July 2024 Foodman Website and JD Supra
Artificial Intelligence AI Inteligencia Artificial RIF de IA

On 6/6/24, the U.S. Treasury issued a Request for Information (RFI) for the uses, opportunities, and risks of Artificial Intelligence (AI) in the Financial Services Sector.  The AI RFI presents nineteen questions that are geared towards the U.S. Treasury gaining insights of AI and the financial services sector.  Via the AI RFI, the U.S. Treasury  seeks to:

  • increase its understanding of how AI is being used within the financial services sector
  • opportunities and risks presented by developments and applications of AI within the sector, including potential obstacles for facilitating responsible use of AI within financial institutions
  • the extent of impact on consumers, investors, financial institutions, businesses, regulators, end-users, and any other entity impacted by financial institutions’ use of AI
  • obtain recommendations for enhancements to legislative, regulatory, and supervisory frameworks applicable to AI in financial services and understanding how AI innovations can help promote a financial system that delivers inclusive and equitable access to financial services

The AI RFI contains very detailed supplemental information regarding the U.S. Treasury’s findings and the use of AI. Here are some extracts of the AI RFI as to the interest of the U.S. Treasury gaining insight into the uses of AI by financial institutions:

  • Provision of products and services: Financial institutions’ use of AI to assist in decisions related to offering financial products or services, such as whether to offer transaction accounts, credit, or insurance, and the terms and conditions of such offerings, as well as financial forecasting products and pattern recognition tools;
  • Risk management: Financial institutions’ use and potential use of AI for managing various types of risk, including credit risk, market risk, operational risk, cyber risk, fraud and illicit finance risk, compliance risk (including fraud risk), reputation risk, interest rate risk, liquidity risk, model risk, counterparty risk, and legal risk, as well as the extent to which financial institutions may be exploring the use of AI for treasury management or asset-liability management;
  • Capital markets: Financial institutions’ use of AI to assist in capital markets activities, including identifying investment opportunities, allocating capital, executing trades, and providing financial advisory services;
  • Internal operations: Financial institutions’ use of AI to manage internal operations, such as payroll, HR functions, training, performance management, communications, cybersecurity, software development, and other internal operational functions;
  • Customer service: Financial institutions’ use of AI in customer management, including complaint handling, investor relations, website management, claims management, or other external-facing functions;
  • Regulatory compliance: Financial institutions’ use of AI to manage regulatory requirements, including capital and liquidity requirements, regulatory reporting or disclosure requirements, BSA/AML requirements, consumer and investor protection requirements, and license management;
  • Marketing: Financial institutions’ use of AI to market to individuals, groups of individuals, or institutional counterparties.

Extracts from the AI RFI from risks associated with AI use by financial institutions

  • Model risks, operational risks, compliance risks, and third-party risks, bias, discrimination, monoculture, concentration, fraud, herding, hallucinations, explainability, conflicts, reputational risk, and data privacy risks.
  • AI being used in connection with cyber threats or contributing to job displacement.
  • Some financial institutions report that existing risk management frameworks may not be adequate to address emerging AI technologies and they may have an incomplete understanding of where the data used to train certain AI models and tools was acquired and what the data contains, as well as how the algorithms or structures are developed for those AI models and tools.
  • AI models and tools may exacerbate certain risks that may warrant further scrutiny and risk mitigation measures.
  • Creation of human capital shortage in financial institutions, where sufficient knowledge about a potential risk or bias of those AI technologies may be lacking such that staff may not be able to effectively manage the development, validation, and application of those AI technologies.
  • Reliance on third-party providers to develop and validate AI models and tools, which may also create challenges in ensuring alignment with relevant risk management guidance.
  • Negative impact on consumers and complicate efforts for financial institutions to ensure compliance with fair lending and anti-discrimination laws, or laws prohibiting unfair, deceptive or abusive acts or practices, potentially leading to legal violations.
  • AI-powered capabilities that enable financial institutions to offer more personalized products and services can also be used to inappropriately target consumers in ways that might be unfair, abusive, and discriminatory.
  • Issues related to data accuracy, and the use of inaccurate data or providing inaccurate information may also lead to a violation of law.
  • Financial institutions are responsible for ensuring compliance for all activities performed, including those conducted by third-parties.

Artificial Intelligence is not going anywhere

The AI RFI contains valuable insight as to how the U.S. Treasury recognizes that AI is here to stay. This is evident in how the U.S. Treasury via the IRS is utilizing AI to increase the examination focus and identify potential compliance risk in the areas of partnership tax, general income tax and accounting, and international tax.  With the assistance of AI, the IRS will be able to select tax returns that represent a cross section of industries including hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms, high net worth individuals and other industries.  AI will enable the IRS to increase the examination focus and identify potential compliance risk in the areas of partnership tax, general income tax and accounting, and international tax.

The AI RFI seeks to better understand potential impacts in financial services to help inform any potential policy deliberations or actions

Best to stay informed in all developments related to AI if you are using AI. Ensuring accuracy, compliance and fairness is critical in the use of AI.

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