New EU Legislation For Artificial Intelligence – What It Means For Wealth Management

Sean Donald John Musch and Michael Borrelli and Charles Kerrigan 13 December 2023

New EU Legislation For Artificial Intelligence – What It Means For Wealth Management

The arrival of new EU rules governing AI looks imminent. This article considers its main features and genuflects on what this could mean for the wealth management sector.

As the European Union moves towards adopting regulations on artificial intelligence, this means one of the most important collections of developed countries now has a rulebook ready for it. Other nations, such as the US, have moved in this direction. We carry the following commentary and analysis. The authors of this article are Sean Donald John Musch, chief executive, founder of AI & Partners, Michael Borrelli, chief operating officer and co-CEO at that firm, and Charles Kerrigan, partner at CMS UK. (We have carried analysis from CMS and AI & Partners in August about this legislation here, here and here.) 

The editors of this news service are pleased to share these views; the usual editorial caveats apply to comments from outside contributors. Email if you wish to respond.

The recently negotiated Artificial Intelligence Act by the European Union (EU) stands as a significant milestone, positioning the EU as a global leader in regulating AI technologies (1). The comprehensive rules, agreed upon by Members of the European Parliament and the Council, aim to ensure the responsible development of AI while upholding fundamental rights, democracy, and environmental sustainability.

Key provisions and safeguards
The Act includes a set of prohibitions on specific applications of AI that pose potential threats to citizens' rights and democratic values. Notably, it prohibits biometric categorisation systems based on sensitive characteristics, untargeted scraping of facial images for recognition databases, emotion recognition in workplaces and educational institutions, social scoring based on personal characteristics, and AI systems manipulating human behaviour.

Law enforcement exceptions are outlined, allowing the use of biometric identification systems in publicly accessible spaces under strict conditions, subject to judicial authorization, and limited to specific crime categories. The Act emphasises targeted searches for serious crimes, prevention of terrorist threats, and the identification of individuals suspected of specific crimes.

Obligations for high-risk AI systems
High-risk AI systems, identified for their potential harm to health, safety, fundamental rights, environment, democracy, and the rule of law, face clear obligations. This includes mandatory fundamental rights impact assessments applicable to sectors like insurance and banking. AI systems influencing elections and voter behaviour are also classified as high-risk, ensuring citizens' right to launch complaints and receive explanations for decisions impacting their rights.

Guardrails for general AI systems
To accommodate the diverse capabilities of general-purpose AI (GPAI) systems, transparency requirements have been established. This involves technical documentation, compliance with EU copyright law, and detailed summaries about the content used for training. For high-impact GPAI models with systemic risk, additional obligations such as model evaluations, mitigation of systemic risks, adversarial testing, reporting on incidents, cybersecurity measures, and energy efficiency reporting are introduced.

Support for innovation and SMEs
Recognising the importance of fostering innovation and preventing undue pressure on smaller businesses, the Act promotes regulatory sandboxes and real-world testing. National authorities can establish these mechanisms to facilitate the development and training of innovative AI solutions before market placement.

Wealth management and extra-territorial application
The Act's extra-territorial application is noteworthy, extending its regulatory reach to any business, irrespective of their location, when they deal with the EU. This underscores the EU's commitment to global standards for AI regulation. In its political position, the EU took a “pro-consumer” stance, prioritizing consumer rights. However, this stance drew varying reactions from tech firms and innovation advocates who might have preferred a different balance between regulation and freedom.

When it comes to wealth management, the use, development, and/or deployment of AI by wealth management businesses must comply with the EU AI Act. This encompasses aspects such as lead generation, client retention, compliance management, investment advice, market trend analysis, increased efficiency, and data centralisation, aligning with the Act's overarching goals of responsible and ethical AI development.

Sanctions and entry into force
The Act introduces substantial fines for non-compliance, ranging from €35 million or 7 per cent of global turnover to €7.5 million or 1.5 per cent of turnover, depending on the severity and size of the company.

What rapporteurs say
Co-rapporteur Brando Benifei highlighted the legislation's significance, emphasising the Parliament's commitment to ensuring rights and freedoms are central to AI development. Co-rapporteur Dragos Tudorache underscored the EU's pioneering role in setting robust regulations, protecting citizens, SMEs, and guiding AI development in a human-centric direction.

During a joint press conference, lead MEPs Carme Artigas (Secretary of State for Digitalisation and AI) and Commissioner Thierry Breton expressed the importance of the Act in shaping the EU's digital future. They emphasised the need for correct implementation, ongoing scrutiny, and support for new business ideas through sandboxes.

Next steps
The agreed text awaits formal adoption by both Parliament and Council to become EU law. Committees within Parliament will vote on the agreement in an upcoming meeting.

Significance and global impact of the Act
This legislation stands as a monumental achievement, positioning the EU as a trailblazer in responsible AI governance. Without its approval, the absence of unified regulations could have led to unchecked AI deployment, risking citizens' rights. Its approval ensures a framework for ethical AI development, setting a global standard. Geopolitically, the EU asserts influence by extending regulations extra-territorially, contributing to international norms. Economically, the Act inspires confidence, driving a sustainable AI economy. Its approval safeguards against potential abuses, fosters global collaboration, and charts a course for a technologically advanced, ethically grounded future.

The Artificial Intelligence Act represents a groundbreaking effort by the EU to balance innovation with safeguards, ensuring the responsible and ethical development of AI technologies. By addressing potential risks, protecting fundamental rights, and supporting innovation, the EU aims to lead the world in shaping the future of artificial intelligence.

The Act's successful implementation will be crucial in realizing this vision, and ongoing scrutiny will ensure the continued alignment with the EU's commitment to rights, democracy, and technological progress.



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