Today, the Financial Markets Authority (FMA) has released a study into the use of artificial intelligence (AI) in the financial services sector in New Zealand. The study was conducted as part of the FMA’s Occasional Paper Series and examines how AI is currently being used in New Zealand financial services and how AI could be applied in the future.
FMA press release and research paper available here And here.
Who needs to read it? Why?
This research report will be of interest to all financial services providers using or considering the use of AI. It helps inform the FMA’s future regulatory guidance as it assesses the risks and benefits of AI to better inform the oversight of AI in financial services.
What does it cover?
The study surveyed 30 regulated entities, including custodians, insurers, asset managers and financial advice providers, to gather insights. The survey had a response rate of 40%, with 13 entities responding. The FMA was primarily interested in the uses of AI, including generative AI (GenAI), machine learning, AI-based decision-making tools and chatbots. Key issues and concerns raised by the FMA regarding the use of AI include algorithmic bias, data privacy, cybersecurity, governance and transparency, operational resilience and over-reliance on GenAI tools.
The research report covers four main aspects of AI use: current AI use, future AI use, governance and accountability, and compliance. Key findings are summarized below:
- Current AI usage is heavily focused on customer outcomes and operational efficiency. This includes customer service tools like chatbots and machine learning and security tools to detect cyber threats.
- Going forward, respondents plan to use AI to improve risk management and data analytics, as well as customer outcomes and operational efficiency.
- Most respondents have trained their staff on the appropriate use and interpretation of AI-generated information. The content and structure of these trainings were not mentioned.
- Most respondents plan to use AI in their decision-making processes, with various methods to mitigate biases inherent in AI-based decision-making. The FMA encourages the industry to monitor international developments to ensure New Zealanders maximise the benefits of AI.
- Most respondents were confident in their ability to effectively manage the risks associated with AI.
- Despite entities’ intention to establish a specific data governance and risk framework to manage AI risks and ensure transparency in the use of AI, most entities have not considered what disclosures they will make to their customers.
Our point of view
We support the FMA’s engagement with the industry to explore the impacts of AI in financial services. In doing so, the FMA can strengthen dialogue with regulated entities to identify its key regulatory priorities and ensure risks are minimised, including around bias, data privacy and cybersecurity.
We find it unfortunate that the FMA’s response rate was only 40% and wonder whether this is a symptom of consultation fatigue – which we know is a factor in the financial services sector at present – or whether it is a symptom of New Zealand lagging behind many other OECD economies in adopting AI. Either way, it may mean that the small sample size is not representative of the broader financial services provider community.
That said, while the goal of the research paper is only to gain a preliminary understanding, the FMA still has plenty of room to explore the ramifications of current AI technologies on the key issues and concerns flagged at the beginning of the paper.
We believe the market will benefit from the FMA undertaking further research and focusing more on the compliance aspect of its research paper, as financial services providers will (or should) be interested in how they can develop the use of AI technologies alongside their risk and regulatory compliance plans.
And then?
The FMA intends to work with industry stakeholders to inform the use of AI in financial services. The FMA will host a roundtable on 1 October 2024 with study participants to explore in more detail how AI is being used in financial services in New Zealand.
If you have any questions about what the views expressed by the FMA may mean for your business, or would like more information on these concepts, please contact one of our experts.
This article was co-authored by Darlene Hu, an intern on our Financial Services team.