Call For Public Comment: A Report on AI Use in the Financial Sector

This month, an interim report on artificial intelligence in the financial sector was published for public comment. The report was prepared by the Ministries of Justice and Finance, the Israel Competition Authority, the Israel Securities Authority, the Capital Market, Insurance and Savings Authority, and the Bank of Israel.

The report includes first-of-their-kind recommendations for regulating the use of AI in the financial sector. It is open for comments until December 15th.

General Approach and Principles for Use of Artificial Intelligence in the Financial Sector

The report centers on encouraging innovation and AI adoption, while addressing associated risks and establishing appropriate regulation as needed.

It proposes adopting flexible regulatory tools that can respond to technological developments, such as administrative directives and temporary regulations, while giving supervised entities discretion to implement self-regulation tools.

According to the report’s authors, Israeli regulation should align with global regulation in the field while avoiding the establishment of a separate local standard.  The report advocates a risk-based approach and the removal of unnecessary regulatory barriers to encourage a competitive, innovative, and efficient market.

The report also reviews general challenges associated with artificial intelligence, risks unique to the financial sector, and impacts in three areas—investment consulting and portfolio management, banking system credit, and insurance underwriting. We previously outlined the general risks of AI use by companies in the legal guide published this year.

Artificial Intelligence Challenges in the Financial Sector

The report outlines unique challenges of AI in the financial sector:

1. Financial stability risks – Reliance on a limited number of common AI models across the financial sector could lead many actors to behave similarly, potentially impairing independent and diverse decision-making. An operational failure in these systems could also affect many actors, with widespread consequences for the sector.

   Report recommendations: Continuously monitor AI use and map sensitive activities that rely on AI, while ensuring appropriate regulation.

2. Cyber and fraud risks – AI could be used to spread disinformation and facilitate financial fraud through deepfakes or other impersonation methods.

   Report recommendations: Expand regulatory monitoring and oversight of these risks, guide financial entities in mapping risks, and increase public awareness.

3. Risk to competition – The use of AI systems may increase market concentration and create barriers to entry for new actors, especially where a few suppliers control the development of base models.

   Report recommendations: Strengthen fair competition practices in accordance with competition laws and improve access to information required for AI model training, to promote equal opportunities and reduce market concentration.

4. Discrimination and individual harm – Errors arising from AI use could cause significant harm to customers affected by AI data processing. Examples include rejected credit applications, incorrect identification of suspicious transactions, and AI-based trading preferences.

   Report recommendations: Promote solutions to examine AI outputs and reduce bias and discriminatory outcomes.

Financial Sector Recommendations

The report focuses on three financial domains: investment consulting and portfolio management, banking system credit, and insurance underwriting.

Investment Consulting and Portfolio Management

AI can reduce costs and make consulting and portfolio management services accessible to a broader audience.

Report recommendations:

• Encourage investment consulting and portfolio management license holders to integrate AI into their activities to make financial services more accessible.
• Add a chapter in addressing current AI technology to the online services guidelines and examine the use of chatbots in investment consulting and portfolio management.
• Promote research into the behavior of AI system users to understand the technology’s impact on investor behavior.

Banking Credit

Report recommendations:

• To minimize the risks of discrimination and exclusion, clarify that AI uses are not exempt from existing law and that before using AI tools, financial institutions must have the means to comply strictly with regulatory requirements.
• Include AI issues in corporate governance processes to ensure that management and boards assume responsibility for the unique risks involved.
• Implement processes to review the data used to determine credit risks, protect data privacy, and ensure that only relevant data is used to train AI systems.

Insurance Underwriting

Next Steps

To ensure responsible integration of AI in financial services, the report recommends several important steps:

• Strengthen explainability for models where decisions require reasons to be provided, where there are significant consumer risks, or where AI plays a significant role in decision-making.
• Ensure human involvement in the decision-making processes where relevant.
• Ensure notification and disclosure of the use of AI tools and their impact on consumer services or products.
• Enhance personal data protection in the use of AI.
• Prevent discrimination in service, credit, and insurance provision.
• Expand financial entities’ responsibility to their customers to include activities performed through AI.
• Develop risk assessment and corporate governance mechanisms that enable fair and transparent AI use, including oversight mechanisms, relevant policy documents, and appropriate vendor assessments.

Recommendations for Financial Sector Companies

We recommend that all financial sector companies take steps now to ensure responsible and safe AI use, including:

• Identify and map AI processes used within the organization.
• Conduct a risk assessment regarding these uses.
• Formulate an internal policy for AI use and identify the stakeholders responsible for its implementation.
• Implement protective measures to ensure responsible and fair operation of AI systems.

***

Dr. Avishay Klein is a partner and head of the firm’s Privacy, Cyber and AI Department.

Adv. Masha Yudashkin is an associate in the firm’s Privacy, Cyber and AI Department.