Today, the Financial Markets Authority (FMA) released research on the use of Artificial Intelligence (AI) in New Zealand’s financial services sector. The research was undertaken as part of the FMA’s Occasional Paper series and reviews how AI is currently used in New Zealand financial services and how AI may be applied in the future.
The FMA’s media release and research paper are available here and here.
Who needs to read it? Why?
The research paper will be of interest to all financial service providers who use or intend to use AI. The report helps indicate the FMA’s future regulatory focus, as it assesses the risks and benefits of AI to better inform oversight of AI in financial services.
What does it cover?
The research paper surveyed 30 regulated entities, including deposit takers, insurers, asset managers, and financial advice providers to generate insights. The survey had a 40% response rate, with 13 entities responding. The FMA was primarily interested in uses of AI including generative AI (GenAI), machine learning, AI decision-making tools, and chatbots. The key issues and concerns flagged by the FMA on the use of AI include algorithmic bias, data privacy, cybersecurity, governance and transparency, operational resilience, and over-reliance on GenAI tools.
The research paper covers four main aspects of the use of AI: current use of AI, future use of AI, governance and accountability, and compliance. The key findings are summarised below:
- Current use of AI is heavily focused on customer outcomes and operational efficiency. This includes customer service tools such as chatbots and machine learning and security tools to detect cyber threats.
- In the future, respondents intend to use AI to improve risk management and data analytics alongside customer outcomes and operational efficiency.
- Most respondents have trained staff on proper use and interpretation of AI-driven insights. The contents and structure of these trainings were not noted.
- Most respondents expect to use AI in their decision-making processes, with varied methods to mitigate inherent biases in AI-driven decision-making. The FMA encourages the industry to watch international developments to ensure New Zealanders maximise its benefits from AI.
- Most respondents were confident in their ability to effectively manage the risks associated with AI.
- Despite entities’ intentions to establish a specific data governance and risk framework to manage the risks of AI and ensure transparency in the use of AI, most entities have not considered what disclosures they will make to their customers.
Our view
We support the FMA’s engagement with industry to explore the impacts of AI in financial services. By doing this, the FMA can bolster dialogue with regulated entities to identify its key regulatory priorities and ensure minimisation of risks including bias, data privacy, and cybersecurity.
We do think it is a pity that the FMA only had 40% response rate, and wonder whether that is a symptom of either consultation fatigue - which we know is a factor in the financial services sector at the moment - or whether it is a symptom of New Zealand still lagging many other OECD economies in up-take of AI. Either way, that may mean the small sample size is not representative of the wider community of financial service providers.
That said, while the goal of the research paper was only to gain preliminary understanding, there is still plenty of room for the FMA to explore the ramifications of current AI technologies on the key issues and concerns flagged at the beginning of the paper.
In our view, the market will benefit from the FMA undertaking further research and focusing further on the compliance component of its research paper, as financial service providers will (or at least should) be interested in how they can develop use of AI technologies alongside their risk and regulatory compliance plans.
What next?
The FMA intends to collaborate with industry stakeholders to navigate the use of AI in financial services. The FMA will host a roundtable on 1 October 2024 with the study participants to further explore how AI is being used in New Zealand’s financial services.
If you have any questions about what the views expressed by the FMA may mean for your business, or are wanting further information about the concepts, please contact one of our experts.
This article was co-authored by Darlene Hu, an Intern in our Financial Services team.
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