Artificial intelligence (AI) is poised to affect every aspect of the world economy and play a significant role in the global financial system, leading financial regulators around the world to take various steps to address the impact of AI on their areas of responsibility. The economic risks of AI to the financial systems include everything from the potential for consumer and institutional fraud to algorithmic discrimination and AI-enabled cybersecurity risks. The impacts of AI on consumers, banks, nonbank financial institutions, and the financial system’s stability are all concerns to be investigated and potentially addressed by regulators.
It is the goal of Perficient’s Financial Services consultants to help financial services executives, whether they lead banks, bank branches, bank holding companies, broker-dealers, financial advisors, insurance companies or investment management firms, the knowledge to know the status of AI regulation and the risk and regulatory trend of AI regulation not only in the US, but around the world where their firms are likely to have investment and trading operations.
Japan currently has yet to pass a law or regulation specifically directed to regulating the use of AI at financial services firms. Currently, the Japanese government and regulators are taking an indirect approach of supporting a policy goal of prioritizing innovation while minimizing foreseeable harms.
On April 19, 2024, the Japanese government published new “AI Guidelines for Business Version 1.0” (the “Guidelines”). While not legally binding, the Guidelines are expected to support and induce voluntary efforts by developers, providers, and business users of AI systems through compliance with generally recognized AI principles and are similar to the EU regulations discussed previously in that they propose a risk-based approach.
As noted on page 26 of the English version of the Guidelines, the Guidelines promote “agile governance” where “multiple stakeholders continuously and rapidly run a cycle consisting of environment and risk analysis, goal setting, system design, operation and then evaluation in various governance systems in companies, regulations, infrastructure, markets, social codes and the like”.
In addition to the Guidelines, an AI Strategy Council, a government advisory body, was established to consider approaches for maximizing the potential of AI while minimizing the potential risks to the financial system. On May 22, 2024, the Council submitted draft discussion points concerning the advisability and potential scope of any future regulation.
Finally, a working group in the Japanese Parliament has proposed the first specific Japanese regulation of AI, “the Basic Act on the Advancement of Responsible AI,” which proposes a hard law approach to regulate certain generative AI foundation models. If passed as-is, the Japanese government would designate the AI systems and developers that are subject to regulation; impose obligations on them with respect to the vetting, operation, and output of the systems; and require periodic reports concerning AI systems.
The proposed obligations would provide a general framework, while industry groups for financial services firms would work with the Japanese Financial Services Agency (“JFSA”) to establish the specific standards by which firms would comply. It is further thought that the government would have the authority to monitor AI developers and impose fines and penalties for violations of the reporting obligations and/or compliance with the substance of the law.
