The US Department of Treasury has put out a call for comment on the use of artificial intelligence (AI) in financial institutions. It is an in-depth series of questions and gives insights into the view of the Treasury in the use of AI. While the questions lean more towards banking and securities, it also would cover insurers and more, so all of Celent’s customers should find it of interest.
Department of Treasury Request for Information
We suggest that all financial institutions will, at a minimum, want to read the Treasury’s questions and positions. We would hope that most would respond, as this could lead to significant regulatory oversight on the use of AI in Financial Services. The Treasury also focuses on third-party providers, or vendors, which makes this request critical for vendors of all sizes that provide, or intend to provide, AI capabilities as an offering.
Rather than just repeating the questions here, we thought we would bring out several that are critical. From our perspective, the focus is very much on the consumer and the impact on them, particularly on less served communities. Key topics include bias, data privacy, data protection, and transparency. There is a special emphasis on the use of third-party providers, both in the creation of the AI models and in accessing data about the specific circumstances being analyzed. These could be a consumer loan, a credit card application, a life insurance application and more. As mentioned earlier, the impact on less served communities and the fear of bias and the requirement of transparency is on point.
This is not the Department of Treasury’s first look at this topic. In November of 2022, they looked at the opportunities and risk of AI as a part of a review of non-bank firms in the consumer finance market. The report found instances of bias and discrimination and the lack of transparency made oversight more difficult.
In December of 2023, the Department issued an RFI on national financial institutions inclusion strategy, which included a focus on AI.
In March of 2024, the Department published a report on AI and cybersecurity. The report included opportunities and challenges that AI provided for the security of the financial marketplace. This was a response to President Biden’s Executive order 14110 issued on October 30, 2023 entitled Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence.
An early review of AI in financial institutions was from Treasury’s Financial Crimes Enforcement Network (FinCEN) which looked at the use of AI to combat money laundering in 2018.
Let’s look at a few of the questions. These are not the full questions, but excerpts. This is not a complete list of the questions either. We refer you to the link above for the entire document.
Some questions are foundational:
What types of AI models and tools are financial institutions using?
What are the actual or expected benefits from the use of AI?
The above question was broken down by stakeholders, including financial institutions, financial regulators, consumers, advocacy groups, and more.
To what extent are the AI models and tools used by financial institutions developed in-house, by third-parties, or based on open-source code?
Some are more pointed:
Are their challenges or barriers to access for small financial institutions seeking to use AI?
How do financial institutions expect to apply risk management or other frameworks and guidance to the use of AI, and in particular, emerging AI technologies?
The questions go on to focus on risk mitigation, data privacy, fraud, bias, and more, with an emphasis on the impact to underserved communities.
For insurers, there is a direct reference to the NAIC’s Model Bulletin on the Use of Artificial Intelligence Systems by Insurers.
While a short summary, the topic is critical for virtually every financial institution including banks, credit card issuers, insurance companies, and more. The use of AI can be a huge competitive advantage when used properly and within reasonable guardrails. It is not that AI is inherently risk-prone, but more a matter of the speed and capabilities of AI make it easier to make bad decisions, not just good decisions.
As an added read, there is a section in the CEO letter in JPMorganChase’s 2023 annual report. Just search on AI.
JPMorganChase CEO letters
The deadline for comment on the Department of Treasury RFI is August 12, 2024.