FINRA Posts Paper on ArtificiaI Intelligence in Financial Services, Requests Comments

FINRA’s Office of Financial Innovation has posted a report on Artificial Intelligence (AI) and the securities industry. Financial services firms are incorporating AI into a growing number of services. FINRA is seeking to engage with this sector of Fintech to better understand the impact on the financial service industry over time. FINRA states that the paper is an “initial contribution” and is accepting feedback on the paper.

This paper summarizes findings from FINRA’s review on AI:

  • A definition of AI and its scope as it pertains to the securities industry
  • An overview of broker-dealers’ use of AI applications related to: (i) communications with customers, (ii) investment processes, and (iii) operational functions.
  • key factors including potential regulatory considerations, securities market participants may want to consider as they develop and adopt AI-based tools.

Very broadly, FINRA states that AI applications in the securities industry cover the following areas:

  • Communication with customers, including outreach to potential customers
  • Brokerage management including holistic customer profiles and customized research
  • Portfolio management and trading
  • Operational functions including compliance, cybersecurity and credit risk management
  • Administrative funcions

While acknowledging the benefits for consumers FINRA notes several regulatory considerations and key challenges including risk management, data privacy and governance. Effectively, similar areas of concern for more traditional operations but with the Fintech twist of automation and deep data including decision-making models.

To quote FINRA:

“Over the past few years, there have been numerous incidents reported about AI applications that may have been fraudulent, nefarious, discriminatory, or unfair, highlighting the issue of ethics in AI applications. As such, several organizations have established initiatives or developed principles to promote the ethical use of AI. AI-based applications present some particular challenges that securities market participants may wish to consider as they explore and adopt related technology tools.”

FINRA is accepting comments on a rolling basis with a deadline of August 31, 2020. Comments may be emailed to [email protected].

The complete report is available here.


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