HKMA provides guidance to banks contemplating use of AI applications

TECHNOLOGY adoption in the banking industry has been slow in many respects.

On one hand, legacy infrastructure has kept bankers from embracing new-age digital solutions. On the other hand, being custodians of public data, banking institutions are required to adhere to strict laws when it comes to adopting technology — only to ensure the safety and security of data.

However, given the strong demand from customers, bankers are accelerating their journey to digital.

A recent survey conducted by the Hong Kong Monetary Authority (HKMA) revealed that a majority of banks in the country are keen on using artificial intelligence (AI) for a variety of purposes — hence, the regulator took it upon itself to issue guidance for bankers exploring AI applications.

“Banks are expected to take these principles into account when designing and adopting their AI and big data analytics applications,” said HKMA Executive Director (Banking Supervision) Raymond Chan.

“These principles are high-level in nature as the HKMA is mindful that overly prescriptive or rigid requirements may inhibit the further development of AI-related technologies.”

The guidance provided revolves around three key themes, namely, governance, application design and development, and on-going monitoring and maintenance.

In terms of governance, Chan noted that since some AI applications have self-learning capabilities, they may be able to make automated decisions on behalf of their banks. However, the board and senior management must remember that they are ultimately accountable for all AI-driven decisions.

“Accordingly, they should ensure that proper governance framework and risk management measures are put in place to oversee the use of AI applications within their institutions.”

In terms of application design and development, the HKMA believes that bankers should pay attention to the fact that staff engaged in developing AI applications have sufficient expertise and can ensure a sufficient level of explainability.

Chan explicitly warns banking institutions in Hong Kong against using “box-box excuses” when it comes to AI applications. “Banks should implement adequate measures during the design phase to ensure a level of explainability which is appropriate and commensurate with the materiality of their AI applications.”

Given the fact that AI is still in its early stages, the HKMA emphasizes that banks looking to deploy AI applications should use quality data, adopt an effective data governance framework, and ensure that quality issues identified are escalated to the responsible parties for rectification in a timely manner.

Chan and the HKMA also emphasize on the use of clear models when developing AI applications, stating that they will not only better lend themselves to audits but also allow effective management oversight — even if vendors are involved in the development process.

At the end of the day, the focus of the regulator’s AI application guidance is the fact that bankers need to be ethical, fair, and transparent when using the technology.

“Banks should ensure that AI-driven decisions do not discriminate or unintentionally show bias against any group of consumers. The use of AI applications should comply with the banks’ corporate values and ethical standards, and uphold consumer protection principles.”

Further, Chan also recommends that banks make it clear to consumers if AI applications will be used in certain circumstances — prior to service — in a bid to maintain transparency and increase consumer confidence.

In terms of advice around ongoing monitoring and maintenance, the HKMA’s recommendations are fairly simple.

The body recommends that banks conduct periodic reviews, comply with data protection regulations, implement effective cybersecurity measures, and implement a robust risk mitigation and contingency plan.

“As international regulatory standards and industry developments regarding the use of AI are evolving rapidly, the HKMA will keep the aforementioned principles under periodic review and provide further guidance to banks as and when appropriate.”

The HKMA also explained that they plan to issue separate guidance on the principles relating to consumer protection aspects involved in the use of AI applications in the near future — a move which indicated to banks in the country that using AI is important, but solutions that are developed must be designed to serve the consumer and impact them positively.

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