Report: AI tools carry many benefits, some risks for securities industry

The report, which included input from broker-dealer firms, academics, technology vendors, and service providers, concluded that, when regulated properly, firms can use AI tools to increase efficiency, increase productivity, improve risk management, enhance customer relationships, and increase revenue opportunities. The report was the result of a two-year study of AI use among broker-dealers.

Many firms have already applied AI tools to compliance and risk management functions, the report found. AI tools were crucial in both expanding the reach of surveillance and monitoring tools to include new communication pathways like video chats, images, and more, while at the same time reducing “false positive” alerts, allowing compliance professionals to focus their attention on the remaining alerts. Firms were also successfully implementing AI tools for know your customer (KYC) and financial crime monitoring.

Similarly, AI tools could prove effective in regulatory management, allowing firms to digitize the traditionally manual process of regulatory review and compliance.

“Some industry participants noted that automated regulatory intelligence management programs have the potential to increase overall compliance, while reducing both costs and time spent implementing regulatory change,” the report said.

With pressure from regulators and the market to improve cyber-security, firms are examining how AI tools can “assist overwhelmed cybersecurity staff to predict potential attacks, detect threats in real-time, and respond to them faster and at lower costs.”

One area where the report expressed concern about the use of AI tools was in credit risk management. The tools can be used to speed up assessments of the creditworthiness of their counterparties, but some AI-based credit-scoring systems “have faced criticism for being opaque and potentially biased and discriminatory. These models not only analyze traditional credit-evaluation criteria, such as current financial standing and historical credit history, but may also identify other demographic factors as deterministic criteria, which could lead to unfair and discriminatory credit scoring based on biases present in the underlying historical data.”

For communicating with customers, AI is all about efficiency. Virtual assistants are ubiquitous at large broker-dealers, providing the first response to customer inquiries by providing answers to some and routing others. E-mail inquiries are also handled using AI-enabled digital tools. More cutting-edge AI tools are being tested to provide targeted marketing to customers and potential customers. The AI tools “analyze their customers’ investing behaviors, Website and mobile app footprints, and past inquiries, and in turn, to proactively provide customized content to them.”

The idea of using AI to monitor trades and customer behavior is more common in brokerage account management, the report found.

“Industry participants indicated that registered representatives use this information to augment their existing knowledge and expertise when making suggestions to their customers,” the report said, adding that firms can use this data to create customized research on investment opportunities for their customers.

In portfolio management and trading, AI tools can help broker-dealers predict price movements and maximize trading speed and price performance. But the report also noted that using AI to make automated trades comes with pitfalls, particularly when the market is experiencing unpredictable swings. Unmonitored AI trading transactions “may create a situation where the AI model no longer produces reliable predictions, and this could trigger undesired trading behavior resulting in negative consequences,” the report said.

The report also noted that firms are using AI tools to automate paper-based processing and to extract targeted information from digitized documents.