How transparency, explainability and fairness are being connected under UK and EU approaches to AI regulation

Article written by Kushagra Jain, research associate for the Financial Regulation Innovation Lab and scholar at the Michael Smurfit Graduate Business School, University College Dublin, Dublin, Ireland.

Introduction and global perspective

Rapid and continuing advances in artificial intelligence (AI) have had profound implications. These have and will continue to reshape our world. Regulators have responsibly and proactively responded to these paradigm shifts. They have begun to put in place regimes to govern AI use.

Global collaboration is taking place in developing these frameworks and policies. For instance, an AI Safety Summit was held in the UK in November 2023. Participants included 28 nations representing the EU, US, Asia, Africa, and the Middle East. Its aim, with internationally coordinated action, was to mitigate AI development “frontier” risks. At the summit, the necessity to collaboratively test next generation AI models against critical national security, safety and societal concerns was identified. Alongside this, the need to develop a report to build international consensus on both risk and capabilities was acknowledged. Two further summits are planned in the next 6 and 12 months respectively. Subsequent summits are expected to continue these topical and crucial global dialogues. These could perhaps build on the first summit’s key insights and realisations.[1]

The UK’s pro-innovation regulation policy paper similarly emphasises continued work with international partners to deliver interoperablility. Further it hopes to incentivise responsible application design, and development of AI. The paper aims for the UK’s AI innovation to be seen as the most attractive in the world. To achieve this aim, it seeks to ensure international compatibility between approaches. Consequently, this would attract international investments and encourage exports (Secretary of State for Science, 2023).[2] Notably however, different regions have taken distinct approaches to regulation applicable within their jurisdiction.

Distinctions between the EU and UK approaches

Broadly, the draft EU Artificial Intelligence Act seeks to codify a risk-based approach within its legislative framework. The framework categorises unacceptable, high, and low risks which threaten users’ safety, human safety, and fundamental rights. It also institutes a new AI regulator (Yaros et al., 2023, Yaros et al., 2021). In contrast, the UK’s approach generally espouses being iterative, agile and context dependent. It is designed to make responsible innovation easier. Existing regulators are responsible for its implementation. All of this is outlined in their AI Regulatory Policy Paper and AI White Paper (Secretary of State for Science, 2023, Prinsley et al., 2023, Yaros et al., 2022).

Another key distinction demarcates the two. No all-encompassing definition of what “AI” or an “AI system” constitute exists in the UK’s case. AI is instead framed in the context of autonomy and adaptivity. The objective is ensuring continued relevance of the proposed legislation for new technologies. This means legal ambiguity is inherent in such an approach. However, individual regulator guidance is expected to resolve this within each regulator’s remit (Prinsley et al., 2023, Yaros et al., 2022).

The EU legislation would apply to all AI system providers in the EU. Further, it also applies to users and providers of AI systems, where the system produced output is utilised in the EU. This applicability is regardless of where they are domiciled. It is envisioned as a civil liability regime to redress AI-relevant problems and risks. At the same time, it seeks to do so without unduly constraining or hindering technological development. Maintaining excellence and trust in AI technology at the same time are the dual targets within it (Yaros et al., 2023, Yaros et al., 2021).

Conversely, the UK regulation applies to the whole of the UK. However, it is also territorially relevant beyond the UK in terms of enforcement and guidance applicability. Initially, it is on a non-statutory footing. The rationale is that it could create obstacles for innovativeness and businesses. Moreover, rapid and commensurate responses may also be impeded if statutory duty is imposed straightaway. During this transitory period, existing regulators’ domain expertise is relied upon for implementation. The eventual intention is assessing if a statutory duty needs to be imposed. Another aim is further strengthening regulator mandates for implementation. Finally, allowing regulators flexibility to exercise judgment in applying principles is a target. Over and above these, coordination through central support functions for regulators is envisaged. Innovation-friendly, yet effective and proportionate risk responses would be the desired outcome of such functions. These functions would be within government. However, they would leverage expertise and activities more broadly across the economy. Additionally, they will be complemented and aligned. This will be achieved through voluntary guidance, and technical standards. Assurance techniques will similarly be deployed, alongside trustworthy AI tools, whose use would be encouraged (Secretary of State for Science, 2023, Prinsley et al., 2023).

Shared focus on fairness, transparency and explainability

In spite of varied approaches, both the EU and UK share an emphasis on aspects such as fairness, transparency, and explainability. These in particular are of interest owing to their human, consumer, and fundamental rights implications. For the UK, this emphasis is apparent from two of their white paper’s five broad cross-sectoral principles (Secretary of State for Science, 2023, Prinsley et al., 2023, Yaros et al., 2022):

Appropriate transparency and explainability: These are traits sought to be present in AI systems. Their decision-making processes should be accessible to parties to ensure heightened public trust, which non-trivially drives AI adoption. It remains to be discovered how relevant parties may be encouraged to implement appropriate transparency measures. This is acknowledged within the white paper.
Fairness: Overall involves avoidance of discriminating unfairly, unfair outcomes, and undermining of individual and organisational rights by AI systems. It is understood that developing and publishing appropriate fairness definitions and illustrations for AI systems may become a necessity for regulators within their domains.

This was also encapsulated in the UK’s earlier AI Regulation Policy Paper as follows (Yaros et al., 2022):

Appropriately transparent and explainable AI. AI systems may not always be meaningfully explainable. While largely unlikely to pose substantial risk, in specific high-risk cases, such unexplainable decisions may be prohibited by relevant regulators (e.g., a tribunal may decide where a lack of explainability may deprive an individual’s right to challenge the tribunal’s decision).
Fairness considerations embedded into AI. Regulators should define “fairness” in their domain/sector. Further, they ought to outline the relevance of fairness considerations (e.g., for job applications).

