Increasing use of AI in financial services: Managing the regulatory and litigation risks

Herbert Smith Freehills Kramer LLP have published an article in Butterworths Journal of International Banking and Financial Law examining the increasing use of AI in financial services and the associated regulatory and litigation risks which may arise for financial firms. 

The financial services sector is at the forefront of the AI revolution. Firms are increasingly using AI to improve efficiency, enhance risk management, and tailor products and services. A survey from the Bank of England and the Financial Conduct Authority at the end of 2024 reported that 75% of firms responding were already using AI, with a further 10% planning to adopt it within three years. 

Reported usage spanned a wide range of business areas and over half of all AI use cases involved some degree of automated decision-making. Firms identified the greatest benefits as being in data and analytical insights, anti-money laundering, fraud detection and cybersecurity. At the same time, they recognised significant risks relating to data privacy and protection, data quality and data security. 

These findings illustrate the central tension facing firms: AI offers clear operational advantages but also poses a range of risks to be managed.

In this article, we consider: the regulatory approach to AI in the financial services sector, the key regulatory and litigation risks for firms, and the practical steps that firms can take to mitigate such risks.

The article can be found here: Increasing use of AI in financial services: managing the regulatory and litigation risks This article first appeared in the June edition of JIBFL.