Skip to main content

AI and RegTech: Industry Insights on AI in Financial Regulation

Article written by Alessio Azzutti (University of Glasgow), Mark Cummins (University of Strathclyde),
Iain McNeil (University of Glasgow).
Note: Segments of this blog were generated by ChatGPT using notes taken on the day capturing the
presentations and discussions. The authors edited this generated content accordingly.

The integration of Artificial Intelligence (AI) into financial practice and regulatory processes represents a pivotal shift, promising enhanced efficiency, accuracy, and innovation across regulatory compliance and supervision. Our recent discussions explored various facets of AI’s role in financial regulation, revealing a landscape rich with opportunities and challenges. This synthesis (generated by ChatGPT from our discussions with industry partners in our AI & RegTech Workshop on 10 May 2024 and revised by the authors) aims to distill key insights from the discussion across themes, providing an overview of the promises that AI bears on regulatory practices. It will be followed soon by a white paper as part of the White Paper Series published by the Financial Regulation Innovation Lab. This white paper will set out the issues in more detail, linking them to prior research and evolving practice.

Transformation of Regulatory Compliance through AI

AI’s integration into regulatory compliance processes marks a significant evolution in how financial institutions deal with complex regulatory environments. Discussions highlighted AI’s potential to revolutionise compliance by automating and augmenting tasks such as data collection, management and analysis, especially in relation to vast datasets in order to generate actionable insights with unprecedented speed and accuracy. At the same time, the efficacy of AI in compliance hinges on several critical factors. Financial regulations encompass a spectrum of rules ranging from overarching principles to specific quantitative benchmarks and qualitative guidelines.

AI applications must move among these diverse regulatory requirements, which vary in complexity and scope across jurisdictions. Participants underscored the importance of regulatory clarity in fostering AI adoption in compliance (RegTech). Uncertainties about regulatory expectations can stifle innovation in RegTech solutions. Standardisation of data formats, communication protocols, and other AI-related requirements emerged as essential prerequisites to streamline AI integration and enhance compliance efficiency. AI can be integrated into compliance through comprehensive system-wide approaches or targeted solutions for specific regulatory challenges. In addressing the relationship between AI and the various layers of regulation, the roundtable emphasised the need to view compliance as a dynamic process and activity rather than a static framework.

Participants agreed on some crucial aspects related to AI governance. Despite AI’s capabilities, human oversight remains indispensable, for instance, to validate AI outputs, ensure ethical decision-making, and interpret regulatory requirements accurately. Indeed, the discussion highlighted the ongoing need for human experts to manage AI-augmented compliance effectively. Greater standardisation in AI-related technologies and regulatory frameworks are also seen as future catalysts for innovation in the RegTech sector. Standardised practices can enable financial institutions and technology providers to focus on enhancing their AI solutions rather than coping with disparate regulatory landscapes.

Design and Governance of AI-Enabled Compliance Systems

The application of AI, particularly its subfield of Machine Learning (ML) methods, in compliance systems was explored as a transformative force reshaping business strategies and operations within financial institutions. AI systems empower organisations to analyse complex datasets rapidly and derive insights that inform decision-making. Among other things, participants highlighted AI’s role in improving risk management, fraud detection, and overall operational efficiency. However, the design of AI systems in compliance is seen as extending beyond automation to facilitate strategic alignment with business goals and regulatory objectives.

In this context, ensuring effective model governance emerged as a critical priority for organisations deploying AI in regulatory compliance. Robust governance frameworks can help ensure transparency, accountability, and compliance with regulatory standards. The emerging field of Explainable AI (XAI) is deemed critical in financial services to ensure transparency and build trust among stakeholders. Clear explanations of AI processes and decisions enhance user confidence and facilitate regulatory compliance.

Addressing biases—whether in data, models, and their inherent human assumptions—was highlighted as essential to ensure fair outcomes and mitigate risks. Robust governance frameworks include mechanisms for bias detection, mitigation, and continuous monitoring to uphold ethical and legal standards. Discussions emphasised the need for clear policies and procedures to monitor AI models in and along the entire AI lifecycle.

