How Banks Can Innovate within the EU AI Act

The EU AI Act officially goes into effect next month with more stringent prohibitions on unacceptable risk taking hold in February. As financial institutions seek to comply with this pioneering piece of legislation, they face a growing list of challenges — especially related to onboarding cutting-edge technologies like generative AI (GenAI).

It’s clear from the recent Financial Times article, Europe’s Rushed Attempt to Set the Rules for AI, that many are starting to see the EU AI Act as a potential impediment to innovation. Leaders within financial institutions, meanwhile, are seeking to expand the use of AI-related technologies, including machine learning (ML), large language models (LLMs), natural language processors (NLPs), and GenAI.

If these things are at odds — banks seeking to implement AI at scale quickly and the EU seeking to rein in its use — then how can they ensure compliance while adopting these technologies quickly and safely at scale?

European financial institutions are increasingly aware that only robust AI governance and AI risk management operations can help keep the banks compliant with the EU AI Act. Ensuring that AI models are property developed, tested, and validated is key to banks finding success within the bounds of the EU AI Act as well.

Consider the key points of the EU AI Act that are most relevant to banks:

• Classification of AI systems
  • Categorizes AI systems into unacceptable, high, and limited or minimal risk.
  • Financial institutions often use high-risk AI systems for credit scoring, fraud prevention, and customer profiling.

• High-Risk AI systems requirements
  • Risk management: Continuous monitoring and assessment of risks.
  • Data governance: Ensure data quality, integrity, and relevance.
  • Transparency and documentation: Maintain detailed documentation; inform users about AI interactions.
  • Human oversight: Allow for human intervention and review in decision-making.

• Compliance and enforcement
  • Ensure AI systems comply with the Act; conduct regular audits and assessments.
  • Fines and penalties: Significant fines for non-compliance.

• AI governance framework
  • Establish policies and procedures for ethical and responsible AI use.
  • Include accountability mechanisms and ethical guidelines.

• Impact on innovation
  • Balance compliance with promoting AI innovation to remain competitive.

• Sector-specific regulations
  • Navigate overlapping regulations like GDPR and MiFID II alongside the AI Act.

Finding balance between sensible regulation while allowing businesses large and small to find room to innovate is nothing new. This has happened with every new technological shift. But as new AI and GenAI use cases emerge, there’s always a delicate balance to be found between innovation and logical regulation. In many ways, however, AI feels different. The pace of innovation is so rapid and the implications of this technology are so profound that traditional regulatory approaches often struggle to keep up.

The good news is that there are solutions that can help banks navigate the EU AI Act and other emerging and existing regulations. Many financial institutions are looking for advanced compliance tools and AI governance frameworks designed to ensure that AI systems meet regulatory requirements without stifling innovation. These solutions need to include automated compliance monitoring, robust data governance practices, and transparent reporting mechanisms to keep regulators informed and stakeholders confident in the ethical use of AI.

Moreover, collaboration between regulators, financial institutions, and AI developers is crucial. By working together, these groups can create a regulatory environment that not only protects consumers and ensures fair practices but also fosters innovation and competitiveness in the financial sector. As the landscape of AI regulation continues to evolve, a proactive and cooperative approach will be essential for balancing the risks and rewards of AI adoption in financial services.

Interested in learning how your business can manage its adherence to the EU AI Act? Click here to speak with a ValidMind expert today.