In contrast, for the EU, this takes the following shape as encoded in the legislation (Yaros et al., 2023, Yaros et al., 2021):

Direct human interface systems (such as chat bots) are of limited risk and acceptable if in compliance with certain transparency obligations. Put differently, end-user awareness of machine interaction is needed. For foundation models[3], intelligible instructions and extensive technical documentation preparation may fall into the explainability and transparency bucket. This enables providers downstream to comply with their respective obligations.
Prohibition of a premise such as social scoring/ systems exploiting vulnerabilities of specific groups of persons. This is termed an unacceptable risk and can be considered linked to fairness. For foundation models, this may be framed as only incorporating datasets subject to appropriate data governance measures. Examples of these measures include data suitability and potential biases. Fairness may also take the form of context-specific fundamental rights impact assessments. These would bear in mind use context before deploying high-risk AI systems. More dystopian possibilities exist that may irreparably harm fairness. Such scenarios are avoided through outright bans on certain systems. These include those with indiscriminate scraping of databases, sensitive characteristic bio-metric categorisation, bio-metric real-time identity, emotion recognition, face recognition, and predictive policing.

Conclusions and future topics

In conclusion, merits and demerits come to mind when considering both the EU’s and UK’s paths to regulating AI innovation. The EU’s approach may be perceived as more bureaucratic. Owing to its stricter compliance approach, it would require anyone to whom it applies to expend significantly more time, cost, and effort. Only then will they ensure they do not fall foul of regulatory guidelines.

That being said, its stronger ethical grounding ensures the best interests of relevant stakeholders. In a similar vein to GDPR, it may serve as a blueprint for future AI regulations adopted by other countries around the world. Coupled with the EU’s new rules on machinery products ensuring new machinery generations guarantee user and consumer safety, it is a very comprehensive legal framework (Yaros et al., 2023, Yaros et al., 2021).

On the other hand, the UK’s approach has received acclaim from industry for its pragmatism and measured approach. The UK Science and Technology Framework singles out AI as one of 5 critical technologies as part of the government’s strategic vision. The need to establish such regulation was highlighted by Sir Patrick Vallance in his Regulation for Innovation review. In response to these factors, the AI Regulation Policy and White Papers were penned. The regulation’s ability to learn from experience while flexibly and continuously adopting best practices will catalyse industry innovation (Secretary of State for Science, 2023, Intellectual Property Office, 2023).

Nonetheless, a dark side of innovation may also manifest as a consequence. Bad players proliferating and exploiting the lack of statutory regulatory oversight may cause reputational damage to the UK, in so far as AI is concerned, if not handled rigorously. This is especially pertinent in insidious cases, such as those illustrated earlier by the banned AI systems under EU law.

Despite significant differences between the EU and UK’s approaches, commonalities exist in pivotal regulatory priorities such as transparency, explainability and fairness. Blended pro-innovation and risk-based regulatory approaches might achieve the best results for these priorities. Such a blend can be ascertained based on how efficacious each approach is in achieving its goals over time. and given the context of its application.

Given the systematic importance of the US in shaping the global economic landscape, it may be interesting to explore in a future blog its approach to AI regulation. In particular, investigating how transparency, explainability and fairness are dealt with in contrast with the EU, and juxtaposed against the UK, might shed new light on how AI regulation should evolve (Prinsley et al., 2023, Yaros et al., 2022, Yaros et al., 2021), with the dawn of what may one day be called the AI age in human history.

References

Intellectual Property Office (2023, 06 29). Guidance: The government’s code of practice on copyright and AI. Retrieved from: https://www.gov.uk/guidance/the-governments-code-of-practice-on-copyright-and-ai

Prinsley, Mark A. and Yaros, Oliver and Randall, Reece and Hadja, Ondrej and Hepworth, Ellen (2023, 07 07). Mayer Brown: UK’s Approach to Regulating the Use of Artificial Intelligence. Retrieved from: https://www.mayerbrown.com/en/perspectives-events/publications/2023/07/uks-approach-to-regulating-the-use-of-artificial-intelligence

Secretary of State for Science, Innovation & Technology (2023, 08 03). Policy paper: A pro-innovation approach to AI regulation. Retrieved from: https://www.gov.uk/government/publications/ai-regulation-a-pro-innovation-approach/white-paper

Yaros, Oliver and Bruder, Ana Hadnes and Leipzig, Dominique Shelton and Wolf, Livia Crepaldi and Hadja, Ondrej and Peters Salome (2023, 06 16). Mayer Brown: European Parliament Reaches Agreement on its Version of the Proposed EU Artificial Intelligence Act. Retrieved from Mayer Brown: https://www.mayerbrown.com/en/perspectives-events/publications/2023/06/european-parliament-reaches-agreement-on-its-version-of-the-proposed–eu-artificial-intelligence-act

Yaros, Oliver and Bruder, Ana Hadnes and Hadja, Ondrej (2021, 05 05). Mayer Brown: The European Union Proposes New Legal Framework for Artificial Intelligence. Retrieved from Mayer Brown: https://www.mayerbrown.com/en/perspectives-events/publications/2021/05/the-european-union-proposes-new-legal-framework-for-artificial-intelligence

Yaros, Oliver and Hadja, Ondrej and Prinsley, Mark A. and Randall, Reece and Hepworth, Ellen (2022, 08 17). Mayer Brown: UK Government proposes a new approach to regulating artificial intelligence (AI). Retrieved from Mayer Brown: https://www.mayerbrown.com/en/perspectives-events/publications/2022/08/uk-government-proposes-a-new-approach-to-regulating-artificial-intelligence-ai

