Artificial Intelligence in Financial Services
Artificial intelligence is everywhere. Although we may not see its influence on our daily lives yet, in many sectors and services it is widely used. Maybe we do not see them around yet, however, we all enjoy speculating and discussing the possibility that artificial intelligence will take jobs away from people in the future. For example, IBM’s famous algorithm, Watson, is already helping diagnose cancer. It is easy to see that artificial intelligence will be heavily used in medicine in the future, and moreover, it may even be more successful than human doctors. We do not know yet.
During the infancy of artificial intelligence, banking and financial services may be the sector that employs artificial intelligence to the greatest extent among other sectors. We can see the artificial intelligence in the mobile banking apps we use, and that artificial intelligence gives the people the opportunity to access to banking services without having to visit brick-and-mortar institutions. Today, the amalgamation of traditional banking and financial services with artificial intelligence is called Financial Technology, in short, FinTech.
A recent product of FinTech has been boggling the minds of people especially regarding the extent of its liability. It is the robo-advisor. Basically, a robo-advisor is an online platform where people can get investment advice from an algorithm, an artificial intelligence, which is programmed to process data and generate investment advice. Investors only need to visit a robo-advising platform on the internet and enter information such as their age, income, risk appetite, previous investments and etc. The algorithm processes this data and “claims” to be generating the best investment method for the investor. In many cases, investors are letting the algorithm invest on their behalf. So, robo-advisor is not only a financial advisor, but it also does investment on behalf of its customers.
The main target of robo-advisors are people with limited disposable income and low experience in financial markets. It is much cheaper to use a robo-advisor than to get service from a human financial advisor. At this point, we cannot deny that robo-advisors are providing service to the people that would normally not get service from a human financial advisor, and by doing so, robo-advisors are making these people familiar with the dynamics of financial markets.
However, in terms of the legal implications of this state-of-art product, there is a very essential question: Is a robo-advisor liable for its decisions and investment advice as a human financial advisor? Securities regulators have been trying to answer this question, but they failed to find a common ground to find a solution to this tricky issue. For example, the Securities and Exchange Commission in the USA notified investors that robo-advisors have the same duties and liabilities as human financial advisors. However, another major actor in the financial markets, the Financial Industry Regulatory Authority, stated that robo-advisors cannot have the same liabilities as human financial advisors because they cannot perform a portfolio analysis like a human financial advisor. In Canada, the Canadian Securities Administrators stated that robo-advisors are recognized as financial advisors, however, only hybrid-robo advisors are allowed (hybrid robo-advisors use both artificial intelligence and human financial advisors to generate investment advice unlike a pure robo-advisors which generate the investment advice solely through an algorithm).
As we can see, securities administrators are still not sure about the liabilities of robo-advisors. We have to admit, this is not an easy task. Especially, when we do not know the underpinnings of the algorithm used to create investment advice, it gets trickier to set certain standards to regulate it.
One might argue that if the robo-advisor violates the interests of its customers, then the creators of the robo-advisors should be held liable. This approach is sound; however, it cannot be applied in practice. Because there is no direct connection between coding the algorithm and the robo-advisor’s wrongful practices. We do not know if even a perfectly designed artificial intelligence may make mistakes or not. We are still not at a position where we can observe that. We are trying to foresee its future.
It goes without saying that the innovation in financial markets, and in every other sector, should be encouraged. But, undoubtedly, innovation has its own risks. One day, a robo-advisor may be subjected to a sanction by a court, not its creators. We are not there yet. But we are lucky to be living in a time where we can see this change.