AI is revolutionising the financial world but from a regulatory perspective this is as much of a headache as a benefit.

The AI market is booming. A recent report from Research and Markets suggested the enterprise AI market could grow at 48.7% year on year between now and 2022. The media attention it has received so far is testament to the success it has already had, but the predictions being made recognise a more important fact: that we’ve only seen the tip of the iceberg.

The rise of AI

AI is a new and emerging technology. The next few years will see the technology develop rapidly and there’s a good chance that we haven’t even begun to envisage the uses it could be put to. Already financial services firms are using AI to improve customer relationships with chatbots, to improve trading performance with advanced algorithms which can detect emerging trends and to manage risk.

Artificial intelligence creates two issues for regulators. On the one hand there are the benefits – the many ways in which machine learning and automation can be used to improve regulatory compliance. On the other are the potential regulatory issues and risks AI can create.

One of the key benefits come in the form of regtech which is also being referred to as AI for the regulatory sphere. It can harness the power of machine learning to highlight areas in which a firm might be at risk of non-compliance and implement remedial action before the regulators get involved.

The challenge of regulation

Algorithms can monitor trades being made and flag any up which appear to be suspicious, such as if it detects certain patterns with one trader or recurring problems in a department. It can also keep firms up to date with the ever-changing regulatory landscape, providing up to the minute development on announcements, initiatives and new requirements.

Solutions such as these, can improve oversight, compliance monitoring and detection capabilities while also reducing the financial burden of managing compliance.

For all those benefits, AI creates a potential headache for regulators. The first is the issue of data. AI technology has been made possible thanks to the surge in the amount of data businesses can capture. This is a big data sector, one which relies on vast quantities of information passing through systems each and every day.

Handling that data safely and securely at a time when cyber criminals are becoming increasingly sophisticated is one of the great challenges firms face. At the same time, compliance with new regulations such as MiFiDII becomes even more difficult when a firm is handling large amounts of mobile, unstructured data.
Under the terms of MiFiDII firms will have to show all information relevant to deals with its clients including email conversations and telephone logs. Keep track of all this information is a major administrative task.

AI can be part of the solution as well as the problem. Sophisticated data management systems can store information and automatically collate key reports for regulators.

Making sure this information works in the way firms and regulators intend, though, is far from straightforward. Firms face a number of challenges in terms of infrastructure, mindset and expertise. There is a shortage of true experts in new and emerging technologies such as AI and most FS firms will face expertise gaps in some areas.

The challenge is complex. And in itself that has been enough to dissuade some firms from making the transition. However, AI does have enormous potential. It’s up to the firms themselves to work out how they can make the most of it.