On 18 June 2024, the European Commission (Commission) launched a targeted consultation to better understand and shape the future of Artificial Intelligence (AI) in the financial services sector. The Commission aims to identify the key use cases, benefits, barriers, and risks associated with AI applications in finance – a sector both ripe with innovation and fraught with regulatory challenges.
The structure and scope of the consultation
The consultation is structured into three sections, comprising 43 questions that solicit both multiple-choice and open-ended responses:
- General questions on AI development: This section seeks to gather broad insights, including benefits, challenges and risks about the ongoing development and deployment of AI technologies in financial services.
- Specific use cases in finance: Here, the focus shifts to applications of AI within the financial sector, exploring practical scenarios and their implications. It includes tailored questions in relation to banking and payments, market infrastructures, securities, insurance, pensions and asset management.
- The AI Act and financial sector: The final section delves into the implications of the AI Act, which entered into force on 1 August 2024. While the Act is broadly applicable, there are high-risk use cases affecting credit scoring and insurance that require closer scrutiny, especially when it comes to the scope of the definition of AI systems.
Responses are particularly sought from financial firms that develop, provide or use AI systems. However, input from all financial services stakeholders is welcome. The deadline for responses is 13 September 2024.
Balancing innovation and regulation
A key objective of this consultation is to avoid generating new, duplicative regulatory requirements that could stifle innovation. Instead, the Commission seeks to compile a comprehensive report based on the feedback received, analysing the main trends and issues related to AI applications in financial services. This approach underscores a commitment to fostering innovation while ensuring that AI's integration into financial services is both safe and beneficial.
The European Banking Authority (EBA) is anticipated to release a report early next year assessing the AI Act's application and its impact on the financial sector. This forthcoming analysis could potentially serve as a foundation for future regulatory measures.
Any such regulatory measure might establish a framework under Union financial services law that in fact governs the use of AI systems for financial services. The EBA and the other European Supervisory Authorities (ESAs) play an important role for regulating AI systems that are inside and outside the scope of the AI Act (such as AI systems used to evaluate the creditworthiness of natural persons). This is, because, for certain obligations under the AI Act, the AI Act defers to the applicable Union financial services law as the only relevant regime for financial institutions. A financial institutions’ compliance with these rules will then be supervised by their national financial regulators. For AI systems used by financial institutions that are outside the scope of the AI Act, the applicable rules will in any case be solely regulated by the financial regulators. Therefore, the consultation is also not limited to AI systems under the AI Act.
So far, the ESAs published only limited guidance on AI. In May 2024, the European Securities and Markets Authority (ESMA) issued initial guidance to firms using AI when they provide investment services to retail clients. Already in 2021, the European Insurance and Occupational Pensions Authority (EIOPA) also issued non-binding guidance on how to implement key principles in practice throughout the lifecycle of an AI application. However, so far the ESAs have not adopted measures that would have the status of an official Level 3 Guideline under the ESAs sectoral authorities.
Industry workshops and collaboration
While the responsible department within the Commission for any potential follow up to this targeted consultation is DG FISMA, it is worth flagging that the AI Office – which is part of DG CNECT – is holding the pen on upcoming guidelines and Level II legislation, which are expected in the coming months and years. This leadership team underscores the importance of cross-departmental collaboration, given the significant role of DG CNECT and the AI Office on the drafting and application of the AI Act.
In addition to the consultation, the Commission plans to organise workshops in Autumn 2024. These workshops aim to collect practical feedback from industry representatives, including AI service providers. These sessions, led by DG FISMA and DG CNECT in collaboration with European Supervisory Authorities (EIOPA, EBA, and ESMA) and national authorities, will offer a platform for stakeholders to present projects, share insights and discuss challenges and opportunities.
Registration for these workshops was open until 26 July 2024. The final composition of the workshop sessions will be determined based on the expressions of interest received, ensuring a diverse and representative dialogue.
Looking ahead
The AI Act, which complements the existing EU financial services acquis, regulates the development and deployment of AI in the EU. This regulatory framework aims to manage the risks associated with specific AI applications while promoting innovation and growth. As the Commission gathers data and insights through this consultation and subsequent workshops, it will be better equipped to refine and implement policies that balance these dual objectives.
This consultation represents a crucial opportunity for the financial services sector to shape the future of AI regulation and innovation. It is still early to predict what the Commission has in store for AI in financial services and whether the results of this exercise may entail new legislative proposals or not, but by participating actively in this process, stakeholders can help ensure that AI is integrated in a manner that maximises benefits while mitigating risks. This collaborative effort will be instrumental in navigating the complex landscape of AI in financial services, paving the way for a more innovative and secure future.
The consultation should be viewed as part of a global effort by various financial regulators to address the opportunities and risks of AI in the financial sector in their jurisdictions. In the U.S., regulatory interest and scrutiny regarding AI in financial services is increasing rapidly. For example, in June 2024 the U.S. Treasury Department released a request for information on the Uses, Opportunities, and Risk of AI in the Financial Services Sector (AI RFI). The EU consultation and the AI RFI have certain things in common. Like the EU consultation, the AI RFI also seeks comments on the latest development in AI technologies and applications and how they are being used in the financial services sector. The AI RFI also does not create new or expand existing regulatory obligations. In contrast to the EU, however, the U.S. lacks a comprehensive AI regulatory framework and there is no indication one may be coming in the foreseeable future.
Our teams specialise in advising on multi-jurisdictional AI governance and regulatory frameworks, helping clients navigate the risks and capitalise on the opportunities associated with AI. We will continue to monitor key developments and analyse their potential impact on your business. If you wish to discuss any points raised in this post in further detail, please contact the authors or your usual Freshfields contact.
