Rise in Fraud Anticipated with Increased AI Use in Finance, Warns UK Watchdog

The Financial Conduct Authority (FCA), the United Kingdom’s chief financial watchdog, has issued a warning about the increased risk of fraud associated with the growing adoption of Artificial Intelligence, or AI, in financial services.

While AI can provide endless benefits, such as cutting prices for consumers and streamlining operations, it may also pose significant threats to market integrity and consumer protection if not properly managed.

The watchdog has already observed how volatility during a trading day has doubled and amplified compared to during the 2008 global financial crisis.

“This surge in intraday short-term trading across markets and asset classes suggests investors are increasingly turning to highly automated strategies,” the watchdog says.

The watchdog will test how its existing rules on senior managers’ accountability at firms it regulates and forthcoming tougher “consumer duty” on firms towards their customers can manage risks and develop opportunities from AI.

The FCA on Wednesday is expected to set out its thoughts on how to regulate how Big Tech intersects with financial services, with questions such as whether their troves of data could disrupt competition in the market

AI and Financial Services: A Promising Future

AI has transformed many sectors of the economy, and the financial industry is no exception. Financial institutions are increasingly leveraging AI’s capabilities to analyse large data sets, automate routine tasks, improve decision-making, and enhance customer service. From robo-advisors providing personalised financial advice to AI-powered fraud detection systems, the applications of AI in finance are vast and varied.

These advancements are not without their challenges, though—Nikhil Rathi, chief executive of the FCA warned that AI’s increasing use could lead to an increase in fraudulent activities and cyber threats. This stems from the fact that as technology evolves, so do the techniques used by conmen and cybercriminals.

Fraud Prevention in the Age of AI

Fraudsters are increasingly using AI to carry out sophisticated scams, creating more realistic phishing emails, generating fake identities, and outsmarting traditional fraud detection systems. These concerns have put financial regulators worldwide, including the FCA, on high alert.

Rathi has suggested that financial institutions are to look into getting their investments together for fraud prevention and cyber resilience. The watchdog plans to take a robust approach, advocating for beneficial innovation while ensuring proportionate protections.

“We will remain super vigilant on how firms mitigate cyber-risks and fraud given the likelihood that these will rise,” Rathi says.
The FCA intends to test how its existing rules on senior managers’ accountability and forthcoming tougher “consumer duty” can manage the risks and harness the opportunities offered by AI. This approach recognises that AI’s impact extends beyond the technology itself to encompass broader organisational and societal implications.

The Role of Big Tech in Financial Services

A related issue raised by the FCA is the intersection of Big Tech and financial services. Big Tech companies, armed with extensive data sets and advanced AI capabilities, can predict consumer behaviour more accurately than traditional financial institutions. This could potentially disrupt competition and create imbalances in the market.

Rathi questions what it means for competition if big tech firms have access to unique and comprehensive data sets, such as browsing data, biometrics, and social media data. The FCA is expected to share its thoughts on regulating this area, indicating its intent to address the challenges posed by the interaction of Big Tech and finance.

The way forward? As much as the increased use of AI in finance undoubtedly brings many benefits, it is also a potent reminder that innovation must be balanced with the need to manage risks wisely. Rathi’s comments highlight the importance of robust regulatory oversight and the continued vigilance of financial institutions in managing the potential threats associated with AI.

As AI continues to transform the financial landscape, regulators and industry participants must work together to ensure that technology serves the interests of consumers and the broader market.

This means investing in advanced fraud prevention and cyber resilience measures, holding senior managers accountable for managing AI-related risks, and engaging in thoughtful dialogue about the role of big tech in financial services. Doing so, could ensure the finance industry can embrace and put to use the power of AI while safeguarding against potential threats, ensuring a stable and secure financial ecosystem that benefits everyone.