Moreover, the debate between in-house AI development versus third-party vendor solutions highlighted some organisational preferences and challenges. Large financial institutions often opt for in-house development to tailor AI solutions to their specific needs and maintain control over data integrity and security.

Broadly speaking, legal and ethical considerations in AI deployment include data privacy, intellectual property rights, and liability for AI-based decisions. The roundtable discussions emphasised the need for clear regulatory frameworks to address all the complexities embedded in AI governance, which necessitates shared responsibility across stakeholders—developers, users, regulators, and consumers. Clear delineation of roles and responsibilities was deemed crucial by participants to mitigate risks and ensure responsible AI deployment.

The specific exploration of Generative AI in compliance identified its potential in automating routine tasks and enhancing productivity. Despite its benefits, concerns about data privacy, security, and the ethical implications of AI-generated content remain paramount. We heard further calls for human-in-the-loop solutions. Human oversight ensures the credibility and accuracy of Generative AI outputs.

Mutual Reinforcement of RegTech and SupTech

RegTech (regulatory technology) and SupTech (supervisory technology) represent two sides of the same coin, namely the adoption of innovative technology to bring greater effectiveness and efficiency to financial regulation and its enforcement. RegTech tools powered by AI enhance regulatory compliance by improving understanding of regulations, managing business activities, and achieving higher-quality compliance outcomes. However, regulatory fragmentation and differing compliance requirements pose challenges to widespread and trustworthy adoption. In parallel, financial supervisors are researching and gradually adopting AI-based SupTech solutions to enhance their ability to achieve supervisory objectives in an efficient and effective manner. Interoperability between RegTech and SupTech systems is essential for frictionless and secure data exchange between regulators/supervisors and regulated entities in order to improve regulatory oversight. Standardised data formats, communication protocols, and AI-related requirements promote collaboration between financial institutions and regulatory authorities. Greater regulatory clarity and standardisation are seen as catalysts for innovation in the RegTech space. Clear guidelines on regulatory requirements targeting AI applications facilitate technological advancements while ensuring compliance with regulatory standards. Collaboration between public authorities, financial institutions, and technology providers is expected to foster a conducive ecosystem for AI innovation in financial regulation. The roundtable discussions emphasised the importance of collaborative efforts to overcome regulatory challenges and promote technological convergence.

Conclusion

The synthesis of the roundtable discussions provides a comprehensive overview of AI’s transformative impact on financial practice and regulatory processes, underscoring opportunities for innovation, efficiency gains, and enhanced compliance. Key themes include (i) AI’s role in dealing with complex regulatory frameworks and (ii) advancing analytical capabilities in compliance systems, but also (iii) requirements for the design of ethical and law-compliant AI solutions, as well as (iv) the mutual reinforcement of RegTech and SupTech. While AI presents unprecedented opportunities, challenges such as regulatory fragmentation, technical robustness and reliability, and ethical considerations require careful consideration. Moving forward, collaboration between stakeholders, regulatory clarity, and robust governance frameworks will be critical in harnessing AI’s full potential while safeguarding against the associated risks. The insights from the roundtable discussions offer a starting point for various stakeholders, including financial institutions, technology providers, and financial regulators, to delve into issues related to AI and the resulting evolving landscape of financial regulation in a responsible and effective manner. With continued advances in AI, its integration into regulatory practices, if supported by adequate governance, holds promise for shaping a more resilient, efficient, and tech-savvy financial ecosystem.

Image by, https://www.freepik.com/free-photo/standard-quality-control-collage-concept_30589261.htm#fromView=search&page=1&position=0&uuid=5ac75fc0-aba0-4b75-96b8-13559c1795a8

FinTech Scotland announces the companies selected for its Second Innovation Call: Shaping the Future of ESG in Financial Services

The FinTech Scotland”™s Financial Regulation Innovation Lab has published the name of the companies selected for its second innovation call focused on shaping the future of ESG (Environmental, Social, and Governance) in financial services. This initiative has attracted innovative solutions from around the world dedicated to addressing the crucial ESG challenges faced by the financial sector.

The Financial Regulation Innovation Lab, a pioneering initiative by FinTech Scotland, in partnership with the University of Strathclyde and the University of Glasgow, aims to drive forward innovation in financial regulation in financial services.