About the author

Kushagra Jain is a Research Associate at the Financial Regulation Innovation Lab (FRIL), University of Strathclyde. His research interests include artificial intelligence, machine learning, financial/regulatory technology, textual analysis, international finance, and risk management, among others. He was awarded doctoral scholarships from the Financial Mathematics and Computation Cluster (FMCC), Science Foundation Ireland (SFI), Higher Education Authority (HEA) and Michael Smurfit Graduate Business School, University College Dublin (UCD). Previously, he worked within wealth management and as a statutory auditor. He completed his doctoral studies in Finance from UCD in 2023, and obtained his MSc in Finance from UCD, his Accounting Technician accreditation from the Institute of Chartered Accountants of India and his undergraduate degree from Bangalore University. He was formerly FMCC Database Management Group Data Manager, Research Assistant, PhD Representative and Teaching Assistant for undergraduate, graduate and MBA programmes.

[1] These details, and further information can be found here, here, and here.

[2] This information and further context can be found here.

[3] AI systems adaptable to a wide range of distinctive tasks, designed for output generality, and trained on broad data at scale.

Photo by Tara Winstead: https://www.pexels.com/photo/robot-pointing-on-a-wall-8386440/

17 fintechs selected for the Financial Regulation Innovation Lab’s first innovation call

The Financial Regulation Innovation Lab, in collaboration with the University of Strathclyde and The University of Glasgow, has selected the firms that will take part in its first innovation call centred around “Simplifying Compliance through AI and Emerging Technologies,”. This call aims to showcase how technology can meet UK and global regulatory requirements, potentially setting a new benchmark for future advancements in the industry.

The mission

This initiative will not only look at advancing innovation but also at highlighting the significant role of artificial intelligence and emerging technologies in simplifying and enhancing compliance processes within the financial sector. By bringing together academia and some of the UK’s leading financial institutions, such as Morgan Stanley, Tesco Bank, Virgin Money, abrdn, and Deloitte, the programme will offer unparalleled mentorship, insights, and real-world case studies to the participants.

The selected fintechs

17 companies have been meticulously selected to participate in this programme. These companies, established in the UK, Canada, and Singapore, represent the cutting edge of fintech innovation:

Aifluent

Amiqus

Argus Pro LLP

AsiaVerify

Auquan

Change Gap Ltd

Datawhisper

DX Compliance

Fairly AI

Financial Crime Intelligence

First Derivative

HAELO

International Data Flows

Legal-Pythia

Level E Research

Talan UK

Pytilia

Next steps

These selected fintech companies will gather in Glasgow on the 12th of March, where they will delve into use cases presented by the supporting financial institutions. This gathering will not only provide them with a unique opportunity to learn directly from leading experts in the field but also to hear about the latest developments in AI from university scholars. The discussion will span best practices for maximising the benefits of innovation calls and strategies for scaling businesses for success

The collaboration between these fintech innovators, academia, and some of the largest financial institutions in the UK will not only demonstrate the potential of AI and emerging technologies to revolutionise regulatory compliance but also help inform the future of financial innovation.

The FRIL project is funded by the Glasgow City Region Innovation Accelerator programme. Led by Innovate UK on behalf of UK Research and Innovation, the pilot Innovation Accelerator programme is investing £100m in 26 transformative R&D projects to accelerate the growth of three high-potential innovation clusters ”“ Glasgow City Region, Greater Manchester and West Midlands. Supporting the UK Government’s levelling-up agenda, this is a new model of R&D decision making that empowers local leaders to harness innovation in support of regional economic growth and help attract private R&D investment and develop future technologies.

The Art of Problem-Solving: Insights from a New Type of Innovation Call

“Fall in love with the problem you’re trying to solve”, that’s Kent Mackenzie’s mantra when it comes to innovation challenges. As leader of Deloitte’s Digital Compliance business, Kent has spent the past 12 years observing innovation calls of all different types, whether they are directly pointed towards a particular financial services organisation, regtech provider or academia. While many of these have come up with some quite good solutions, Kent observes that they can major quite heavily from one perspective.

What intrigues Kent at the moment, however, is an exciting new type of innovation call that is being issued from FinTech Scotland and leading financial services firms, in conjunction with Deloitte. Spearheaded by the newly established Financial Regulation Innovation Lab, the first in a series of industry-led innovation calls will focus on ‘Simplifying Compliance through the Application of AI and Emerging Technologies’.

With a passion for FinTech, data and advanced analytics, Kent has worked with local, national and international clients to develop tech and data solutions to manage financial crime, regulatory compliance, credit risk, and collections & recoveries. We thought he would be the ideal person to answer our questions and provide us with more detail about the inaugural innovation call”¦

Q: How can industry-wide innovation calls in general, such as the one led by the Financial Regulation Innovation Lab, contribute to accelerating positive change in financial services?

A: I think for me, the breadth and ambition of this series of innovation calls is what will stand out quite markedly. The wonder of these innovation challenges is the involvement of a very broad community of participants, from large financial institutions and fintech providers, to academia and regulators. What I’m looking forward to the most is having the richness that comes through from that breadth of community, because not only will we be able to understand the problem through a number of different lenses, but we can then go on to solve that problem with a number of different answers and potential solutions.

Q: How does the Lab’s unique environment for collaboration support financial services firms in innovating to meet their regulatory obligations. And what makes this initiative groundbreaking in that context?

