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Gensler Warns of ‘AI Washing’ in the Financial Industry

Speech | Feb 14, 2024

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Insights from Gary Gensler's speech titled "AI, Finance, Movies, and the Law" at Yale Law School, discussing the intersection of artificial intelligence (AI) with finance and legal frameworks.

While this isn't Gensler's first kick at the can in terms of AI meets finance speeches, below are some insights from his speech that could be informative for members and readers of NCFA Canada:

See:  AI and the Metaverse: The Imperative for Rules and Regulations

AI is super important we need to learn everything about it:  Without a doubt, AI adoption is proliferating widely across various sectors, including finance, where it's used for call centers, account openings, compliance programs, trading algorithms, sentiment analysis, and more.  This is why it's imperative that everyone including the SEC understand AI's capabilities and limitations within the financial industry.

Opportunities and challenges

AI can bring a swath of benefits to finance, such as greater financial inclusion and enhanced personalized user interactions and experiences.  However, Gensler points out the many challenges, including the often unexplainable nature of AI decisions, the potential for biased outcomes, and the accuracy of predictive models. For the fintech sector, these points stress the need for careful integration of AI technologies, ensuring they are transparent, fair, and reliable.

Gensler discusses the systemic risks that could arise from widespread reliance on a few AI models or platforms within the financial industry and emphasized the need for updated regulatory frameworks to address these risks, suggesting that the current risk management models and guidance may not be sufficient.  Regulators will  need deeper foresight and be incredibly adaptable to manage potentially wide reaching systemic implications.

Further, the current Chairman of the SEC is concerned with AI deceptions and manipulation such as "AI washing" — misleading claims about a product's AI capabilities, truthfulness in disclosures, and protecting investors from fraud and misrepresentation in the age of AI (think 'deep fakes').

A review by Bloomberg Law found that over 40% of S&P 500 companies mentioned AI in their most recent annual reports to the SEC, a significant increase from previous years. Companies are advised to be cautious about their AI disclosures, ensuring they accurately reflect the technology's role in their operations and the risks it poses.

See:  The Use and Regulation of Artificial Intelligence: When AI Meets Consumer Duty

Gensler conveyed the necessity for those deploying AI models in finance to implement appropriate guardrails, considering current laws and regulations. This includes ensuring AI models do not engage in prohibited activities like front-running or providing conflicted investment advice. The emphasis here is on the ethical and legal responsibilities of fintech companies in deploying AI technologies.

Outlook

Gensler's speech presents a regulatory insider's overview of the opportunities and challenges at the nexus of AI, finance, and regulation. His insights highlight the transformative potential of AI in financial services, while also calling for a balanced approach that addresses ethical, legal, and systemic concerns.


NCFA Jan 2018 resize - Gensler Warns of 'AI Washing' in the Financial IndustryThe National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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