For this innovation call, FinTech Scotland will be encouraging collaboration between fintech innovators and established financial institutions as well as leveraging research from universities to enhance the integration of ESG principles into financial practices, ensuring that the industry not only meets regulatory requirements but also contributes positively to society and the environment.

The call specifically targeted solutions that can help financial firms better manage their ESG responsibilities. The Lab”™s focus areas include ESG reporting, risk management, data transparency, and sustainable investment strategies.

Meet the participants

24 companies have been selected to be taken to the next stage of this initiative:

  • ESG Disclose
  • RegArt
  • Snugg
  • Data Catalyst
  • ESG Stream
  • Pulse Market
  • Trade in Space
  • Siccar
  • Ciendos
  • Exponential Climate
  • Cogo
  • Frontierra
  • GoCodeGreen
  • Gaialens
  • MnAI
  • Verifoxx
  • Scott Logic
  • Portf.io
  • Agentic Workflow
  • Texpert
  • ESG360
  • Propeco
  • Zumo
  • Two Hands

 

A Three-Month Escalation Process

These innovative companies will now participate in a three-month escalation process. This phase is designed to help them refine their pitches and deepen their understanding of the ESG challenges experienced by the financial sector. The process will involve intensive mentorship, targeted workshops, and engagement with industry experts from EY, Morgan Stanley, Lloyds Banking Group, HSBC, Barclays, Phoenix Group, Sopra Steria, Equifax, Virgin Money and abrdn.

 

Demo Day in September 2024

The program will culminate in a demo day scheduled for September 2024. During this event, the participating companies will present their refined propositions to a panel of judges and industry leaders. A select subset of these companies will be chosen to further develop their solutions in collaboration with established financial firms. This collaboration aims to bring cutting-edge ESG solutions to market, driving sustainability and innovation in financial services.

The Importance of ESG Innovation

ESG considerations are increasingly becoming a critical aspect of the financial services industry. The innovative solutions developed by the participants are looking to enhance transparency, accountability, and sustainability within the sector. By addressing key ESG challenges, these companies are helping to build a more responsible and future-proof financial ecosystem.

As noted by FinTech Scotland, the integration of ESG principles is crucial for ensuring that financial practices not only comply with regulatory standards but also positively impact society and the environment.

Discussion with ESG Leaders on regulation

Season 4, episode 7

Listen to the full episode here.

In this episode we speak with Mark Hadfield from “Meet the 85%”, Manuel Maqueda from Harvard University, strategic adviser Max Nokhrin and Victor Milligan from Cairnbridge Advisors about the current state of ESG and associated regulations. What are their insights and recommendations? What the FinTech Scotland’s Financial Regulation Innovation Lab can deliver and their hopes for the programme.


Regulatory Risk Trends in June 2024: A Comprehensive Overview

As we move through 2024, the landscape of regulatory risk continues to evolve, presenting both challenges and opportunities for businesses worldwide. The latest report from Pinsent Masons, “Regulatory Risk Trends – June 2024,” provides an in-depth analysis of current and emerging risks. This blog post summarises key insights from the report, highlighting the major trends and their implications for businesses.

Key Regulatory Risk Trends

Operational Resilience

The Bank of England’s focus on operational resilience remains a cornerstone of regulatory scrutiny. Firms are required to demonstrate their ability to withstand and recover from significant operational disruptions. The Financial Policy Committee’s macroprudential approach underscores the need for robust operational risk management frameworks.

Consumer Duty

The Financial Conduct Authority (FCA) has intensified its efforts to enforce the Consumer Duty, which mandates that firms must act to deliver good outcomes for retail customers. This involves ensuring fair treatment of customers, providing clear and transparent information, and fostering an environment where customers can pursue their financial objectives effectively.

Financial Promotions and Influencers

The FCA has been particularly vigilant regarding financial promotions, with a crackdown on misleading advertisements and unauthorised financial advice from social media influencers. Recent enforcement actions highlight the need for firms to ensure their promotional materials comply with regulatory standards and do not mislead consumers.

