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.
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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
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).