Banking and Finance Law Daily Wrap Up, FINANCIAL TECHNOLOGY—House Financial Services Committee Republicans lay out preferred AI regulatory path, (Aug 19, 2024)

By Jeff Williams

The committee leaders cautioned against a “one-size-fits-all” regulatory approach and spotlighted various areas they think AI can and will improve financial services.

Saying that artificial intelligence (AI) “presents an unprecedented opportunity to transform the financial services sector,” House Financial Services Committee Chairman Patrick McHenry (R-N.C.) and the chairmen of the committee’s six subcommittees transmitted a letter to U.S. Treasury Secretary Janet Yellen. According to these House Financial Services Committee Republicans, it is “critical” that the financial services sector and regulators focus on taking actions to maximize the benefits to consumers and business from the technology.

“Committee Republicans are committed to fostering an environment where AI can thrive while protecting consumers and maintaining market integrity,” the lawmakers said in the letter, which came in response to a Treasury Department request for information about AI in financial services. “By focusing on fostering innovation, enhancing customer experiences, and ensuring financial inclusion, AI can significantly improve the financial sector's efficiency and accessibility.”

With AI technologies already being increasingly deployed for fraud detection, underwriting, debt collection, customer onboarding, real estate, investment research, property management, and customer service, “adoption and further automation of services continue to result in significant cost reductions and greater access to financial services to more Americans,” McHenry and the others said.

In addition to McHenry, the letter was signed by Digital Assets, Financial Technology and Inclusion Subcommittee Chairman French Hill (R-Ark.), Financial Institutions and Monetary Policy Subcommittee Chairman Andy Barr (R-Ky.), Subcommittee on Capital Markets Chairman Ann Agner (R-Mo.), Oversight and Investigations Subcommittee Chairman Bill Huizenga (R-Mich.), National Security, Illicit Finance, and International Financial Institutions Subcommittee Chairman Blaine Luetkemeyer (R-Mo.), and Housing and Insurance Subcommittee Chairman Warren Davidson (R-Ohio).

Much like ATMs and other previous technological improvements, “AI has potential to increase access to services such that it can become the norm for more Americans as it becomes more embedded in our financial lives,” they said, pointing in particular to the potential for AI-powered banking solutions to “provide crucial financial services and help bridge the gap in financial inclusion” for underbanked and underserved communities.

While improvements are occurring, the representatives also stressed there are concerns about the “explainability and reliability” of new generative AI models, which have “lagged traditional machine learning applications.”

The letter also highlighted the view that smaller financial institutions, lacking the resources or data to build their own AI models, often rely on third-party solutions, which “offer immense benefits, enabling these institutions to access advanced technologies without the substantial investment required to develop them in-house.”

As a result, there should be third-party risk management and cybersecurity guidance that addresses the increased importance of those solutions and regulatory frameworks need to be “tailored to the diverse range” of market participants, the lawmakers wrote.

“A one-size-fits-all approach will only stifle competition among financial institutions,” they said. “Regulators must evaluate each institution's use of AI technology on a case-by-case basis, ensuring the necessary flexibility to accommodate individual circumstances. Regulators, Congress, and the Department of the Treasury should be judicious with respect to regulating AI, recognizing the regulations, rules, guidance, and laws currently in place that address the use of technologies by financial institutions.”

The lawmakers also called attention to data privacy issues arising from the increased use of AI, noting citing the Data Privacy Act of 2023, which the committee approved in February 2023 but has not advanced further, as an example of legislation that could provide consumers greater control over their data. That control should include the ability to terminate the collection of their data or request its deletion, the letter said.

“This approach not only protects consumer’s privacy but also supports innovation by providing a clear framework within which financial institutions can operate,” the lawmakers said. “Balancing the protection of personal financial information with the benefits of AI-driven advancements is essential in maintaining consumer trust and fostering a competitive, innovative financial services sector.”

Overall, the regulatory environment needs to “keep pace” with AI advancements, they said, adding: “Committee Republicans strongly support a principles-based regulatory approach that can accommodate rapid technological changes more effectively. We caution against horizontal, cross-economy approaches that broadly regulate the use of AI. The government should take a sectoral approach that ensures primary regulators, who understand their respective markets and AI use cases within those markets, retain the regulatory authority to proceed in a technology-neutral manner.”

LegislativeActivity: AINews BankingOperations FinancialIntermediaries FinancialStability FinTech Privacy PrudentialRegulation