Money Laundering Regulations

HM Treasury’s consultation on improving the effectiveness of money laundering regulations signals ongoing governmental focus on combating financial crime. The consultation aims to enhance regulatory frameworks to prevent money laundering and terrorist financing, ensuring that the UK’s financial system remains robust and secure.

Vulnerable Customers

The FCA has issued finalised guidance on the fair treatment of vulnerable customers, emphasising the need for firms to take into account the diverse needs of their customer base. This guidance outlines practical steps for firms to ensure that vulnerable customers are not disadvantaged and can access the financial services they need.

Politically Exposed Persons (PEPs)

The FCA’s review of the treatment of PEPs aims to strike a balance between preventing financial crime and ensuring that PEPs are not unfairly discriminated against. This ongoing review seeks to refine the regulatory approach to PEPs, ensuring compliance while mitigating undue burdens on these individuals.

Cybersecurity and Data Protection

With the increasing reliance on digital technologies, cybersecurity and data protection have become paramount. Regulatory bodies are pushing for enhanced measures to protect sensitive data and prevent cyberattacks, requiring firms to implement rigorous cybersecurity protocols and regular assessments.

Implications for Businesses

Businesses must stay ahead of these regulatory changes to mitigate risks and ensure compliance. Here are some practical steps firms can take:

ӢEnhance Operational Resilience: Develop and regularly test robust business continuity plans to handle potential disruptions.

ӢPrioritise Consumer Duty: Foster a customer-centric culture and ensure that all customer interactions are fair, transparent, and beneficial.

ӢMonitor Financial Promotions: Implement stringent compliance checks for all promotional materials and be cautious when using social media influencers.

ӢStrengthen Anti-Money Laundering Measures: Stay updated on regulatory changes and enhance internal controls to prevent financial crimes.

ӢSupport Vulnerable Customers: Train staff to identify and support vulnerable customers, ensuring they receive appropriate services and advice.

ӢReview PEP Policies: Balance compliance requirements with fair treatment of PEPs, avoiding unnecessary restrictions while maintaining security.

ӢInvest in Cybersecurity: Regularly update cybersecurity measures and conduct vulnerability assessments to protect against data breaches.

 

The regulatory landscape is becoming increasingly complex, and businesses must remain vigilant to navigate these changes successfully. By understanding and addressing these regulatory risk trends, firms can build trust and resilience in their operations. The insights from Pinsent Masons’ June 2024 report provide a valuable roadmap for navigating this dynamic environment.

For more detailed information, you can access the full report here.

The Financial Regulation Innovation Lab: Lessons and advice from the first Innovation Call

Season 4, episode 5

Listen to the full episode here.

In this podcast, our partners at Label Sessions interviewed Antony Brookes and Ruairidh Patfield from abrdn to hear about their experience of getting involved in the Financial Regulation Innovation Lab’s first innovation call. 

Alongside Tesco Bank, Virgin Money, Morgan Stanley and Deloitte they worked with the University of Glasgow and the University of Strathclyde to reshape financial compliance through AI and emerging technologies.

Calling fintechs from around the world to get involved they selected 5 of them to partner with. In this podcast we also hear from those 5 organisations with:

Callum Murray (Amiqus)

Mick O’Connor (Haelo)

Daniel munro (Level-E)

Neil Sinclair (Pytilia)

Simon Dix (DX Compliance)

To apply for our new Innovation Challenge on reshaping ESG in Financial Services visit https://www.fintechscotland.com/what-we-do/financial-regulation-innovation-lab/shaping-the-future-of-esg-in-financial-services/

New ground breaking innovation challenge deepens collaboration with global financial firms to deliver positive environmental impact

FinTech Scotland, working with ten industry partners, announces a new innovation challenge, focused on delivering positive environmental and societal outcomes. 

Working in collaboration with EY, Morgan Stanley, Lloyds Banking Group, HSBC, Barclays, Phoenix Group, Sopra Steria, Equifax, Virgin Money and abrdn, this innovation challenge invites innovative companies from across the world to apply, with successful firms potentially eligible for funding of up to £50,000. 

