ESMA Releases Statement on AI in Retail Investment Services

Regulation | Jun 5, 2024

Image: AI and Retail Investment Services, ESMA Statement

AI in Retail Investment Services Guidance Released by the European Securities and Market Authority (ESMA)

The European Securities and Markets Authority (ESMA) has published a public statement on the use of Artificial Intelligence (AI) in retail investment services. The document offers important advice for investment organizations hoping to balance the risks and rewards of artificial intelligence, especially those that provide retail investment services in the European Union (EU). Chief Operating Officers (COOs), Chief Compliance Officers (CCOs), and other senior management in charge of implementing and overseeing how AI technologies are used in their companies.

Important to note that the EU’s AI Act was given final approval on May 21, 2024, (effective 2026), by establishing a comprehensive legal framework that regulates the application of AI across a variety of industries, including financial services, and possibly setting a new global standard for AI regulation.

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While ESMA’s guidelines are primarily concerned with MiFID II compliance and the use of AI in retail investing services and to support participants in understanding the legal requirements and industry best practices for incorporating AI into their operations while maintaining ESMA standards compliance and protecting the interests of their clients.

5 Select Takeaways from ESMAs Statement

1.  Protecting Client Interests

Behave in the best interest of clients. Businesses need to make sure that the use of AI tools in investment decision-making is transparent. This means being transparent with clients about how AI is used in decision-making procedures, and making sure the information is delivered clearly without misrepresentation.

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• Do you tell your clients up front about how AI affects their investment decisions?
• Do your clients receive accurate, impartial, and non-misleading information from our AI tools?

2. Improving Governance and Oversight

Management must take responsibility and ownership of the application of AI technologies within their firms. So establishing a strong governance framework to monitor AI’s performance and how it aligns with the company’s risk tolerance, strategy, and overarching compliance structures is key.

• What governance does your company have in place today to keep track and evaluate the use of AI applications?
• How well does your management even understand the AI technologies we are using?

3.  Effective Risk Management

This includes understanding the quality and types of data being used to train AI systems, regular testing, and monitoring of AI models to mitigate potential risks and biases. Special focus on the performance and integrity of AI applications and use.

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• Is your data quality sufficient and reliable for your AI requirements?
• Do your regularly test and monitor our AI models for risks and biases?

4.  Staff Training and Competence

Firms must adequately train all staff using AI technologies on operational aspects, potential risks, ethical considerations, and regulatory implications. Training and upskilling must be continuous to adapt to the quickly changing regulatory landscape.

• Does your staff and leadership adequately trained on the use of AI technologies?
• Is there a continuous learning program to keep up with evolving AI technologies and regulations?

5.  Keep Detailed Records

To ensure compliance with MiFID II requirements and provide a clear audit trail for regulatory review, companies are expected to keep extensive records documenting the use of AI technologies, including decision-making processes, data sources, algorithms, and any modifications over time.

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• Does your firm maintain comprehensive records of its AI applications, decision-making, and use?
• Does your company meet the MiFID II requirements regarding AI record-keeping practices?

Conclusion

Stay up to date with this AI in retail investment services statement from ESMA.  Innovate while maintaining investor confidence by establishing a strong risk management culture and meeting regulatory requirements.

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