comprehensive insights regarding the deployment of AI in the UK financial sector. The FCA endeavours to rapidly identify and evaluate the impact of AI on the market by actively participating in diagnostic work on AI deployment, conducting surveys in collaboration with the Bank of England, and closely monitoring market dynamics. This will enable the development of a robust regulatory framework that is specifically tailored to the challenges and opportunities that arise from AI.
Creating a Proportionate Regulation Framework for Innovation
The FCA is on track to construct a regulatory framework that supports innovation, ensuring that regulatory modifications are not only effective but also proportionate and supportive of financial sector innovation. It intends to proactively test and develop new sorts of regulatory interaction and environments that will enable the safe and responsible testing, design, governance, and impact of AI technology in UK financial markets. The emphasis is on proportionate regulatory interventions that promote beneficial innovation, support new technology proposals, and provide a set of tools for collaboration and the production of proof of concept. This policy is consistent with the government’s pro-innovation approach to AI.
Partnering with Industry Stakeholders for Effective Implementation
Recognising the value of collaboration, the FCA is expanding its relationships with industry stakeholders such as the Bank of England, the Payment Services Regulator (PSR), and the Digital Regulation Cooperation Forum (DRCF). This tight engagement with local and foreign regulators, corporations, civil society, and academics is critical for reaching an agreement on best practices, identifying potential future regulatory work, and developing a strong empirical understanding of the impact of AI on financial markets.
By emphasising continuing collaboration, the FCA hopes to guarantee that any potential future regulatory changes are responsive to developing concerns and in line with the different viewpoints and solutions developed through collaborative efforts. This multifaceted approach demonstrates the FCA’s commitment to promoting the safe and responsible deployment of AI in financial markets, thereby protecting consumers’ interests and preserving market integrity.
Macro Global’s AI-enabled FSCS SCV Enterprise Regulatory Solution Suite
Macro Global extensively applies an AI approach to its SCV regulatory solution suite, enhancing the efficacy and functionality of the FSCS SCV reporting solutions provided to financial institutions.
- The AI algorithms embedded in Macro Global’s SCV Alliance and SCV Forza play a pivotal role in various critical functions. These functions include ensuring data accuracy and validation, data enrichment and cleansing, automated compliance, risk management, and operational efficiency.
- The SCV Enterprise Regulatory Solution Suite features a fully automated intelligent platform that excels in data aggregation, meticulously manages account segregations, and utilises linked accounts and related datasets to generate precise SCV reports that meet the requirements of FSCS.
- By seamlessly integrating with CBS, Macro Global’s SCV suite streamlines multi-level data validations and control procedures using AI-based fuzzy logic. This integration not only prevents data duplication but also swiftly generates accurate SCV reports in the appropriate format for seamless submission to FSCS.
- One of the core strengths of Macro Global’s approach is the elimination of potential human errors through the alignment of AI-based algorithms, formulae, and logic with predefined business and process rules. This ensures consistency in data handling and processing, reducing risks associated with manual interventions.
- Facilitating account and customer rule management, data enrichment and validation, the AI-powered features of the FSCS SCV suite enhance data quality and integrity throughout the regulatory reporting process.
- Additionally, the automated reconciliation capabilities embedded in the MG’s SCV suite allow for real-time reconciliation during the accounting period. These functionalities are complemented by a comprehensive audit trail that logs all previous reconciliations, providing transparency and accountability in the reporting process.
- By aligning with the FCA’s AI roadmap and fostering proactive engagement, Macro Global contributes to the responsible and ethical adoption of AI within the financial services industry.
Macro Global’s devotion to ensuring data security and compliance, coupled with the strategic application of AI technology, cements its position as a reliable partner for financial institutions seeking efficient SCV regulatory reporting solutions.
Contact Macro Global today to discuss your specific needs and explore how the SCV Enterprise Regulatory Solution Suite can help you leverage AI responsibly and efficiently.
SCV Alliance
FSCS SCV Audit Platform
