Call to evidence: use of AI in banking, pensions and other financial services to be subject to new inquiry by MPs

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Introductory thoughts

As covered recently in the February edition of FinTech Matters, the Treasury Committee has called for evidence for its inquiry to consider "the potential impacts of the increased use of Artificial Intelligence (AI) in banking, pensions and other financial services." The purpose of this inquiry is "to explore how the UK financial services can take advantage of the opportunities in AI while mitigating any threats to financial stability and safeguarding financial consumers, particularly vulnerable consumers."

Recent statistics from the Bank of England reveal that approximately 75% of businesses are currently employing some form of artificial intelligence. This widespread adoption underscores the growing reliance on AI technologies across various industries. Furthermore, an additional 10% of companies have plans to integrate AI technology within the next three years, indicating a continuing trend towards automation and advanced data analysis.

For a considerable period, the United States has been at the forefront of AI development, leading innovations and setting benchmarks in this field. However, the recent launch of "DeepSeek" serves as a significant example of how rapidly the AI industry can transform in terms of technological advancements and further, how continuous innovation is essential to maintain leadership. Deepseek demonstrated that new players can enter and disrupt established markets by introducing novel capabilities and competitive dynamics.

What will the inquiry cover?

The inquiry is seeking answers to the following questions:

how is AI currently used in different sectors of financial services and how this might change over the next ten years?
to what extent can AI improve productivity in financial services?
what are the risks to financial stability arising from AI and how can they be mitigated?
what are the benefits and risks to consumers, particularly those who are vulnerable, arising from AI?
how can Government and financial regulators strike the right balance between seizing the opportunities of AI but at the same time protecting consumers and mitigating against any threats to financial stability?

The inquiry is also examining several potential issues associated with artificial intelligence (AI). These issues include AI-induced hallucinations, which refer to instances where AI systems generate inaccurate or false outputs. Another significant concern is the potential for job losses as AI systems become more integrated into various industries and replace certain roles traditionally performed by humans. Additionally, there is a recognised risk of bias within AI systems, which can result from the data used to train these systems or from their design.

Future focus on AI

Despite these valid concerns, AI technology is likely to be increasingly crucial in shaping future developments. Recognising this importance, successive governments have made firm commitments to both develop and integrate AI technologies across different facets of everyday life. This governmental commitment highlights an understanding that while it is essential to address and mitigate the risks associated with AI, it is equally important to harness its transformative potential for societal benefits.

The Chair of the Committee noted that "[i]t’s critically important the City can capitalise on innovations in AI and continue to be a world leader in finance. We must, though, also be mindful of ensuring there are adequate safeguards in place to mitigate the associated risks, particularly for customers. This piece of work will allow us to see the full picture." This piece of work will allow us to see the full picture – this demonstrates that there is a heavy focus on how financial services will be affected by adoption of AI and how the City of London can maintain its position.

Concluding thoughts

The adoption of AI technologies within various sectors is a complex and multifaceted issue which necessitates ongoing scrutiny. This inquiry represents one part of a broader dialogue on the integration of advanced technologies into our societal and economic frameworks. As we delve deeper into understanding AI's implications, an array of questions are likely to be generated:

At a macro-economic level, considerations include the potential for AI-generated trading algorithms to disrupt market stability. Such algorithms operate with high efficiency and speed but lack human intuition and ethical considerations, which could lead to unforeseen volatility in financial markets.
On an individual level, there is significant apprehension regarding fairness and bias in AI decision-making processes. For instance, if an AI system is used by insurance companies to evaluate applicants, there is a risk it might systematically disadvantage certain groups based on biased data inputs or flawed algorithmic design.

This breadth of issues likely to be involved underscores why the current inquiry may produce more questions than definitive answers. The expansive nature of topics covered means every answer potentially uncovers new areas for investigation.

Central to addressing these challenges is maintaining rigorous standards within financial firms regarding both risk management and regulatory compliance. Financial institutions must continue their vigilance against threats such as money laundering and terrorist financing while integrating new technologies responsibly.

In conclusion, while the path forward involves navigating numerous uncertainties and potential pitfalls associated with AI adoption in finance (and beyond), it also holds immense promise for innovation if approached thoughtfully and collaboratively.

Submissions to the inquiry can be made until Monday 17 March 2025.