A: I think there are a number of different components. Firstly, the Lab will provide us the opportunity to really focus on a particular use case. There have been some innovation calls in the past in which fintechs and regtechs have missed the point of the question and end up coming up with solutions that don’t solve the original problem. What is innovative about the Lab is that it allows us to bring in a range of perspectives from the people that are feeling the impact of this particular problem.

Secondly, this breadth of participants will be able to forensically examine every single element of a potential solution: from the established, to the groundbreaking, to the “way-out-there” considerations – these are all valid when you come to solve a complicated and gnarly problem like this. Lastly, once the Lab has gained an intimate understanding of how it is going to solve the problem, we can focus on the perspective from regulators, academics and end-users who will all try to ensure the solution will actually work in the context of the real world. I truly expect the Lab to be a real petri dish of experience, in the way that it will forensically deconstruct a problem, build up a solution, and then challenge from a number of different angles to ensure it is market-ready.

Q: The Lab’s inaugural innovation call is focusing on ‘Simplifying Compliance through the Application of AI and Emerging Technologies’. How will simplifying compliance processes accelerate positive change, and why is this particularly important now?

A: Ultimately, financial services companies are trying to do a number of things: to achieve better outcomes for consumers; to access people who might have previously been financially excluded with products and services; and to provide the best rates and offerings to clients. But in order to achieve all these things, a deep understanding of the underpinning regulations of these offerings is compulsory.

The current challenge for organisations is the time it takes between understanding the regulation, and then bringing products and services to market. The use of technology, however, can rapidly accelerate this understanding so that new products and services can be created with much more expedience. In addition, a beneficial byproduct of using technology is that it also promotes transparency on how a product has been shaped around a particular regulation decision, the communication of which is crucial to consumers, compliance departments and regulators.

Q: From Deloitte’s perspective, how does the innovation challenge contribute to building confidence in the adoption of AI and other technologies within the financial services sector, particularly in meeting global regulatory requirements?

A: When adopting AI, particularly in meeting global regulatory requirements, there can at times be a “black box” type feeling. Typically, the extraction and translation of regulatory obligations can be a highly nuanced affair due to the different risk appetites of organisations and the final definition of what constitutes an obligation. Because of this nuance, I don’t expect AI can solve the entirety of absolute extraction of appropriate obligations. But I do expect us to solve a lot of the problem in the right way, and in doing so then build confidence around how AI can play in this space. As we explore all the angles, facets, challenges and concerns, by unpacking and then restacking them, this will give us confidence that actually AI is capable of doing either all of this job, some of this job, or parts of this job.

Q: How do you see these Innovation Calls contributing to maintaining and growing Scotland and the UK’s position as a global leader in financial services regulatory innovation?

A: The net effect of these innovation calls across all of these groups is positive. For Deloitte itself, it will accelerate and advance our understanding of how our clients are thinking about this. For fintechs, it will also advance the intimate understanding and knowledge of the problem that their tech is trying to solve so they can better shape their offerings and propositions. Both large financial services organisations and consumers alike will have their eyes opened to the art of the possible, either in today’s world or the future. And for academia, it will ping their synapses on every level to further examine possible points of contention or unresolved issues. So for each of the stakeholders involved in these calls, it’s going to give them oxygen for their own individual pursuit.

I am also really intrigued about the role of the regulator during these innovation calls. I am quite looking forward to having the contribution from the regulator – in the room with a ringside seat – on where they stand on quite how far technology could and should take us.

Essentially, I think this new type of innovation call stands to help each of the stakeholders fall in love with the problem, construct solutions, and examine how they can be applied as live use cases.

Fintechs and other teams of innovators are invited to join the Financial Regulation Innovation Lab’s innovation call challenge, ‘Simplifying Compliance through the Application of AI and Emerging Technologies’. Applications are closing 3rd March. To find out more click here.

Regulating the Future: Building Trust and Managing Risks in AI for FinTech

Written by Dharini Mohan, MSc Financial Technology (FinTech) student at UWE Bristol. She is also a part-time Service Associate at Hargreaves Lansdown.

Artificial Intelligence (AI) has emerged as a transformative force in the FinTech sector, promising to revolutionise processes, enhance customer experiences, and drive innovation. However, as AI adoption accelerates, concerns surrounding regulation, trust, and risk management have become increasingly prominent.

Following the Rise & Shine event organised by Fintech Fringe, sponsored by Rise (created by Barclays) earlier this month in London, the critical importance of regulating AI in FinTech, building trust among stakeholders, and effectively managing risks were thoroughly discussed among the panellists to ensure sustainable growth and innovation in AI for FinTech. Here are some noteworthy insights and strategies that were shared.

Know Your AI (KYAI), Know Your Risk

While Know Your Customer (KYC) practices have long been a cornerstone of risk management for financial institutions, the emergence of AI introduces a new dimension to this imperative. Understanding the nuances of customer profiles is crucial for accurate risk assessment, but it’s equally essential to grasp the capabilities and limitations of AI systems to effectively manage associated risks. The challenge lies in the inherent complexity and unpredictability of AI algorithms, which can introduce unforeseen risks into operations across different sectors, whether financial or intangible. Without a comprehensive understanding of AI technologies and their potential implications, organisations risk being blindsided by vulnerabilities and shortcomings in their AI systems. Therefore, embracing the concept of KYAI is essential for navigating the complexities of AI-driven services and mitigating associated risks effectively.

