Data privacy and hallucinations are the biggest risks to the financial services sector brought by artificial intelligence (AI), while half of global regulators are just catching up on the technology, according to a global study.
The University of Cambridge’s Judge Business School study found that 80% of regulators see data privacy and protection as a top risk, while 70% believe the same to be true for AI hallucinations and unreliable AI outputs.
The UK Foreign, Commonwealth and Development Office, which supported the study, questioned 628 global finance organisations, including a roughly equal share of central banks, financial services businesses and tech suppliers.
Operational resilience, model opacity and lack of explainability, loss of human oversight, adversarial AI-related cyber threats, and algorithmic bias and fairness were the next most serious risks, according to regulators.
The Bank for International Settlements, the International Monetry Fund and the World Economic Forum, were also involved in the research, which was completed in collaboration with Financial Innovation for Impact.
The research found that 80% of financial services firms are adopting AI to some level, with its use in software development the most mature, with 42% of respondents fully deployed and 33% in development.
But the survey found that nearly half (48%) of the 130 regulatory authorities surveyed said they are “still in the ‘exploring’ stage for AI adoption or not engaged with AI at all”.
Regulators are, however, “generally optimistic about AI’s role”, according to the study report, with 78% citing AI as “significant or transformative for supporting their objectives by 2030”.
Almost a third (29%) rate AI as potentially transformative, with 49% expecting it to support financial inclusion, as compared to 12% that see it as challenging. Some 42% believe the technology will help fight financial crime, versus 18% that said it will make it more challenging.
Bryan Zhang, executive director of the Cambridge Centre for Alternative Finance and executive chair of Financial Innovation for Impact, said the scale and pace of AI adoption in financial services is “genuinely remarkable”.
“Four in five firms are already deploying AI at some level, agentic systems have crossed into the mainstream, and real productivity and profitability gains are being felt across the industry, although unevenly.”
But he added: “Our data also reveals a sector navigating a very fluid and complex landscape, with fragmented views expressed by the industry, regulators and Al vendors on issues such as where accountability lies when things go wrong, and risks such as cyber vulnerabilities are compounding faster than they can be humanly overseen. The opportunity is enormous – and so is the responsibility to get the governance right and strengthen trust.”
In January, a Treasury Committee report said the UK public and the country’s finance system are “exposed to potential serious harm” because regulators in the financial sector are “not doing enough” to manage risks introduced by AI.
The MPs reported that the risks come as a result of the positions adopted by the Bank of England and the Financial Conduct Authority (FCA), which the committee described as a “wait-and-see approach”.
“The major public financial institutions, which are responsible for protecting consumers and maintaining stability in the UK economy, are not doing enough to manage the risks presented by the increased use of AI in the financial services sector,” said the committee of MPs.
Meanwhile, senior leaders across financial services have warned of a critical gap in AI governance standards, according to research from AI compliance firm Zango.
Timothy Clement-Jones, Liberal Democrat spokesperson for Science, Innovation and Technology in the House of Lords and co-chair of the All-Party Parliamentary Group on AI, wrote in the report: “What is immediately missing is the translation of high-level regulatory principles into day-to-day operational practice. We cannot simply wait for the aftermath of the first major AI-fuelled financial scandal to force us into action.”