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The EU Artificial Intelligence Act: Effects On Wealth Management And Beyond – Part 1
This is the first in a three-part series examining how new European Union rules affecting artificial intelligence will affect development and the use of AI and what this means for the private banking and wealth management community.
New European Union legislation on artificial intelligence may not have garnered the kind of attention of other, noisier, news stories in recent weeks. But given the importance of AI – and the impact, for good or ill, of EU directives on other topics (data protection, for example) – it is important for wealth management professionals to understand the topics. We are, therefore, delighted to share these insights from AI & Partners and CMS Law. The authors are Sean Musch and Michael Charles Borrelli, AI & Partners, and Isabel Neelands and Charles Kerrigan, CMS Law.
This is the first of three articles on this topic.
As is always the case, the editorial team doesn’t necessarily endorse all views of guest writers and we invite readers to reply. Jump into the conversation! Email tom.burroughes@wealthbriefing.com
Content summary
Artificial intelligence (AI) continues to be the focus of
increasing public attention; board members at wealth management
firms and financial institutions around the world need to take AI
technologies seriously. This article – from compliance,
regulatory, and legal experts – includes discussions on AI’s
impact on financial services and wealth management firms, what
firms in the industry can do, and suggests a potential path
forward. In light of recent stories and euphoria concerning AI
and its reported capability to drive the biggest labour market
shift since the industrial revolution, we are writing three
articles on the topic; a trilogy from personnel at CMS Law
(Charles Kerrigan and Isabel Neelands) and AI & Partners (Sean
Musch and Michael Charles Borrelli).
In this first article here, we introduce you to the European
Union Artificial Intelligence Act (the EU AI Act) and discuss its
impact on the financial services and wealth management
sector.
EU AI Act – A ground-breaking regulatory
framework
The general objective of the European Commission’s proposed
Harmonised Rules on Artificial Intelligence (the EU AI Act),
first proposed in April 2021, seeks to ensure the proper
functioning of the single market by creating the conditions for
the development and use of trustworthy AI systems in the Union.
It is the world’s first regulation on AI (1) which sets out a
harmonised legal framework for the development of the
technologies, placing on the Union market, and the use of AI
products and services. Moreover, the EU AI Act seeks to achieve a
set of specific objectives:
(i) ensure that AI systems placed on the EU market are safe
and respect existing EU law;
(ii) ensure legal certainty to facilitate investment and
innovation in AI;
(iii) enhance governance and effective enforcement of EU law
on fundamental rights and safety requirements applicable to AI
systems; and
(iv) facilitate the development of a single market for
lawful, safe and trustworthy AI applications and prevent market
fragmentation.
The interaction with AI, with its specific characteristics (e.g.
opacity), can adversely affect a number of fundamental rights and
users' safety. To address those concerns, the EU AI Act follows a
risk-based approach whereby obligations align with the level of
risk. It distinguishes between AI systems posing:
-- unacceptable risk;
-- high risk;
-- limited risk, and
-- low or minimal risk.
AI applications would be regulated only as necessary to address
specific levels of risk (see Figure 1).
Figure 1: EU AI Act – risk levels and compliance obligations
Compliance costs are expected to cost EU businesses EUR 10.9BN PA by 2025 (2)
With the EU AI Act, an assessment of compliance costs is provided
as a cost estimation of administrative burdens. An estimate
of the annual labour compliance cost for one AI model is
projected to be €29,277.00 ($32,946.00).
Global regulatory compliance is projected to range from €1.6
billion to €3.3 billion in total compliance costs, with the
assumption that 10 per cent of the AI units are defined as high
risk, subject to the EU AI Act. Moreover, infringements of the EU
AI Act, per AI system, can result in either:
-- €40 million; or
-- 7 per cent of global annual turnover (whichever is
higher).
Impact on wealth management
The EU AI Act has far-reaching implications for various
industries, and the wealth management sector is no exception. As
firms in this domain grapple with the complexities of AI
regulation, they must navigate both challenges and opportunities
that arise from compliance with the EU AI Act. Increasingly,
AI-based applications are being used not only to optimise human
expertise in administrative tasks, but also to optimise the more
strategic business processes and ultimately, even to help
business decision-making.
Various touchpoints
There are many ways AI can be leveraged; AI strategies will vary
by the segments of clients they serve, the investment types they
support, their overall investment philosophies, and the AI
capabilities they possess. Even in the domain of digital
advisory, services could range from digital-only advisory simply
augmenting portfolio rebalancing capabilities with AI-derived
insights.
According to research from the Alan Turing Institute (3), within
asset management – including pensions, savings, and investments –
the interests of customers can be harmed by conflicts of
interest, excessive charges, suboptimal returns, or unexpected
financial losses. Using AI for purposes of portfolio management
and trade execution has the potential of having positive as well
as negative impacts when it comes to preventing such outcomes
(see Figure 2).
Figure 2: Potential benefits and harms of using AI in the
performance of investments
For example, in portfolio management (4) AI helps churn huge
chunks of data instantaneously and harvest meaningful,
context-relevant insights. Financial Institutions can use this
functionality to generate portfolio insights sensitive to dynamic
factors and wider contexts. Andrew Salesky, chief digital officer
at Charles Schwab Corp, reiterates this point in a conversation
with wealth management: “Newer disciplines like predictive
analytics and AI are allowing advisors to increase the scale at
which they can effectively deliver a customised client experience
and powering the solutions that can help them do it……….” (5)
.
AI’s full impact yet to be felt
As shown in part one, AI has a big role to play – and compliance
with the EU AI Act is essential to its success. In part two,
we will be expanding our discussion by examining compliance
strategies and financial services firms’ collaborations with
professional AI services firms.
Footnotes:
2, https://www2.datainnovation.org/2021-aia-costs.pdf
3, https://www.turing.ac.uk/sites/default/files/2021-06/ati_ai_in_financial_services_lores.pdf
4, https://www.capgemini.com/gb-en/insights/expert-perspectives/the-role-of-ai-in-wealth-management/
5, https://www.wealthmanagement.com/technology/ai-coming-wealth-management-here-s-what-means
