Financial regulation is struggling to keep pace with the rapid development of artificial intelligence, according to European policymakers, who are faced with the dilemma of how to support adoption while containing risks to market integrity and stability.
Nikhil Rathi, CEO of the UK’s Financial Conduct Authority, said the traditional rule-making cycle “doesn’t work” in an era of rapid technological change, especially as the development of AI accelerates.
“Technology is moving very fast, and we need to think differently about some of the new things we’re seeing in AI,” Rathi told CNBC’s “Squawk Box Europe” on Thursday.
Rathi highlighted the efforts of Britain’s Financial Stability Board on the frontier of AI, and the creation of the AI Safety Institute in the UK, as part of a wider campaign to help policymakers, regulators and businesses better understand risks and use technology safely.
Christine Lagarde, president of the European Central Bank, said that AI is a source of productivity and profit. But, in an interview with France’s Les Échos, he also warned that the technology poses “a huge risk.”
“For almost ten years we have been talking about cybersecurity risks, hacking, data theft and so on,” said Lagarde. “But with the speed and depth of AI models, we are facing a much greater risk, because it is happening so quickly, and because the means of protection – and the funding needed for them – are not yet available.”
His comments come after the impact of AI on productivity and market confidence emerged as a keynote address at the ECB’s annual meeting in Sintra, Portugal – Europe’s version of the Jackson Hole series – this week.
Sarah Breeden, deputy governor of the Bank of England, said agent AI could increase volatility during times of market stress.
In his Sintra speech on Tuesday, Breeden said that, currently, most commercial firms are using autonomous AI to perform low-risk tasks, such as research. “But that could change quickly,” he said.
Guardrails and circuit breakers?
The increased use of agent AI in financial markets may require greater oversight, he said, as guardrails “like circuit breakers or kill switches” can “slow down or stop trading in the entire market if incorrect AI models cause a market crash.”
But top banks and regulators recognize that Europe is lagging behind in AI investment and the development of frontier companies that drive success.
Boris Vujčić, vice-president of the European Central Bank, said: “Europe is now in a situation where… it should, of course, improve its capabilities in the field of AI. There has also been a lot of talk about sovereignty issues in the field of AI. Europe has shown in the past that it is able to adapt to new technologies …[to] raise productivity growth. [But] it wasn’t staying at the border.”
Rathi said market authorities ultimately need to strike a better balance in such rapidly evolving technologies.
He said that while tech innovation offers exciting opportunities for the UK, especially when it comes to the country’s productivity and growth challenges, it is important that markets are not exposed to risks that regulators cannot fully monitor.
“The truth is that some of these technologies are now moving in weeks, or months, and the traditional cycle of making rules does not work that way, so we need to think of new tools and a different way to interact with the market in a cooperative way, for example, in financial crimes and AI risks, so that we can make sure that we protect our objective of market integrity,” he said.
He added: “We don’t want to stand in the way of discovery, but we must be open about where it is dangerous.”