Never Put Customer-Facing Operations to AI

Customers often seek personalised, empathetic interactions when addressing their queries or concerns ”“ qualities that are inherently human and difficult for AI systems to authentically replicate. The recent case involving Air Canada proves the potential repercussions of relying on AI for customer-facing operations. In this instance, Air Canada’s chatbot provided incorrect information to a traveller, leading to a dispute over liability for the misinformation provided. The airline argued that its chatbot was a “separate legal entity” responsible for its own actions, but the tribunal ruled in favour of the passenger, emphasising that Air Canada ultimately bears responsibility for the accuracy of information provided through its channels, whether human or AI-driven. This scenario demonstrates the significance of maintaining human oversight and accountability in customer interactions within AI technologies.

Plot Twist: Humans Can Make AI Better

It’s about finding the right balance ”“ a little bit of this, a little bit of that. Humans are the ones who input the data, so any decision that AI provides would align with the data it possesses and serve the data’s purpose. Human-based controls are crucial, and it’s up to the organisation to determine how they wish to establish regulations and understand their responsibilities based on their clients’ needs. The integration of Human-in-the-Loop (HITL) is brilliant as it allows humans to be involved in both the training and testing stages of building an algorithm, enabling real-time data control and contributing to the development of a dynamic risk profile. Having more controls on how the model handles data inputs, where the data is sourced, and how it’s divided for training and testing is essential to measure deviations effectively.

It is (Mathematically) Impossible to Eliminate All Discrimination and Bias

Given the impossibility of eliminating all discrimination and bias, organisations must carefully choose the biases inherent in their AI systems. Questions arise regarding the origins of Generative AI, particularly ChatGPT by OpenAI, with concerns raised over its development in a research lab in San Francisco. The training data, sourced from non-diversified datasets, presents a significant challenge, reflecting a limited cultural context and accentuating the necessity for a challenger model to address these gaps. For instance, you may not find sufficient information for certain countries, and that may potentially portray discrimination, but that is just the data the model was trained on. Despite undergoing rigorous training, AI is not infallible and is prone to errors. This highlights the prominence of continuous refinement and validation processes. Additionally, the intrinsic need for human oversight persists, as diversity never takes care of itself within AI systems. Synthetic datasets offer a solution to address the shortfall in training data, incorporating real-world data to provide comprehensive coverage and mitigate biases.

Key Strategies to Mitigate Risks: 1) Identifying 2) Classifying 3) Mapping Out

In navigating AI risks effectively, truly articulating an organisation’s specific risks serves as the foundational step in risk management, complemented by due diligence and a comprehensive understanding of AI deployment. It’s essential to consider whether to develop an in-house AI stack or outsource it, as well as implementation of post-deployment controls for ongoing training and maintenance of AI systems. Risk classification is key, alongside crucial actions such as fortifying cybersecurity measures, protecting data privacy, and monitoring third-party involvement, all while addressing opacity risks and setting risk-based priorities. FinTech ventures must carefully consider their product element alongside regulatory compliance. With the EU AI Act mandating the establishment of a risk management system for high-risk AI systems, it surely helps organisations stay up-to-date and compliant.

Conclusion

As AI continues to reshape the FinTech landscape, the importance of regulating AI, fostering trust, and managing risks cannot be emphasised enough. Regulatory frameworks must evolve to keep pace with technological advancements, ensuring responsible and ethical deployment of AI. It’s essential to acknowledge that AI literacy is just as vital as financial literacy, enabling the FinTech industry to fully leverage AI’s potential while navigating its inherent complexities and uncertainties.

Risk management is not merely a matter of ticking boxes; it requires continuous vigilance and adaptability.

FinTech Scotland Deepens Collaboration with Leading Global Financial Firms for Inaugural Innovation Challenge

Applications Open for AI Compliance Innovation to Discover Fintech Partners

Today, FinTech Scotland, working with professional services supporter Deloitte, and with Tesco Bank, Morgan Stanley and abrdn, launched a first-of-its-kind innovation challenge. The industry-led call to action will encourage financial institutions and innovators from across the Fintech community and beyond to learn collaboratively and facilitate industry forums to collectively share best practices for companies to develop new solutions to key financial regulatory challenges.

The inaugural innovation challenge, spearheaded by the newly established Financial Regulation Innovation Lab (FRIL), and funded through the UK Governments’ Innovation Accelerator programme, delivered by Innovate UK, focuses on ‘Simplifying Compliance through the Application of AI and Emerging Technologies’.

The first in a series of industry-led innovation calls, the initiative is dedicated to fostering confidence in the adoption of emerging technologies into financial services. Notably, this call aims to demonstrate the ability technology could have in meeting global regulatory requirements, setting a new standard for future advancements in the industry.

FinTech Scotland and the financial services firms, in conjunction with professional services leader Deloitte, are inviting entrepreneurs and innovators to identify and use technologies to address industry compliance challenges. Launched under the principle of responsible innovation, these calls set the stage for exploration and development of effective solutions that will yield positive outcomes for the pressing needs of consumers and businesses alike, resulting in an overall economic contribution.

Nicola Anderson, CEO of FinTech Scotland, said:

“We are extremely excited to kick off this inaugural industry innovation challenge. Demand-led innovation calls are an important part of the toolkit that the Financial Regulation Innovation Lab will employ to drive positive outcomes. It is also an opportunity to bring together financial institutions and innovators, enabling financial institutions to learn collaboratively about ways to improve compliance processes to drive efficiency for the sector and, ultimately, increase consumer protection.”

In partnership with the University of Strathclyde and the University of Glasgow, the Lab aims to leverage expertise in financial services risk and compliance and combine this with emerging technologies to build capabilities that maintain and grow both Scotland and the UK’s position as a global leader in financial services regulatory innovation.

