As artificial intelligence (AI) adoption grows, so do the risks of today’s typical black-box AI. These risks include customer mistrust, brand risk and compliance risk. As recently as last month, concerns about AI-driven facial recognition that was biased against certain demographics resulted in a PR backlash.
With customer protection in mind, regulators are staying ahead of this technology and introducing the first wave of AI regulations meant to address AI transparency. This is a step in the right direction in terms of helping customers trust AI-driven experiences while enabling businesses to reap the benefits of AI adoption.
This first group of regulations relates to the understanding of an AI-driven, automated decision by a customer. This is especially important for key decisions like lending, insurance and health care but is also applicable to personalization, recommendations, etc.
The General Data Protection Regulation (GDPR), specifically Articles 13 and 22, was the first regulation about automated decision-making that states anyone given an automated decision has the right to be informed and the right to a meaningful explanation. According to clause 2(f) of Article 13:
“[Information about] the existence of automated decision-making, including profiling … and … meaningful information about the logic involved [is needed] to ensure fair and transparent processing.”
One of the most frequently asked questions is what the “right to explanation” means in the context of AI. Does “meaningful information about the logic involved” mean that companies have to disclose the actual algorithm or source code? Would explaining the mechanics of the algorithm be really helpful for the individuals? It might make more sense to provide information on what inputs were used and how they influenced the output of the algorithm.
For example, if a loan application or insurance claim is denied using an algorithm or machine learning model, under Articles 13 and 22, the loan or insurance officer would need to provide specific details about the impact of the user’s data to the decision. Or, they could provide general parameters of the algorithm or model used to make that decision.
Similar laws working their way through the U.S. state legislatures of Washington, Illinois and Massachusetts are
WA House Bill 1655, which establishes guidelines for “the use of automated decision systems in order to protect consumers, improve transparency, and create more market predictability.”
MA Bill H.2701, which establishes a commission on “automated decision-making, artificial intelligence, transparency, fairness, and individual rights.”
IL HB3415, which states that “predictive data analytics in determining creditworthiness or in making hiring decisions…may not include information that correlates with the race of zip code of the applicant.”
Fortunately, advances in AI have kept pace with these needs. Recent research in machine learning (ML) model interpretability makes compliance to these regulations feasible. Cutting-edge techniques like Integrated Gradients from Google Brain along with SHAP and LIME from the University of Washington enable unlocking the AI black box to get meaningful explanations for consumers.
Ensuring fair automated decisions is another related area of upcoming regulations. While there is no consensus in the research community on the right set of fairness metrics, some approaches like equality of opportunity are already required by law in use cases like hiring. Integrating AI explainability in the ML lifecycle can also help provide insights for fair and unbiased automated decisions. Assessing and monitoring these biases, along with data quality and model interpretability approaches, provides a good playbook towards developing fair and ethical AI.
The recent June 26 US House Committee hearing is a sign that financial services need to get ready for upcoming regulations that ensure transparent AI systems. All these regulations will help increase trust in AI models and accelerate their adoption across industries toward the longer-term goal of trustworthy AI.
It is a bipartisan sentiment that, left unchecked, AI can pose a risk to fairness in financial services. While the exact extent of this danger might be debated, governments in the US and abroad acknowledge the necessity and assert the right to regulate financial institutions for this purpose.
The June 26 hearing was the first wake-up call for financial services: they need to be prepared to respond and comply with future legislation requiring transparency and fairness.
In this post, we review the notable events of this hearing, and we explore how the US House is beginning to examine the risks and benefits of AI in financial services.
Two new House Task Forces to regulate fintech and AI
The fintech task force should have a nearer-term focus on applications (e.g. underwriting, payments, immediate regulation).
The AI task force should have a longer-term focus on risks (e.g. fraud, job automation, digital identification).
And explicitly, Chairwoman Waters explained her overall interest in regulation:
Make sure that responsible innovation is encouraged, and that regulators and the law are adapting to the changing landscape to best protect consumers, investors, and small businesses.
The appointed chairman of the Task Force on AI, Congressman Bill Foster (D-IL), extolled AI’s potential in a similar statement, but also cautioned,
It is crucial that the application of AI to financial services contributes to an economy that is fair for all Americans.
This first hearing did find ample AI applications in financial services. But it also concluded that these worried sentiments are neither misrepresentative of their constituents nor misplaced.
Risks of AI
In a humorous exchange later in the hearing, Congresswoman Sylvia Garcia (D-TX) asks a witness, Dr. Bonnie Buchanan of the University of Surrey, to address the average American and explain AI in 25 words or less. It does not go well.
DR. BUCHANAN I would say it’s a group of technologies and processes that can look at determining general pattern recognition, universal approximation of relationships, and trying to detect patterns from noisy data or sensory perception.
REP. GARCIA I think that probably confused them more.
DR. BUCHANAN Oh, sorry.
Beyond making jokes, Congresswoman Garcia has a point. AI is extraordinarily complex. Not only that, to many Americans it can be threatening. As Garcia later expresses, “I think there’s an idea that all these robots are going to take over all the jobs, and everybody’s going to get into our information.”