The challenge focusses on the best use of data and identifying new data sources that can help address critical Environmental, Social, and Governance (ESG) questions. It invites innovative enterprises to develop data led solutions and technology enabled approaches to new ESG regulatory requirements, helping drive responsible outcomes for people and the environment.

The challenge will run for 3 months, and successful applications will work alongside some of the leading global financial services firms, learning about challenges, their ways of working and how to best integrate solutions within their businesses. Successful applicants will also be able to access support and inputs from industry partners to help develop their solution further.

The programme is enabled by FinTech Scotland’s Financial Regulation Innovation Lab, which works to support innovation and ground-breaking solutions to the increasing demand of new financial regulations, using a collaborative approach working across industry, academia, regulators, experts and innovators. 

The Financial Regulation Innovation Lab will utilise the expertise from leading academic experts in climate, data and technology from across the University of Strathclyde and the University of Glasgow to support the development of this programme. 

Companies interested in applying can do so here until the 7th of July at midnight. 

 

Nicola Anderson, CEO at FinTech Scotland said:

“I’m excited to see this work develop to drive innovation on this important agenda. This programme highlights two key attributes that when combined can accelerate responsible innovation. Using collaborative action that is focused on priority industry needs will accelerate positive innovation. I’m looking forward to seeing the progress and outcomes from this work have a positive impact for the environment and for society”. 

 

Tom McFarlane, Partner at EY said: 

“Embedding environmental, social, and governance (ESG) criteria across the financial sector is not just a regulatory requirement, but a fundamental driver of long-term value. The FRIL’s ESG Innovation Call will bring firms of all sizes together to create innovative solutions that raise the standards of ethical and sustainable governance, and EY is proud to play a part in supporting this”.

  

Angela Benson, Head of Glasgow Finance at Morgan Stanley said: 

“Morgan Stanley is delighted to join this ESG Innovation Call, reflecting our steadfast commitment to integrating environmental, social, and governance principles into our core business strategies. This initiative is an excellent platform for fostering collaboration and driving forward the innovative solutions needed to address the pressing sustainability challenges we face today”.

 

Jennifer Simpson, Head of Climate & ESG Risk at Lloyds Banking Group said:

“LBG is excited to join the Financial Regulation Innovation Lab’s ESG Innovations Call as we recognise the critical importance of addressing climate and ESG risks ensuring a sustainable future for our customers. This initiative also aligns with our purpose of helping Britain prosper and provides an excellent opportunity for us to work with industry partners, Fintech’s and researchers to develop innovative solutions that enhances ESG integration and supports regulatory delivery”.

 

Kal Bukovski, Director of Academia and Research at Sopra Steria said: 

“Our involvement underscores our dedication to advancing ESG principles through cutting-edge research and collaboration. This effort reflects Sopra Steria’s broader mission to leverage technology and expertise for positive environmental and social impact”.

 

Richard Nicol, Senior Product Owner at Phoenix Group said: 

“This call aligns seamlessly with our commitment to integrating sustainable governance into our investment strategies. We recognise the critical role that fintech innovations can play in addressing global environmental and social challenges that not only generate strong financial returns but also contribute positively to our broader community and planet”.

 

Brendan Mohr, Head of Sustainability Compliance at Barclays said: 

“We are delighted to participate in this initiative as it is a unique opportunity to collaborate across the industry. Financial institutions need to evolve at pace to meet both our customer’s expectations and our own strategic goals, so it is essential that we find new ways to achieve this. This is a great opportunity to find innovative solutions to accelerate change while maintaining the controls that keep our customers safe”.

Special Money2020 – Interview with Appointedd

Season 4, episode 3

Listen to the full episode here.

In this episode we spoke with Megan Grant from Edinburgh-based fintech Appointedd about Consumer Duty and the role that new innovative technologies can play in supporting established financial firms meet those new requirements.

At the end we also mentioned Megan’s next challenge, swimming the channel to raise money for charity. To support her follow this link. https://www.justgiving.com/page/megan-grant-channel-swim

FinTech Scotland announces grant winners in first of its kind AI compliance cluster-wide challenge.

