AI is outpacing the rules, Europe’s top bankers and regulators warn

Financial regulation is struggling to keep pace with the rapid development of artificial intelligence, according to European policymakers who are grappling with how to support adoption while containing risks to market integrity and stability.

Nikhil Rathi, chief executive of the UK Financial Conduct Authority, said the traditional rule-making cycle “doesn’t work” in an age of fast-paced technological change, particularly when artificial intelligence development is accelerating.

“Technology is moving incredibly fast, and we need to think differently about some of the innovations we’re seeing in artificial intelligence,” Rathi told CNBC’s “Squawk Box Europe” on Thursday. he said.

Rathi highlighted the British Financial Stability Board’s efforts on edge AI, as well as the establishment of the AI ​​Security Institute in the UK, as part of a broader effort to help policymakers, regulators and businesses better understand risks and adopt the technology safely.

European Central Bank President Christine Lagarde said that artificial intelligence is a source of productivity and profit. However, in an interview with France Les EchosHe also warned that the technology poses a “huge risk”.

“We have been talking about cybersecurity risks, hacking, data theft, etc. for nearly a decade,” Lagarde said. “But with the acceleration and deepening of artificial intelligence models, we face a much more serious risk, because this is happening very, very quickly, and the defense tools and the funding for them have not yet been found.”

His comments come after the impact of artificial intelligence on productivity and market integrity emerged as a key talking point at the ECB’s annual meeting in Sintra, Portugal, this week, the European version of the Jackson Hole symposium.

Bank of England deputy governor Sarah Breeden said agent AI could increase volatility during market stress.

For now, commercial firms are mostly using autonomous AI for lower-risk operational tasks such as research, Breeden said in Sintra on Tuesday. “But that could change quickly,” he said.

He said the increased use of agency AI in financial markets could require greater oversight, such as guardrails “akin to circuit breakers or circuit breaker switches” that would “limit or halt market-wide trading if faulty AI models cause a market meltdown.”

But top bankers and regulators also recognize that Europe is lagging behind in AI investment and the development of pioneering disruptive companies.

Boris Vujčić, vice president of the European Central Bank, said: “Europe is now… in a situation where it must, of course, develop its own capabilities in the field of artificial intelligence. There has also been a lot of talk about sovereignty issues in the field of artificial intelligence. Europe has shown in the past that it has the ability to adapt new technologies…[to] Increase productivity growth. [But] It wasn’t always on the edge.”

Market officials ultimately need to strike a better balance on such rapidly evolving technology, Rathi said.

He said technological innovations presented exciting opportunities for the UK, particularly when it came to the country’s productivity and growth challenges, and it was critical that markets were not exposed to risks that regulators were not yet able to fully monitor.

“The reality is that some of these technologies are now moving in weeks or months, and the traditional rulemaking cycle doesn’t work that way, so we need to think about new tools and a different way of working more collaboratively with the market, for example on financial crime and AI risks, to ensure that we secure our goal of market integrity,” he said.

He added: “We don’t want to stand in the way of adoption but we need to be transparent about where the risks are.”