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Category: Expertise strategy

New EU Act on Artificial Intelligence

With AI filtering into every business sector and a constant buzz word over the past 12 to 18 months, what does this Act mean for businesses? In this article, we explore the impact of the EU AI Act on organisations in the financial services sector.

Martin Hartley, Group CCO at emagine

Having reached agreement on the key terms of the Artificial Intelligence (AI) Act in December 2023, the EU is leading the way with the world’s first comprehensive legal framework on AI.

It is expected to be enforced in phases beginning later this year, with full enforcement anticipated by the end of 2026.  

Read more about Aritficial Intelligence (AI) Act here.

 

What is the significance of the Act?

A pioneering initiative with a global impact, the Act outlines overarching guidelines to provide unified regulation of AI across the single market. It comes with wider implications outside the region, as the legislation will cover all AI systems impacting people in the EU, irrespective of where these systems are developed or located. 

With implementation occurring through national legislation across the 27 EU Member States, inevitably local divergences will arise in the process. Where divergences appear between different countries, there is a risk that some states may gain a competitive advantage over others. 

Regarding compliance, these divergences create an issue for financial institutions and other international businesses, as these organisations will have to make sure they are compliant with the Act both locally and on an international basis. 

 

Where divergences appear between different countries, there is a risk that some states may gain a competitive advantage over others.

 

How widely is AI used in the financial services sector?

Whilst the EU may come in behind other regions for AI adoption, such as Aisa, nonetheless a growing number of banks and other financial services are innovating to set themselves apart from competitors by leveraging AI technologies. 

From among emagine’s extensive financial services client base, all our banking clients are using simple forms of AI such as chatbots, with approximately 70 per cent also using an advanced form of AI. With FinTechs, this proportion rockets up with these organisations using AI wherever possible as they operate in a less regulated environment, but they will be subject to compliance of the EU AI Act.

For banks, there are three business areas in which AI technology is being particularly explored, leveraged and integrated to take advantage of the efficiencies it can bring. These include customer operations, and especially Know Your Customer (KYC) and Customer Due Diligence (CDD) processes.

Marketing and sales departments are using AI to drive customer engagement through more personalised, data-driven campaigns. Meanwhile, software engineers are using AI to speed up and streamline the construction of complex IT frameworks and tools.

What are the main implementation challenges?

The European AI Office was set up in February 2024 to oversee the Act’s implementation and enforcement to ensure AI technologies are developed in a controlled and ethical way that respects human rights. The Office will support governance bodies in Member States to, as much as possible, ensure coherent application of the Act including through codes of practice, guides, guidelines and other tools and methodologies to support implementation. 

Most financial services organisations are still at the innovation and early implementation stage when it comes to AI technology, and it’s important that compliance and accountability in relation to the new EU AI regulation is incorporated from the start, with a consistent approach. The most forward-thinking businesses are investing in risk management and data governance so they can clearly demonstrate their approach to regulators.

Read more about The European AI Office here.

 

The most forward-thinking businesses are investing in risk management and data governance so they can clearly demonstrate their approach to regulators.

 

Transparency is key. Banks will need to demonstrate their compliance in a clear, practical way. For example, many banks are exploring the use of AI within facial recognition systems to enhance security and streamline authentication processes.

Implementing these raises privacy and data security issues and therefore, of course, also regulatory compliance concerns. To meet regulatory requirements, there will need to be a comprehensive audit trail of all facial recognition attempts to ensure transparency, accountability and compliance with data protection regulations.

In relation to KYC processes, if an organisation uses AI technology to process new account applications, for example, it will need to be able to justify the reasons for rejecting an account to regulators. 

Whilst leveraging AI technology is already a key focus for financial services organisations, caution is recommendable. From our extensive experience at emagine, most KYC processes using AI cannot guarantee 100 per cent accuracy and our clients agree that the need for a human element will remain.  

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