FinTech Scotland’s Financial Regulation Innovation Lab (FRIL), a collaborative effort between FinTech Scotland, the University of Strathclyde and the University of Glasgow, is announcing the successful conclusion of its first innovation call focussed on “Simplifying Compliance through the Application of AI and Emerging Technologies,”

The programme concluded with a Demo Day in Glasgow on the 30th of April, when the 15 fintech finalists showcased their innovative solutions in front of professional services firm Deloitte, and leading financial institutions including Tesco Bank, Morgan Stanley, Virgin Money and abrdn who had all contributed by providing use cases for this call.

Five winners were selected as grant recipients, each awarded up to £50,000 to further develop and implement their innovative solutions.

The winners are:

  • Amiqus ”“ One of the UK fastest growing fintechs, revolutionising identity checks
  • HAELO ”“ Helping senior risk managers demonstrate individual accountability.
  • Level E Research ”“ Using AI to improve buy side Compliance surveillance and potential investment decisions.
  • DX Compliance ”“ Using AI to improve Buy Side Compliance surveillance processes.
  • Pytilia ”“ Building AI applications for buy side Compliance surveillance requirements.

This funding will enable these companies to refine their technologies following insights from industry. These innovations will support the sector in increasing the efficiency and effectiveness of compliance processes to drive better customer outcomes.

The challenge attracted participation from fintech companies located in Scotland, the UK, and around the world with applications from countries such as Singapore and Canada.

The focus of the initiative has been on streamlining regulatory processes within the financial sector through advanced technological solutions. Participants underwent a three-phase programme that included challenge definition, solution design and testing, and final demonstrations. This structure provided participants with critical insights into the operational needs of financial firms, facilitated by direct collaboration, academic expertise, and service design support.

The FRIL initiative is part of the larger Glasgow City Region Innovation Accelerator programme with Glasgow, one of three pilot regions’ sharing a £100m investment aimed at transforming R&D within the UK. Led by Innovate UK, this programme supports the UK Government’s levelling-up agenda by empowering local regions to drive economic growth through innovation. This approach not only supports regional development but also positions the UK as a leader in the global innovation landscape.

Glasgow is a hub for science and technology which makes it an ideal setting for this new initiative. The Innovation Accelerator programme aligns with the region’s key economic goals of enhancing productivity, fostering inclusive growth, and achieving net-zero emissions.

FinTech Scotland remains committed to advancing the UK’s financial regulatory framework through cutting-edge research and development, ensuring that the UK continues to set global standards in financial innovation.

 

Nicola Anderson, CEO of FinTech Scotland, said:

“I am proud to see the extraordinary level of collaboration demonstrated across our fintech cluster through this first innovation call. The engagement among industry leaders, academic scholars, and public sector representatives at the Demo Day gives me confidence that our cluster delivery approach can drive real impact and continue to help us deliver our ambition set-out in our Fintech Research and Innovation Roadmap. the impact of our cluster delivery approach. I’d like to thank and congratulate all those involved”

Mark Cummins, at University of Strathclyde commented:

At the University of Strathclyde we are proud to be part of the Financial Regulation Innovation Lab, responsible for grant award funding to successful fintech applicants in our Innovation Call series. The innovative thinking and insight our grant award winners from Amiqus, DX Compliance, HAELO, Level E Research and Pytilia have shown makes them deserving winners of FRIL’s first innovation call on Simplifying Compliance through AI and Emerging Technologies. Our team look forward to supporting each proposition develop throughout its technology roadmap and we are excited about the potential for real industry led innovation that may help reduce the amount of current manual interventions required when addressing regulatory obligations’.

Joanne Seagrave, Head of Regulatory Affairs at Tesco Bank said:

Tesco Bank have been thoroughly impressed by the enthusiasm, innovative thinking and support we’ve received during the Financial Regulation Innovation Lab’s innovation call on Simplifying Compliance through AI and other Emerging Technologies. We’ve seen a high quality and diversity of fintechs involved and many of the solutions presented closely match the objective we set of streamlining compliance with regulatory developments. This has advanced our understanding of AI as well as offering practical new solutions. We’re thrilled that HAELO have been successful in this innovation call and see huge potential for our sector in their proposition.’

