OSFI is gearing up to release its updated guidance on risk management, specifically focusing on the use of artificial intelligence (AI) and machine learning within financial institutions’ models. The anticipation is high among both financial institutions and technology vendors awaiting the finalization of this guidance, as it is expected to have significant implications for the industry.
The current guideline, Guideline E-23, provides a framework for federally regulated financial institutions in Canada to manage model risk effectively. It emphasizes a risk-based approach, particularly concerning models that pose material risks to the institutions. However, the draft version of the updated guideline expands on the current guidance, reflecting OSFI’s increased focus on operational risk in light of the growing reliance on models for decision-making.
While the updated guideline aims to address the evolving landscape of financial institutions leveraging models, there are concerns about certain aspects that may be overly broad. OSFI has the opportunity to adjust the draft guideline based on feedback received during the consultation period before issuing the final version in July 2024.
Stakeholders are particularly interested in potential clarifications regarding the scope of the guideline and its alignment with similar regulations in other key markets. Failure to address these concerns could have significant implications, potentially affecting the adoption of productivity-enhancing and risk-reducing technologies by Canadian financial institutions compared to their global counterparts.
Overall, the release of the finalized guidance by OSFI is eagerly awaited, with industry players closely monitoring any adjustments that may impact how financial institutions manage model risk in the era of AI and machine learning integration. Stay tuned for updates on this developing regulatory framework.
