Building a Risk-based Framework for Al in Finance

Building a Risk-based Framework for Al in Finance: Where is the Human in the Loop? Speaker: Prof. Arner, Kerry Holdings Professor in Law, University of Hong Kong Discussant: Dr. Passador, Bocconi University Chair: Prof. Chiu, UCL Laws Date: 02 April 2025, 1:00 pm–2:00 pm Overview - Context / motivation - Looking forward: 2020-2030 - Major developing themes in finance, technology and regulation: 2025-2030 - Building a risk-based approach to Al in finance Looking Back, Looking Forward - - Finance in the 2010s • Global Financial Crisis • Regulation • Technology Finance in the 2020s • Sustainability • Technology • Globalization vs fragmentation Key Emerging Issues: 2024-2030 - - Cross-border Payments: • Retail, wholesale • FPS/CBDCs/ Stablecoins etc. Data • Al • Strategies • Open finance - Digital assets: Future as a Regulated industry - Regtech / suptech: digital transformation - Sustainability: emerging technologies, risks, opportunities Al and Finance - Digitization, storage, power, communications, analytics - Digitization - Data: standardization - Incentives / resources - Theory / experts FinTech And New Technologies: Approaches And Lessons - Al - DLT/Blockchain - DeFi - Data - Lessons - Innovation hubs, sandboxes, pilots, test and learn - Regulatory design - Graduated proportional risk-based approach - RegTech / SupTech Al Risks And Governance - Macro: scenario analysis - Micro / sectoral: human in the loop - Infrastructure: resilience / competitiveness / security • - The Al supply chain Malicious actors: regtech / suptech / cooperation - Culture: education • Digital Education Council | Home • Online Fintech Courses & Certifications - CFTE Discussant to professor Arner's presentation Introduction - Central Premise: Al is not merely a tool but a transformative force reshaping financial decision-making, risk assessment, and accountability. - Discussion Structure: • Identifying core regulatory challenges of Al in finance. • Assessing the impact of the EU AI Act and its implications for financial regulation. Challenges in regulating Al in Finance - Shift in Decision-Making Paradigm: From human oversight to algorithmic control, challenging traditional regulatory frameworks. - Algorithmic Risks: • High-Frequency Trading & Market Stability: Algorithmic "flash crashes." • Al in Anti-Money Laundering (AML): Black-box decisions raising accountability issues. • Open Banking & Data Risks: Increased cybersecurity vulnerabilities with Al integration. - Regulatory Tensions: • Innovation vs. Stability: Regulatory sandboxes encourage Al development but may expose markets to untested risks. • Liability Dilemmas: Who is accountable for Al-driven financial losses? Al Act and its Implications - Risk-Based Framework: Al Act categorizes financial Al applications as high-risk, imposing stricter oversight. - Unacceptable risk - prohibited e.g. social scoring, predictive policing behavioral manipulation. - High risk subject to mandatory requirements and ex ante conformity assessment • e.g. medical devices, vehicles, law enforcement, education, immigration - Limited risk - subject to transparency obligations e.g. chatbots, deep fakes - Unregulated voluntary codes of conducts e.g. spam filters, games - + general-purpose Al is subject to separate specific regulations • e.g. GPT-4 Al Act and its Implications - Core Provisions: • Compliance Requirements: Data quality, transparency, and cybersecurity standards. • Conformity Assessments: Mandatory external verification before Al deployment. - • Prohibited Practices: Bans exploitative or deceptive Al techniques. • Transparency Obligations: Informing consumers about Al-driven interactions. Critical Considerations: • Balancing Innovation & Compliance: Is the Al Act a necessary safeguard or a regulatory • burden? • Global Competitiveness: Will stringent EU regulations push Al development elsewhere? • Future of Financial Al: How can regulators, financial institutions, and developers navigate evolving compliance landscapes? Conclusion: Six Characters in Search of an Author - The Six Characters of Al in Finance • The Architect: Designs Al-driven financial systems, influencing market structure. • The Gatekeeper: Regulators and compliance officers ensuring Al aligns with legal frameworks. • The Innovator: Tech firms and fintech startups pushing Al capabilities forward. • The Watchdog: Consumer protection agencies monitoring Al fairness and transparency. • The Adopter: Financial institutions integrating Al for competitive advantage. • The Skeptic: Critics questioning Al's ethical, legal, and systemic risks. Closing Thought - The Al Act forces financial institutions to integrate governance mechanisms into Al deployment. - The challenge remains: will this framework enable responsible Al innovation or stifle financial sector advancements? - The future depends on how these rules adapt to rapid technological change