 

Antony Brookes, Head of UK Investment Compliance at abrdn said: Our team at abrdn have been invested in the Financial Regulation Innovation Lab’s innovation call. We have relished the opportunity to engage with a number of innovative fintech companies we would not normally get access to. Their thinking and propositions on Demo Day itself were hugely insightful and have proven that AI does have a place in addressing some of the challenges we face across our industry when it comes to reporting. We are delighted that Pytilia Ltd, DX Compliance Solutions and Level E Research who worked on our abrdn use case have been successful in obtaining grant award funding and look forward to collaborating and supporting their innovation to help enhance surveillance capabilities and ensure a more accurate and tailored approach to regulatory compliance within the asset management sector’.

Rob Sharp, Digital Sales Manager at Virgin Money commented:

Being a leading use case strategic partner with FRIL has been a fantastic opportunity to see the passion and expertise shown by the cohort of fintechs the programme has brought together. The event showcased a range of potential AI solutions and emerging technologies, which are key areas of focus within Virgin Money’s digital strategy. Amiqus’ proposition really resonated with the challenge we set, and we are excited to be collaborating with them on the opportunities their innovative idea creates to help further improve our customer experience.’

Angela Benson, Head of Glasgow Finance at Morgan Stanley said:

“The team at Morgan Stanley have enjoyed the opportunity to participate in the Financial Regulation Innovation Lab’s first innovation call on Simplifying Compliance through AI and other Emerging Technologies. It’s these types of collaborations that will drive our fintech industry forward ”“ from interacting with the participating fintechs to hearing different industry perspectives throughout the calls on the set days we gathered together, including the breadth of innovative thinking we heard on Demo Day.’

Critique of the UK’s pro-innovation approach to AI regulation and implications for financial regulation innovation

Article written by Daniel Dao ”“ Research Associate at the Financial Regulation Innovation Lab (FRIL), University of Strathclyde.

Recently, artificial intelligence (AI) is widely recognised as a pivotal technological advancement with the capacity to profoundly reshape societal dynamics. It is celebrated for its potential to enhance public services, create high-quality employment opportunities, and power the future. However, there remains a notable opacity regarding the potential threats it poses to life, security, and related domains, thus requiring a pro-active approach to regulation. To address this gap, the UK Government has released an AI white paper outlining its pro-innovation approach to regulating AI. While this white paper symbolises the contributions and endeavours aimed at providing innovative and dynamic solutions to tackle the significant challenge posed by AI, it is important to acknowledge that there are still certain limitations which the white paper may refine in subsequent iterations.

The framework of the UK Government’s AI regulations in general is underpinned by five principles to guide and inform the responsible development and use of AI in all sectors of the economy: Safety, security, and robustness; Appropriate transparency and explainability; Fairness; Accountability and governance; Contestability and redress. The pro-innovation approach outlined in the UK Government’s AI white paper proposes a nuanced framework reconciling the trade-off between risks and technological adoption. While the regulatory framework endeavours to identify and mitigate potential risks associated with AI, it also acknowledges the possibility that stringent regulations could impede the pace of AI adoption. Instead of prescribing regulations tailored to specific technologies, the document advocates for a context-based, proportionate approach. This approach entails a delicate balancing act, wherein genuine risks are weighed against the opportunities and benefits that AI stands to offer. Moreover, the white paper advocates for an agile and iterative regulatory methodology, whereby insights from past experiences following evolving technological landscapes inform the ongoing development of a responsive regulatory framework. Overall, this white paper presents an initial standardised approach that holds promise for effectively managing AI risks while concurrently promoting collaborative engagement among governmental bodies, regulatory authorities, industry stakeholders, and civil society.

However, notwithstanding the numerous advantages and potential contributions, certain limitations are often associated with inaugural documents addressing complex phenomena such as AI. Firstly, while the white paper offers extensive commentary on AI risks, its overarching thematic orientation predominantly centers on promoting AI through “soft laws” and “deregulation.” The white paper seems to support AI development with various flexibilities rather than provide some certain stringent policies to mitigate AI risks, thus raising awareness regarding “balance”. The mechanism of “soft laws” hinges primarily on voluntary compliance and commitment. Specifically, without legal forces, there is a risk that firms may not fully adhere to their commitments or may only partially implement them.

