The EU Artificial Intelligence Act: Effects On Wealth Management And Beyond – Part 2

Sean Musch Michael Charles Borrelli Isabel Neelands and Charles Kerrigan 24 August 2023

The EU Artificial Intelligence Act: Effects On Wealth Management And Beyond – Part 2

This is the second 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. 

(See part one, here.)

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 articlefrom compliance, regulatory, and legal expertsincludes 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 triology from personnel at AI & Partners (Sean Musch and Michael Charles Borrelli). 

In this second article we cover an introduction to the European Commission’s proposed Harmonised Rules on Artificial Intelligence (the EU AI Act) and its impact on the wealth management sector. (Editor's note: to comment, email; the usual editorial disclaimers apply to views of outside contributors.)

Compliance – the competitive differentiator

Practical guidance for compliance
Significantly, the EU AI Act (and AI regulation generally) is expected to help improve the business of financial institutions and wealth management firms. Not only does the EU AI Act seek to protect the rights of EU citizens globally, but by default it also creates a framework for safe deployment of AI systems, thereby encouraging its confident adoption, roll out and use, to improve business productivity and services, while managing client perception, expectation and acceptance of these new technologies. 

Successful development, deployment and use of AI never depends on one person; it rests on a collaboration between different teams and positions within a business. The EU AI Act functions much the same, drawing on a variety of positions’ assets to help them implement its requirements across the business to achieve compliance. 

As they embark on their “EU AI Act journey,” banks and wealth management firms will discover specific strengths, weaknesses, and limitations to what they can do in their business and promote and foster safe, secure and trustworthy AI systems. These all depend on a person's position and the responsibilities they hold within their business. Firms should establish and operate an EU AI Act Framework which includes five phases to help achieve readiness, as shown in Figure 1: Assess, Design, Transform, Operate and Conform. The goal of the framework is to translate EU AI Act obligations into actions and outcomes that help clients effectively manage both safety, security, and trustworthiness, to help reduce risk and avoid incidents. 

Figure 1: AI & Partners’ EU AI Act Framework

Implementing transparency measures
Transparency is at the core of fostering client trust. Firms should adopt AI systems that can be explained and interpreted, enabling clients to understand how AI-driven decisions are made. By providing clear insights into the functioning of AI algorithms, they can dispel potential biases and avoid opaque decision-making.

The need or desire to access information about a given AI system is motivated by many reasons; there are many concerns that may be addressed through transparency measures. One important function of transparency is to demonstrate trustworthiness which, in turn, is a key factor for the adoption and public acceptance of AI systems. Providing information may, for instance, address concerns about a particular AI system’s performance, reliability and robustness; discrimination and unfair treatment; data management and privacy; or user competence and accountability.

In an article from the Financial Conduct Authority (1), the task of developing an organisation’s approach to AI transparency is described as identifying a wide range of potentially relevant types of information and deciding how to deal with each of them. There are three salient considerations which arise when reflecting on the ‘why’, ‘who’ and ‘when’ of transparency:

Figure 2: The "Transparency Matrix"

Ensuring human oversight in AI systems
While AI enhances decision-making, human expertise remains irreplaceable. Organisations should remain aware of the need for robust human oversight mechanisms in AI systems to review, validate, and intervene if necessary (the “Hybrid Approach”). This combination of AI and human judgment ensures a balanced approach to investment strategies, reducing the risk of AI-driven errors.

Data from Accenture (2) shows that as companies learn from their initial use cases and the potential of AI technologies becomes clearer, AI quickly rises to a “C-suite” priority. Notwithstanding, truly realising that potential is much harder. Based on their survey results, 76 per cent of executives struggle with how to scale AI across the enterprise (2).
One of the key roadblocks to scaling AI is governance and risk management. Specifically, AI decisions in wealth management have a real impact on people's lives. Placing decision-making capability in the hands of a machine gives rise to large questions around ethics, trust, legality and responsibility. In this respect, both explainability and oversight are paramount, with the hybrid approach (human and machine) needed. Figure 3 shows how this can be embedded in an organisational context.

Figure 3: Intersection of organisational elements 

Collaboration counts in the long-term

Advantages of striking partnerships
Collaborations with trusted service providers specialising in AI and compliance brings immense advantages to firms in a new technological realm. Specialist service providers possess deep expertise in navigating complex AI regulations, allowing senior managers to focus on their core competencies.

For example, Project Infinitech (3), a consortium-led initiative comprising 48 participants in 16 EU member countries, has pilot AI-driven products and services that include use-cases around Know Your Customer (KYC), customer analytics, personalised portfolio management, credit risk assessment, financial crime and fraud prevention, insurance and regulatory technology (RegTech) tools incorporating data governance capabilities and facilitating compliance to regulations. Collaboration, in this sense, was core to its success.

A multitude of opportunities exist to streamline operations
Embracing AI in wealth management presents a multitude of opportunities for streamlining operations, improving client experiences, and delivering superior investment strategies. However, compliance with the EU AI Act is of paramount importance to avoid large fines, litigation risks, and maintain integrity and trust in the industry. 

Wealth managers should prioritise transparency and human oversight while proactively complying with AI regulations. By partnering with professional services firms like AI & Partners, wealth managers can confidently navigate complex legalities, ensuring that their AI systems remain compliant and, most importantly, build trust with their clients through responsible AI usage. 





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