New UK Approach to Financial Service Regulation Demands AI Solutions
The implementation of a new consumer duty in the UK regarding financial service regulation has led to calls for AI-powered solutions, similar to OpenAI’s ChatGPT, to ensure compliance. As an expert in digital financial services, I believe that AI-to-AI connections are crucial in meeting the requirements of this duty effectively.
The reason behind this assertion is the dependence on customer understanding and providing them with the necessary information to make informed decisions. However, the challenge lies in obtaining informed consent from consumers, as it requires a solid understanding of various financial concepts such as mathematics, statistics, portfolio management, and investment history. Given the general public’s limited knowledge in these areas, it might be more efficient to invest in developing and certifying bots capable of making informed decisions on behalf of customers.
On the topic of pricing and value, determining whether a price is appropriate can be difficult for the average consumer. Fortunately, legal professionals can provide guidance in such matters.
For consumers, the new duty of care will have a significant impact on their savings. Banks often offer lower rates to existing customers and entice new customers with high rates that only last for a limited period. However, with the implementation of the duty of care, along with the practical use of variable recurring payments (VRPs) and machine learning, consumers can expect better value and increased efforts from banks to provide competitive rates. Financial Conduct Authority CEO Nikhil Rathi has pledged to closely monitor banks’ practices, shifting the responsibility from consumers to the banks themselves.
To address this issue, banks can either invest significant time and resources into rewriting their code or opt for a more cost-effective solution: using AI to review customers’ circumstances, changing environments, and available products. However, banks must exercise caution in their approach. The Bank of England’s discussion paper on AI from last year highlighted that certain AI-based price discrimination strategies could potentially breach regulatory requirements if they result in unfavorable outcomes for specific groups of retail customers. Consequently, firms should be able to justify their AI models and demonstrate that they do not lead to price discrimination or poor outcomes for customers.
ChatGPT and similar AI technologies are expected to have a substantial impact on the banking sector, with estimated potential value ranging from $200 billion to $340 billion annually if fully implemented. McKinsey, a global consulting firm, even identified the conversion of legacy code as one of the most significant use cases within the banking sector.
This new approach to financial service regulation opens up opportunities for fintechs and regtechs. A report by UK fintech Moneyhub, titled FCA Consumer Duty: Business Burden or Golden Opportunity, outlines various use cases that can create value by ensuring compliance with each requirement. The use of machine-learning models to assess vulnerability to fraud, for instance, can also help customers build resilience against fraud and other external changes, such as shifts in employment status. This approach aligns well with the duty of care, ensuring that an organization’s products and services are fit for purpose and ultimately contributing to customers’ financial health.
In conclusion, the new consumer duty in UK financial service regulation presents a significant opportunity for the integration of AI solutions. By leveraging AI technology, banks and other financial institutions can meet the requirements of the duty of care while delivering better value and more tailored services to consumers. Fintechs and regtechs can also play a vital role in this new era of financial service regulation by developing innovative solutions that enhance compliance and improve overall customer financial well-being.
