Artificial Intelligence in Finance: Putting the Human in the Loop

CFTE Academic Paper Series: Centre for Finance, Technology and Entrepreneurship, no. 1.

University of Hong Kong Faculty of Law Research Paper No. 2020/006

50 Pages Posted: 3 Mar 2020 Last revised: 25 Mar 2020

See all articles by Dirk A. Zetzsche

Dirk A. Zetzsche

Universite du Luxembourg - Faculty of Law, Economics and Finance; Heinrich Heine University Dusseldorf - Center for Business & Corporate Law (CBC)

Douglas W. Arner

The University of Hong Kong - Faculty of Law

Ross P. Buckley

University of New South Wales (UNSW) - Faculty of Law

Brian Tang

The University of Hong Kong - Faculty of Law

Date Written: February 1, 2020

Abstract

Finance has become one of the most globalized and digitized sectors of the economy. It is also one of the most regulated of sectors, especially since the 2008 Global Financial Crisis. Globalization, digitization and money are propelling AI in finance forward at an ever increasing pace.

This paper develops a regulatory roadmap for understanding and addressing the increasing role of AI in finance, focusing on human responsibility: the idea of “putting the human in the loop” in order in particular to address “black box” issues.

Part I maps the various use-cases of AI in finance, highlighting why AI has developed so rapidly in finance and is set to continue to do so. Part II then highlights the range of the potential issues which may arise as a result of the growth of AI in finance. Part III considers the regulatory challenges of AI in the context of financial services and the tools available to address them, and Part IV highlights the necessity of human involvement.

We find that the use of AI in finance comes with three regulatory challenges: (1) AI increases information asymmetries regarding the capabilities and effects of algorithms between users, developers, regulators and consumers; (2) AI enhances data dependencies as different day’s data sources may may alter operations, effects and impact; and (3) AI enhances interdependency, in that systems can interact with unexpected consequences, enhancing or diminishing effectiveness, impact and explainability. These issues are often summarized as the “black box” problem: no one understands how some AI operates or why it has done what it has done, rendering accountability impossible.

Even if regulatory authorities possessed unlimited resources and expertise – which they clearly do not – regulating the impact of AI by traditional means is challenging.

To address this challenge, we argue for strengthening the internal governance of regulated financial market participants through external regulation. Part IV thus suggests that the most effective path forward involves regulatory approaches which bring the human into the loop, enhancing internal governance through external regulation.

In the context of finance, the post-Crisis focus on personal and managerial responsibility systems provide a unique and important external framework to enhance internal responsibility in the context of AI, by putting a human in the loop through regulatory responsibility, augmented in some cases with AI review panels. This approach – AI-tailored manager responsibility frameworks, augmented in some cases by independent AI review committees, as enhancements to the traditional three lines of defence – is in our view likely to be the most effective means for addressing AI-related issues not only in finance – particularly “black box” problems – but potentially in any regulated industry.

Keywords: fintech, regtech, artificial intelligence, human in the loop, financial regulation

Suggested Citation

Zetzsche, Dirk Andreas and Arner, Douglas W. and Buckley, Ross P. and Tang, Brian, Artificial Intelligence in Finance: Putting the Human in the Loop (February 1, 2020). CFTE Academic Paper Series: Centre for Finance, Technology and Entrepreneurship, no. 1., University of Hong Kong Faculty of Law Research Paper No. 2020/006, Available at SSRN: https://ssrn.com/abstract=3531711

Dirk Andreas Zetzsche

Universite du Luxembourg - Faculty of Law, Economics and Finance ( email )

Luxembourg, L-1511
Luxembourg

HOME PAGE: http://wwwen.uni.lu/recherche/fdef/research_unit_in_law/equipe/dirk_andreas_zetzsche

Heinrich Heine University Dusseldorf - Center for Business & Corporate Law (CBC) ( email )

Universitaetsstr. 1
D-40225 Düsseldorf
Germany
+49 211 81 15084 (Phone)
+49 211 81 11427 (Fax)

Douglas W. Arner (Contact Author)

The University of Hong Kong - Faculty of Law ( email )

Pokfulam Road
Hong Kong, Hong Kong
China

HOME PAGE: http://hub.hku.hk/rp/rp01237

Ross P. Buckley

University of New South Wales (UNSW) - Faculty of Law ( email )

Sydney, New South Wales 2052
Australia

Brian Tang

The University of Hong Kong - Faculty of Law ( email )

Pokfulam Road
Hong Kong, Hong Kong
China

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