U.S. agencies address AI risks in finance

The U.S. financial regulatory agencies are preparing to address the risks posed by artificial intelligence (AI) in the financial services sector. These agencies can use their existing legal powers to reduce the economic impacts of AI. These impacts include consumer fraud, algorithmic discrimination, and cybersecurity threats.

In March 2024, the U.S. Treasury Department released a report. The report highlighted AI-specific cybersecurity risks. It also emphasized the importance of effective risk management, governance, and controls in the use of AI technologies.

Financial institutions should manage AI technologies in a safe, sound, and fair way. They should follow applicable laws and regulations related to consumer and investor protection. Janet Yellen is the U.S. Secretary of the Treasury.

She stressed the importance of addressing AI risks during a tour of the Financial Crimes Enforcement Network (FinCEN) in Vienna, Virginia, earlier this year. The Treasury Department’s report and recent executive orders have led to a closer look at how AI is integrated into financial systems. They have also prompted an examination of AI’s impact on consumers and institutions.

Existing laws and regulations may not explicitly mention AI. However, they provide a framework that can promote the safe and fair implementation of AI in financial services. Agencies should conduct thorough due diligence and continuously monitor AI services.

They should ensure that these services align with regulatory expectations and protect consumer interests. The impacts of AI on consumers, banks, nonbank financial institutions, and the stability of the financial system are major concerns.

Addressing AI risks in finance

Regulators should use their current authorities to address these risks. Further legislation may be necessary to fully manage AI’s integration into the financial sector. A key focus of regulatory efforts is to encourage financial institutions to identify, measure, monitor, and manage risks associated with AI.

This includes reducing algorithmic discrimination, preventing fraud, and ensuring transparent and explainable AI models. The Treasury Department’s guidance calls for oversight that matches the risk levels associated with AI-supported business processes. In October 2023, the “Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence” assigned specific AI-related tasks to executive branch financial regulators.

Independent regulatory agencies are also encouraged to proactively address AI risks. They should protect American consumers from fraud, discrimination, and privacy threats. AI poses known and unknown risks to both financial services consumers and the banking sector, both domestically and internationally.

The recommendations provided aim to foster a discussion and vetting process of potential regulatory actions. They do not outline definitive steps. The goal is to effectively use existing authorities while exploring additional measures to manage AI’s challenges and leverage its opportunities in finance.

Various federal entities are actively involved in this regulatory landscape. These include the Treasury Department, Office of the Comptroller of the Currency, Federal Reserve System, Federal Deposit Insurance Corporation, Commodity Futures Trading Commission, National Credit Union Administration, Securities and Exchange Commission (SEC), and Consumer Financial Protection Bureau, among others. Each has the potential to use their specific legal authorities to address and govern the integration of AI within the financial services sector.

Ultimately, the efforts of financial regulatory agencies aim to ensure that AI technologies are implemented in a way that is safe, equitable, and conducive to the stability of the financial system. They seek to safeguard the interests of consumers and the broader economy.

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