Kent Mackenzie, Fintech Lead for Scotland at Deloitte said:

“Deloitte is excited to be one of the challenge supporters of the Financial Regulation Innovation Lab’s first innovation call. Simplifying compliance is critical to delivering change in financial services, and industry-wide solutions can help enable us to accelerate this positive change. The Lab provides a unique environment to support collaboration, and this groundbreaking initiative will further support how financial services firms are innovating to meet their regulatory obligations.”

Joanne Seagrave, Head of Regulatory Affairs at Tesco Bank:

“At Tesco Bank we embrace the opportunity that the Financial Regulation Innovation Lab’s innovation call series offers to collaborate with innovators. This will allow us to gain further insight on how utilising AI and emerging technologies could help support us in managing the evolving regulatory change landscape. It also presents a significant opportunity to advance industry understanding.”

Angela Benson, Head of Glasgow Finance at Morgan Stanley:

“Morgan Stanley recognises the opportunity in employing AI and emerging technologies to address the industry’s global regulatory obligations. We are delighted to partner with FinTech Scotland on this innovation challenge to foster ideation and support the next generation of innovators in this space. Having opened our office in Glasgow over 20 years ago, we have seen first-hand the depth of talent Scotland has to offer.”

Gareth Murphy, Chief Risk Officer at abrdn:

“At abrdn, we’re delighted to join the Financial Regulation Innovation Lab’s inaugural innovation call to action. It is essential that we continue to evolve the mix of people, process and technology in all of our activities. We draw on extensive experience in financial services, in Scotland and globally. This collaboration is a testament to our commitment to seizing the ongoing opportunities that financial services and innovation present.”

The programme includes three phases: challenge definition, solution design & testing, and final demonstrations. Applicants will receive invaluable insights about financial firms through close collaboration, a support network, academic expertise and service design support. Successful companies will receive grant awards up to £50,000 for further development and implementation.

Fintechs and other teams of innovators are invited to join the challenge. The application window is open from 1^stFebruary. To find out more click here

The Innovation Challenge Call finale event will take place in April 2024.

The FRIL project is funded by the Glasgow City Region Innovation Accelerator programme.

Led by Innovate UK on behalf of UK Research and Innovation, the pilot Innovation Accelerator programme is investing £100m in 26 transformative R&D projects to accelerate the growth of three high-potential innovation clusters ”“ Glasgow City Region, Greater Manchester and West Midlands. Supporting the UK Government’s levelling-up agenda, this is a new model of R&D decision making that empowers local leaders to harness innovation in support of regional economic growth and help attract private R&D investment and develop future technologies.

Glasgow has a remarkable history rooted in industry and innovation and is home to world-leading science and technology expertise. The Innovation Accelerator programme will support the Region’s key economic aims of increasing productivity, delivering inclusive growth and achieving net zero.

FCA TechSprint 2024 ”“ A Catalyst for Inclusive Financial Technology

Embracing Innovation for Financial Inclusion: FCA’s TechSprint Initiative

The Financial Conduct Authority (FCA) has launched a new TechSprint focussing on the topic of Financial Inclusion. The application period will run from the 19^th of January until the 13^th of February. The cohort- based sprint will then run from 7th March to 30th May 2024. This initiative is aimed at leveraging technological solutions to foster financial inclusion, a critical step towards a more equitable financial landscape.

A Virtual Journey Culminating in Glasgow

The three-month TechSprint will be conducted virtually, allowing widespread participation and collaboration. The event will culminate in an in-person showcase on 30 May 2024 in Glasgow, Scotland, offering a platform for participants to present their innovative solutions.

The FinTech Scotland Research & Innovation Roadmap identified that with advances in new data sources and emerging technology capabilities being developed by Academia and innovative SMEs within the sector Scotland has the history, the experience and the capabilities to take a leading role on the development and acceleration of solutions and widening access to inclusive products and services. Companies like Inicio, InBest, Amiqus and ClearScore are great examples of leading innovative fintechs spearheading the use of data and technology to support financial inclusion.

Glasgow is also home to the Financial Regulation Innovation Lab (FRIL) which launched in December 2023. The FRIL project is funded by the Glasgow City Region (GCR) Innovation Accelerator programme led by Innovate UK on behalf of UK Research and Innovation. The GCR accelerator supports the UK Government’s levelling-up agenda which at its foundation supports sustainable and inclusive economic growth across all the nations and regions. An inclusive banking and financial sector is integral to achieving this. This Techprint is designed to tackle challenges spanning not only access to financial services but also issues encountered throughout the consumer journey.

Tackling Key Problem Statements

The TechSprint is structured around three fundamental problem statements:

What technological solutions can help to increase the probability of consumers being accepted when they apply for everyday financial services, such as basic bank accounts, credit or insurance products?
What technological solutions can help to deliver positive outcomes for consumers when a firm declines their application for a product, or when at a subsequent point in the consumer journey they become excluded because the product is no longer suitable for their needs?”¯
How can technology, including AI, be deployed to ensure that firms deliver good outcomes across the board to groups of consumers who have been excluded or not well-served in the past, particularly in retail banking, payments, credit and insurance?

Leveraging the FCA Digital Sandbox

The FCA’s unique digital sandbox will be a central resource in the TechSprint, offering access to both real and synthetic data. Participants are encouraged to bring their data or explore other data sources to fuel their innovative solutions.

Building Diverse and Dynamic Teams

Participants in the TechSprint will form diverse teams including visionaries, challengers, and thinkers, ensuring a breadth of perspectives and ideas. These diverse teams are expected to bring their unique personalities and approaches to the table, fostering creativity and innovation.