Ambiguity or uncertainty is also one critical issue with the “soft laws” mechanism. There exists an absence of detailed regulatory provisions within the proposed framework outlined in the white paper. While the document espouses an “innovative approach” with promising prospects, its nature leaves industries and individuals to speculate about necessary actions, thereby raising the potential for inconsistencies in practical implementation and adoption. Firms lack a systematic, step-by-step process and precise mechanisms to navigate through various developmental stages. Crafting stringent guidelines for AI poses considerable challenges, yet it is essential to implement them with clarity and rigor to complement existing innovative approaches effectively.

One more point is that the iterative and proportional approach advocated may inadvertently lead to “regulation lag,” whereby regulatory responses are only triggered in the wake of significant AI-related losses or harms, rather than being proactive. This underscores the necessity for a clear distinction between leading and lagging regulatory regimes, with leading regulations anticipating potential AI risks to establish regulatory guidelines proactively.

Acknowledging the notable potential and inherent constraints outlined in the AI white paper, we have identified several implications for innovation in financial regulation. The deployment of AI holds promise in revolutionising various facets of financial regulation, including bolstering risk management and ensuring regulatory compliance. The innovative approach could offer certain advantages to firms such as flexibility, cooperation, and collaboration among stakeholders to address complicated cases.

As discussed above, to implement the effectiveness of financial regulations, the government authorities may consider revising and developing some key points. Given the opaque nature of AI-generated outcomes, it is imperative to apply and develop some advanced techniques, such as Explainable AI (XAI), to support decision-making processes and mitigate latent risks. Additionally, while regulators may opt for an iterative approach in rule-setting to accommodate contextual nuances, it is imperative to establish robust and transparent ethical guidelines to govern AI adoption responsibly. Such guidelines, categorised as “leading” regulations, should be developed in detail and collaboratively, engaging industry stakeholders, academic experts, and civil society, to ensure alignment with societal values and mitigate potential adverse impacts. Furthermore, it is essential to establish unequivocal “hard laws” for firms and anticipate legal forces for non-compliance with regulations. These legal instruments serve as valuable supplements to the innovative “soft laws” and contribute to maintaining equilibrium within the market.

About the author

Daniel Dao is a Research Associate at the Financial Regulation Innovation Lab (FRIL), University of Strathclyde. Besides, he is Doctoral Researcher in Fintech at Centre for Financial and Corporate Integrity, Coventry University, where his research topics focus on fintech (crowdfunding), sustainable finance and entrepreneurial finance. He is also working as an Economic Consultant at World Bank Group, Washington DC Headquarters, where he has been contributing to various policy publications and reports, including World Development Report 2024; Country Economic Memorandum of Latin American and Caribbean countries; Policy working papers of labor, growth, and policy reforms, etc”¦. Regarding professional qualifications and networks, he is CFA Charterholder and an active member of CFA UK. He has earned his MBA (2017) in Finance from Bangor University, UK, and his MSc (2022) in Financial Engineering from WorldQuant University, US. He has shown a strong commitment and passion for international development and high-impact policy research. His proficiency extends to data science techniques and advanced analytics, with a specific focus on artificial intelligence, machine learning, and natural language processing (NLP).

Photo by Markus Winkler: https://www.pexels.com/photo/a-typewriter-with-the-word-ethics-on-it-18510427/

Simplifying Compliance with AI

Season 4, episode 2

Listen to the full episode here.

In this episode, we explore the role of Artificial Intelligence (AI) in streamlining compliance within the financial sector, showcasing the Financial Regulation Innovation Lab. 

We discuss the future of financial compliance, enriched by AI’s capability to automate and innovate. This episode is for anyone interested in the intersection of technology, finance, and regulation, offering insights into the collaborative efforts shaping a more compliant and efficient financial landscape.

Guests: 

  • Antony Brookes – Head of UK Investment Compliance, abrdn
  • Mark Cummins – Professor of Financial Technology at University of Strathclyde
  • Joanne Seagrave – Head of Regulatory Affairs at Tesco Bank