Eva Dauberton
News Editor
US Treasury's Laurie Schaffer discusses AI
Laurie Schaffer, the Acting Assistant Secretary of Financial Institutions at the US Department of the Treasury, recently spoke at the Electronic Transaction Association (ETA) Annual Fintech Policy Forum. During her remarks, she discussed the Treasury’s perspective on artificial intelligence (AI), both broadly and specifically in relation to consumer finance and the insurance sector.
Schaffer also highlighted the Treasury’s work in this area in light of President Biden’s Executive Order on the safe, secure, and trustworthy development and use of AI, which aims to establish new standards for AI use.
Treasury's broad views on AI
The Treasury recognises AI’s potential and even integrates it internally. However, Schaffer also emphasised the need to consider the associated risks, which she categorised into three main groups:
- Risks stemming from the design of the AI tool or system, such as issues with the model, the translation of data into predictions, or the quality of the data itself.
- Operational and cyber risks, encompassing reliance on third parties and the potential exploitation of Gen AI by malicious actors.
- Risks arising from how humans use or deploy AI, including overreliance on AI outputs.
Risks and benefits of AI use in the insurance sector
Schaffer highlighted the increasing focus on AI and machine learning among insurers. She emphasised the potential for improved efficiency and reduced costs, which could, in turn, address insurance protection gaps by enhancing availability, affordability, and accessibility. However, Schaffer also raised concerns about the lack of explainability in AI models and the potential bias in the data used for predictive models.
To tackle these challenges, she suggested that insurers and regulators should take important steps to protect consumer privacy through adherence to consumer notification and consent requirements, data retention and deletion policies, data sharing agreements, and data security protocols. Additionally, she emphasised the need for transparency in AI algorithms to assess accuracy, fairness, and suitability more effectively.
Risks and benefits of AI use in consumer finance:
In that area, she noted that AI facilitates consumer credit access by examining a broader range of data to generate diverse credit analyses, a method that could potentially expand access to consumer credit compared to the traditional approach. However, she also noted concerns around increased privacy and security risks due to the vast amount and variety of consumer data involved. Additionally, there are concerns about compliance with existing fair lending laws if institutions cannot explain the basis for adverse action underwriting decisions, also known as the “black box” problem.
To address these challenges, Schaffer suggested that policymakers analyse how AI performs compared to traditional credit analysis techniques and ensure that the new processes are accountable to consumers.
Treasury’s efforts to understand and address the risks of AI
Schaffer mentioned several initiatives undertaken by the Treasury to understand and address the risks of AI, including:
- The AI report issued in March 2024: "Managing Artificial Intelligence-Specific Cybersecurity Risks in the Financial Services Sector," which outlines best practices and a series of next steps to address immediate AI-related challenges.
- Continuous stakeholder engagement.
- The recently issued request for information (RFI) on the opportunities and risks presented by new developments and applications of AI in the sector.
- On insurance specifically, the roundtable on AI in the insurance sector recently conducted by the Federal Insurance Office.
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SFC and HKMA issue conclusions paper on OTC derivatives reporting regime proposals
The Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) have issued a conclusions paper following their joint consultation on further enhancements to the over-the-counter (OTC) derivatives reporting regime in Hong Kong issued in March 2024.
The proposals included mandating the use of Unique Transaction Identifier (UTI), Unique Product Identifier (UPI), and the reporting of Critical Data Elements (CDE).
Most respondents supported these proposals, and the conclusions paper now includes a final list of data elements that must be reported. The implementation date for these changes is set for 29 September 2025.
To facilitate implementation, the SFC and HKMA have updated the Administration and Interface Development Guide (AIDG) package. In due course, they will provide an updated version of the Supplementary Reporting Instructions (SRI) and FAQs.
The pending definition and format of certain data fields will be finalised in the upcoming final report of the CDE Technical Guidance version 4 (tentatively by the first quarter of 2025), and an updated list of data fields will be published in a gazette notice thereafter, to be effective on 29 September 2025.
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HKMA issues finalised SPM modules and banking returns for large exposures reporting
The Hong Kong Monetary Authority (HKMA) has issued a circular announcing the finalisation of revisions to several Supervisory Policy Manual (SPM) modules and banking returns, along with their respective Completion Instructions (CIs). These revisions are primarily aimed at implementing the Banking (Exposure Limits) (Amendment) Rules 2023 (BELAR), which will come into effect on 1 January 2025.
Reporting institutions are required to submit the revised banking returns starting from the reporting position as of 31 March 2025.
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ECB's Frank Elderson on the ECB guide on governance and risk culture
Frank Elderson, Member of the Executive Board and Vice-Chair of the Supervisory Board of the European Central Bank (ECB), delivered introductory remarks at the stakeholder meeting on the ECB guide on governance and risk culture. A consultation on the draft guide was launched in July 2024, with a deadline for feedback on 16 October 2024.
Elderson explained the reasons behind the development of the guide and its coverage. He noted that the guide aims to address persistent weaknesses in the composition and effectiveness of management bodies, as well as the quality of oversight. These weaknesses can be attributed to various factors, including structural and behavioural issues.
Elderson also provided details on the content of the guide, specifically that it:
- Outlines specific supervisory expectations on governance and risk culture, taking into account the diverse governance structures and national laws across Europe.
- Incorporates good practices based on real-life examples observed in banks from different countries, governance structures, and business models.
- Explicitly includes risk culture, which encompasses dimensions such as the tone from the top and leadership, effective communication, the culture of challenge and diversity, incentives, and accountability for risks.
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EIOPA issues consultation on supervision of IORPs liquidity risk management
EIOPA has released a consultation paper on a draft opinion regarding the supervision of liquidity risk management for Institutions for Occupational Retirement Provision (IORPs).
Some context
Under the IORP II Directive, IORPs are required to have a comprehensive risk management system in place, which includes liquidity risk management where applicable. Competent authorities must evaluate the risks faced by IORPs and their ability to assess and manage these risks as part of the supervisory review process. Member States can add to the IORP II Directive through national regulation or supervisory measures. An EIOPA survey, however, revealed that only a small number of Member States impose specific requirements on liquidity risk management for IORPs.
This Opinion aims to promote supervisory convergence in the supervision of liquidity risk management by IORPs.
Key takeaways
The draft Opinion encourages a risk-based, forward-looking and proportionate approach and expects supervisors:
- To monitor and assess the liquidity risk exposures of IORPs.
- When IORPs are found to have material liquidity risks, to assess their ability to manage these risks.
- To ensure that IORPs exposed to material liquidity risks fulfil some key principles regarding the management of this exposure, including by stress testing cash flows, drawing up contingency plans and creating a buffer of liquid assets to cover any shortfalls.
Next steps
The deadline for feedback is 20 December 2024 and EIOPA aims to publish the final Opinion in 2025
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