The EU AI Act – Supporting innovation and building trust across the financial services industry
The EU AI Act was agreed by the European parliament in December 2023 and the financial text is likely to be published in early 2024.
This act will apply to all industries across the European Union and is aimed at continuing to foster innovation while ensuring the protection of individual’s rights, through stricter regulation of high-risk AI technologies and the promotion of transparency and trust across AI technologies.
It recognises that innovation is essential for competitiveness, so this Act also includes the creation of regulatory sandboxes to facilitate the development, testing, and validation of innovative AI systems under strict regulatory oversight.
The Act establishes rules and obligations for AI technology, based on the potential risk to the user and society. Five risk levels are defined, with stricter obligations for technologies deemed to be at higher risk.
Technologies with an unacceptable risk are banned, such as systems which aimed at exploiting vulnerabilities or behavioural manipulation. Technologies which are deemed as high risk, with the potential to impact on fundamental rights, democracy and health and safety, will be required to comply with extensive governance activities to ensure these technologies are compliant with the Act.
AI systems which are categorised as limited risk, will need to ensure that they are fully transparent, this means for example, that users should be aware if they are interacting with an AI chatbot or a human.
What does the EU AI Act mean for financial services?
Many of the AI technologies used across the financial services industry fall into the high-risk category, such as trading algorithms, risk analysis and credit scoring. The onus will be on financial institutions to demonstrate that their models can be understood and that their underlying data is unbiased and of good quality.
Matching the requirements of the EU AI Act has the advantage of winning consumer trust, as consumers are becoming very aware of the importance of ethical AI and the need to respect their rights and privacy.
While the EU AI ACT might take two years before coming into force, financial institutions should act now to analyse their AI technologies and make any necessary changes to comply with the required obligations.
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