The TechSprint will encourage collaboration among a diverse range of industry participants and stakeholders. Teams are encouraged to engage in collaborative discussions and sessions throughout the event. The focus is not just on competition but on collective innovation and knowledge sharing.

A period of heightened focus

The TechSprint will contribute to a wider programme across Scotland focused on financial inclusion. FinTech Scotland, Financial Inclusion Scotland, Scottish Financial Enterprise, and Smart Data Foundry are all working in collaboration with industry, regulators and government on a range of initiatives all focused on driving financial inclusion, for people, and businesses. There are a number of initiatives under way for 2024 that create the opportunities to collaborate and drive action on this important agenda.

Solutions will be multifaceted and will require a large degree of public and private sector collaboration. FinTech Scotland’s cluster management approach brings together consumer groups, academia, the financial services sector, technology innovators, data experts, regulators and government and fosters the right environment for collaborative problem solving.

Getting Involved in the Tech Sprint

Interested parties are invited to apply for participation or mentorship in the TechSprint. Applicants are asked to provide detailed information about their experience, data sets, additional resources, and expertise. The FCA stresses the importance of diversity in applications, reflecting its commitment to inclusivity.

Further information on how to get involved, deeper dives into the use case statements and frequently asked questions as well as a detailed participation pack can be found here

Please include a point that the sprint opens for applications on 19th of January – running until the 13th of February.

FinTech Scotland launches ground-breaking Innovation Lab, evolving the future of UK financial regulation

FinTech Scotland proudly announces the launch of the Financial Regulation Innovation Lab (FRIL) – a dynamic initiative set to revolutionise and shape the future regulatory landscapes in the UK and around the globe. Championing the frontier of financial regulation and harnessing cutting-edge technologies, FRIL is set to help ignite employment creation and business opportunities, while also unlocking the potential of future talent.

In partnership with the University of Strathclyde and University of Glasgow, FRIL will deliver a wide-ranging, ambitious research agenda, led by and actionable for the financial sector, to help advance understanding and adoption of new and emerging technologies. The Lab delivers one of the strategic recommendations laid out in the FinTech Research & Innovation Roadmap, launched in March 2022 and aligns with the recently announced UK innovation initiative, the CFIT, formed in response to the HM Treasury FinTech Sector Review.

The Lab will engage participants in industry-led innovation challenge calls, integrate academic research with an industry-relevant agenda, design and implement a skills and education programme, and facilitate knowledge exchange through workshops, roundtables, conferences and trade missions.

“FinTech Scotland is uniquely positioned within the Scottish fintech industry to lead such an initiative as it will work to inspire collaborators across Scotland, the UK and globally, enabling those around the world to see Glasgow’s financial services capabilities,” said Nicola Anderson, CEO of FinTech Scotland. “Bringing the fintech community of industry, academics and regulators together to explore, test and experiment with new technologies is an important part of our mission.”

Professor David Hillier, Associate Principal and Executive Dean of the University of Strathclyde Business School said “The University of Strathclyde is delighted to partner with Fintech Scotland and the University of Glasgow to deliver this critical initiative. We have significant capabilities across the university in emerging technologies including AI, space and quantum, which we look forward to leveraging through FRIL. We look forward to continuing our work with industry, policy makers, regulators and innovative SME’s to drive actionable solutions and deliver on FRILs ambitious agenda.”

Professor Eleanor Shaw, Head of the Adam Smith Business School, University of Glasgow said, “The Adam Smith Business School is very pleased to be a founding partner alongside our colleagues in Fintech Scotland and the University of Strathclyde to deliver FRIL. The opportunity to transform the regulatory landscape is remarkable and we are excited to work with partners across all sectors to deliver a collaborative centre of excellence for cutting edge developments in financial regulation.”

Stephen Ingledew OBE, Chair of FinTech Scotland, explained, “Once more, FinTech Scotland is taking proactive measures to showcase the effectiveness of how a cluster approach can accelerate the UK’s ability to seize competitive advantage in the future of financial regulation and fintech innovation. FRIL will allow us to continue to endorse the opportunity from the fintech sector to support growth across the UK economy.”

The research will cover various aspects of financial regulation, including the following areas:

Explainable AI Applications for ESG Risk Management:
Simplifying ESG Regulation Compliance through Explainable Intelligent Automation
Using Automation and AI to Combat Money Laundering
Synthetic Data for Financial Regulation Innovation
Generative AI for Improved ESG Reporting and Monitoring in Financial Services

FRIL, which is specifically funded by the Glasgow City Region Innovation Accelerator programme (led by Innovate UK on behalf of UK Research and Innovation), will work with industry participants, including large established financial institutions, the Fintech community, academics, voluntary organisations and regulators across the UK. The first four industry-led Innovation Calls to be issued in conjunction with Lab will cover four topical areas:

AI and compliance: Utilising emerging technologies to simplify compliance process and monitoring.
Consumer Duty: Supporting consumer duty obligations and enhancing financial inclusion outcomes.
Financial Crime: Addressing future challenges of financial crime.
ESG: Meeting new regulatory requirements, leveraging new data and new technologies.

Full details of these Innovation Calls will be published here.

Facilitating collaboration and knowledge exchange, FRIL’s output will include white papers, podcasts, newsletters, blogs and a series of events including roundtables, conferences and trade missions. The white papers in particular will cover academic and industry thinking, addressing key questions posed by the opportunity emerging technologies present for financial regulation. The topics of the white papers will be added to and revised on a regular basis ensuring it is Industry led and responsive to Industry needs.

