Banking on AI: mandating a proactive approach to AI regulation in the financial sector

Abstract

Despite an emerging international consensus on principles of AI governance, lawmakers have so far failed to translate those principles into regulations in the financial sector. Perhaps, in order to remain competitive in the global race for AI supremacy without being typecast as stifling innovation, typically cautious financial regulators are unusually allowing the introduction of experimental AI technology into the financial sector, with few controls on the unprecedented risks to consumers and financial stability. Once an unregulated AI software causes serious economic harm, a public and regulatory backlash would lead to over-regulation that could harm innovation of this potentially beneficial technology. Artificial intelligence is rapidly influencing the financial sector with innumerable potential benefits, such as enhancing financial services and improving regulatory compliance. This article argues that the best way to encourage a sustainable future in AI innovation in the financial sector is to support a proactive regulatory approach prior to any financial harm occurring. This proactive approach should implement rational regulations that embody jurisdiction-specific rules in line with carefully construed international principles.