In his opening statement, task force ranking member Congressman French Hill (R-AR) tries to preempt at least the first concern. He cites a World Economic Forum study that the 75 million jobs lost because of AI will be more than offset by 130 million new jobs. But Americans are still anxious about AI development.
overwhelming support for careful management of robots and/or AI (82% support)
more trust in tech companies than in the US government to manage AI in the interest of the public
mixed support for developing high-level machine intelligence (defined as “when machines are able to perform almost all tasks that are economically relevant today better than the median human today”)
This public apprehension about AI development is mirrored by concerns from the task force and experts. Personal privacy is mentioned nine times throughout the hearing, notably in Congressman Anthony Gonzalez’s (R-OH) broad question on “balancing innovation with empowering consumers with their data,” which the panel does not quite adequately address.
But more often, the witnesses discuss fairnessand how AI models could discriminate unnoticed. Most notably, Dr. Nicol Turner-Lee, a fellow at the the Brookings Institution, suggests implementing guardrails to prevent biased training data from “replicat[ing] and amplify[ing] stereotypes historically prescribed to people of color and other vulnerable populations.”
And she’s not alone. A separate April 2019 Brookings report seconds this concern of an unfairness “whereby algorithms deny credit or increase interest rates using a host of variables that are fundamentally driven by historical discriminatory factors that remain embedded in society.”
So if we’re so worried, why bother introducing the Pandora’s box of AI to financial services at all?
Benefits of AI
AI’s potential benefits, according to Congressman Hill, are to “gather enormous amounts of data, detect abnormalities, and solve complex problems.” In financial services, this means actually fairer and more accurate models for fraud, insurance, and underwriting. This can simultaneously improve bank profitability and extend services to the previously underbanked.
Both Hill and Foster cite a National Bureau of Economic Research working paper finding where in one case, algorithmic lending models discriminate 40% less than face-to-face lenders. Furthermore, Dr. Douglas Merrill, CEO of ZestFinance and expert witness, claims that customers using his company’s AI tools experience higher approval rates for credit cards, auto loans, and personal loans, each with no increase in defaults.
Moreover, Hill frames his statement with an important point about how AI could reshape the industry: this advancement will work “for both disruptive innovators and for our incumbent financial players.” At first this might seem counterintuitive.
“Disruptive innovators,” more agile and hindered less by legacy processes, can have an advantage in implementing new technology. But without the immense budgets and customer bases of “incumbent financial players,” how can these disruptors succeed? And will incumbents, stuck in old ways, ever adopt AI?
Mr. Jesse McWaters, financial innovation lead at the World Economic Forum and the final expert witness, addresses this apparent paradox, discussing what will “redraw the map of what we consider the financial sector.” Third-party AI service providers — from traditional banks to small fintech companies — can “help smaller community banks remain digitally relevant to their customers” and “enable financial institutions to leapfrog forward.”
Enabling competitive markets, especially in concentrated industries like financial services, is an unadulterated benefit according to free market enthusiasts in Congress. However, “redrawing the map” in this manner makes the financial sector larger and more complex. Congress will have to develop policy responding to not only more complex models, but also a more complex financial system.
This system poses risks both to corporations, acting in the interest of shareholders, and to the government, acting in the interest of consumers.
Business and government look at risks
Businesses are already acting to avert potential losses from AI model failure and system complexity. A June 2019 Gartner report predicts that 75% of large organizations will hire AI behavioral forensic experts to reduce brand and reputation risk by 2023.
However, governments recognize that business-led initiatives, if motivated to protect company brand and profits, may only go so far. For a government to protect consumers, investors, and small businesses (the relevant parties according to Chairwoman Waters), a gap may still remain.
As governments explore how to fill this gap, they are establishing principles that will underpin future guidance and regulation. The themes are consistent across governing bodies:
AI systems need to be trustworthy.
They therefore require some government guidance or regulation from government representing the people.
This guidance should encourage fairness, privacy, and transparency.
In the US, President Donald Trump signed an executive order in February 2019 “to Maintain American Leadership in Artificial Intelligence,” directing federal agencies to, among other goals, “foster public trust in AI systems by establishing guidance for AI development and use.” The Republican White House and Democratic House of Representatives seem to clash at every turn, but they align here.
The EU is also establishing a regulatory framework for ensuring trustworthy AI. Likewise included among the seven requirements in their latest communication from April 2019: privacy, transparency, and fairness.
And June’s G20 summit drew upon similar ideas to create their own set of principles, including fairness and transparency, but also adding explainability.
These governing bodies are in a fact-finding stage, establishing principles and learning what they are up against before guiding policy. In the words of Chairman Foster, the task force must understand “how this technology will shape the questions that policymakers will have to grapple with in the coming years.”
Conclusion: Explain your models
An hour before Congresswoman Garcia’s amusing challenge, Dr. Buchanan reflected upon a couple common themes of concern.
Policymakers need to be concerned about the explainability of artificial intelligence models. And we should avoid black-box modeling where humans cannot determine the underlying process or outcomes of the machine learning or deep learning algorithms.
But through this statement, she suggests a solution: make these AI models explainable. If humans can indeed understand the inputs, process, and outputs of a model, we can trust our AI. Then throughout AI applications in financial services, we can promote fairness for all Americans.
Zhang, Baobao and Allan Dafoe. “Artificial Intelligence: American Attitudes and Trends.” Oxford, UK: Center for the Governance of AI, Future of Humanity Institute, University of Oxford, 2019. https://ssrn.com/abstract=3312874