In its pursuit of researching the adoption of emerging technologies into financial services to build confidence in solutions and ultimately demonstrate their ability to meet regulatory standards worldwide, FRIL is committed to focusing on innovations and solutions that can effectively address some of the industry’s most pressing issues.

Notes:

This project is funded (or part-funded) by the Glasgow City Region Innovation Accelerator programme.

Supporting the UKGovernment’s levelling-up agenda, this is a new model of R&D decision making that empowers local leaders to harness innovation in support of regional economic growth and help attract private R&D investment and develop future technologies.

Special Scotland Fintech Festival 2023 – Nicola Anderson, CEO at FinTech Scotland

Season 3, episode 10

Listen to the full episode here.

Scotland Fintech Festival took place between the 21st of September and the 12th of October. With over 50 events the festival was a real success this time again.

During the launch event, the Fintech Summit, we recorded special episodes in collaboration with collaboration platform Findr.

In this episode we speak with Nicola Anderson, CEO at Fintech Scotland about the festival itself as well as initiatives that are underway, delivering the recommendations of the ⁠UK Research & Innovation Roadmap⁠.

Navigating the Future: The UK’s Competitive Edge in Fintech Regulation and Innovation

“The UK has a strong competitive advantage in areas like cybersecurity, privacy and, increasingly, artificial intelligence. A lot of work, however, remains to be done. This is not an automatic process by any means,” outlines Dr Devraj Basu, Senior Lecturer in Finance in the Accounting and Finance department at the Strathclyde Business School. Basu helped set up the RegTech Forum which brings together industry, academia and government to help understand the fast moving RegTech landscape and how Scotland and the UK can position themselves to become leading global players.

“While the UK has well established strengths, it needs to pull together all these very different areas by creating an ecosystem solution,” he continues. Basu feels that if the UK provides a proper regulatory framework in the context of technology it will provide a greater impetus in unlocking innovation. A stable regulatory framework is also needed to adapt to technological change to ensure it’s fit for consumers – AI being a prime example. But the UK needs to simultaneously join up with international best practice as well. “These elements require a deep understanding of all the issues, as well as an aspect of agility to bring together all the different stakeholders,” he says.

Regarding the appetite of UK regulators towards the development of overarching digital public infrastructures (such as the so-called India Stack’ built on Aadhaar, India’s digital ID system), Basu believes that the UK can learn from establishing digital identities, preferably through the creation of an overarching framework for privacy regulations. However, the parallels stop there. This is because the UK would, unlike India, have to tackle its legacy technology issues. Further, the UK’s Financial Conduct Authority (FCA) can only play a limited role in transforming legacy infrastructure because rather than dishing out prescriptive directions to industry, the FCA is a principles-based regulator which can only outline overarching maxims.

In terms of innovating financial regulation itself, Basu feels that the UK has done the right thing by introducing regulatory sandboxes. Moreover, he feels strongly that the FCA should start looking at the costs that regulations impose on businesses and how they can be minimised. This could be achieved by implementing a by design’ philosophy by providing either high-level roadmaps that minimise cost or interactive processes that lead to better regulation. “One way of being innovative is if the regulator could convince organisations that the adoption of new regulations would actually improve products or sales. One thing that’s come out of our RegTech Forum is this notion of the by design’ philosophy, which takes a proactive view on regulation, which in turn encourages innovation,” Basu explains. “Ideally a regulator should be a body that guides businesses through a process and helps them get better.”

New partnership to tackle financial fraud using synthetic data

In the ever-evolving landscape of financial fraud, Authorised Push Payment (APP) Fraud has become a prominent concern for both regulators and financial institutions. In 2022 alone, a staggering £485.2 million was lost to APP Fraud scams, accounting for a significant 40% of all financial fraud losses during that period. To combat this growing problem, the Financial Conduct Authority (FCA) and the City of London Corporation have teamed up with Smart Data Foundry to provide innovative solutions and support their mission to eradicate APP Fraud.

Smart Data Foundry’s aizle Synthetic Data Engine

At the heart of this collaboration lies Smart Data Foundry’s cutting-edge aizle® synthetic data engine. This powerful tool is being harnessed to create a synthetic dataset tailored specifically for APP Fraud. This dataset will be accessible through the FCA’s Permanent Digital Sandbox, providing a resource for innovators and stakeholders in the fight against APP Fraud.

Understanding APP Fraud

APP Fraud occurs when individuals are deceived into transferring money to fraudsters posing as legitimate entities or individuals. The consequences of falling victim to these scams are devastating, particularly for those who are financially vulnerable. It is a pervasive issue that requires comprehensive and innovative solutions to address effectively.

TechSprint Initiative and Continued Development

Recognising the urgency of the problem, the FCA and the Payment Systems Regulator (PSR) organised a TechSprint event in September 2022, focusing on combating APP Fraud. Smart Data Foundry played a pivotal role during this event by providing their APP Fraud synthetic dataset. Building on this momentum, Smart Data Foundry has continued to refine and expand their dataset to meet the evolving needs of the industry.

The Importance of Quality Data

Access to high-quality data is essential in the fight against financial fraud. It enables innovators to test ideas, develop proofs of concept, and refine models effectively. The APP Fraud synthetic dataset, provided by Smart Data Foundry, covers the entire lifecycle of APP Fraud, offering a representative and relevant resource for researchers and organisations striving to combat this growing threat.

Bryn Coulthard, Chief Product and Technology Officer at Smart Data Foundry, stated,

“We focus on creating high-utility synthetic data to enable innovation within the financial services industry. We are delighted to continue partnering with the FCA with our APP Fraud datasets to help play a part in tackling this growing problem and to help ignite and accelerate innovation in this space.”