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A Pro-Innovation Approach to AI Regulation in the Financial Sector

Fraud and Anti-Money Laundering (AML) leaders in banks pay attention: the UK government has just released a white paper detailing their plans for implementing a pro-innovation approach to AI regulation. 

The financial industry is no stranger to AI; in fact, it's at the forefront of its adoption. With AI's potential to revolutionize fraud detection and AML practices, it's crucial that we keep up to date with the latest regulatory developments. 

Feedzai has long been committed to responsible AI and understands its importance in the financial industry. Our dedicated Fairness, Accountability, Transparency, and Ethics (FATE) AI research team has been at the forefront of developing ethical and fair AI solutions for fraud detection and AML. A prime example of our commitment to responsible AI is the development of FairGBM, a game-changing algorithm that makes fair machine learning accessible to all. With FairGBM, Responsible AI can be integrated in any machine learning operations. It optimizes for fairness, not just for performance. It is not only available in our products but also through an open-source release for the benefit of other applications.

The UK’s Five Key Principles for AI Use 

Here are the UK’s five key principles for using AI and how these principles might impact fraud and AML leaders in the banking sector.

Principle 1: Safety, Security, and Robustness

AI applications must function securely, safely, and robustly. For fraud and AML leaders, this means ensuring that AI systems are designed to manage risks carefully. Banks should pay particular attention to the potential for cyberattacks and data breaches, as well as ensure that AI-driven fraud detection and AML systems are accurate, efficient, and dependable.

Principle 2: Transparency and “Explainability”

Organisations developing and deploying AI should clearly communicate when and how AI is used and explain the system’s decision-making process. Fraud and AML leaders need to ensure that their AI-driven systems are transparent and that they can articulate the rationale behind their AI-generated decisions. This is particularly important when working with regulators and auditors, as well as when addressing customer concerns.

Principle 3: Fairness

AI should be used in compliance with existing UK laws, such as equalities and data protection legislation, and should not discriminate against individuals or create unfair commercial outcomes. This principle reinforces the need for banks to ensure that their AI-driven fraud detection and AML systems do not discriminate against customers, either intentionally or inadvertently. By upholding the principle of fairness, banks can build trust in their AI systems and avoid potential legal and reputational risks.

Principle 4: Accountability and Governance

Appropriate oversight and clear accountability for AI outcomes are essential. Fraud and AML leaders must establish strong governance structures that oversee AI use, ensuring they are held accountable for AI-generated outcomes. This may involve developing internal policies, protocols, and documentation related to AI, as well as appointing responsible individuals or committees to oversee AI deployment.

Principle 5: Contestability and Redress

People must have clear routes to dispute harmful outcomes or decisions generated by AI. Fraud and AML leaders should establish mechanisms for customers to challenge AI-generated decisions, such as false fraud alerts or false AML flags. This demonstrates a commitment to fairness and transparency and provides an opportunity to learn from and improve AI-driven systems.

The Road Ahead: Implementing FATE at Banks

Over the next year, regulators will issue practical guidance to help organisations implement these principles in their respective sectors. Fraud and AML leaders in banks should use this time to review and assess their current AI-driven systems and practices, ensuring that they align with the UK government’s five principles. By adopting a proactive approach, banks can stay ahead of the curve and continue leveraging AI to improve fraud detection and AML processes while maintaining compliance with evolving regulations.

The UK government’s pro-innovation approach to AI regulation provides a roadmap for fraud and AML leaders in banks to embrace AI responsibly and effectively. By adhering to these five principles, banks can harness the power of AI to combat financial crime while fostering trust, transparency, and fairness in the process.