Emerging Trends Series - Trends in Financial Services and Artificial Intelligence

NET WORK

EMERGING TRENDS SERIES TRENDS IN FINANCIAL SERVICES AND ARTIFICIAL INTELLIGENCE Stephanie Wilson, Partner, Reed Smith

EXECUTIVE SUMMARY

EMERGING TRENDS SERIES NETWORK

Emerging Trends in Trends in Financial Services and Artificial Intelligence Reed Smith’s Stephanie Wilson BIHC recently spoke with Stephanie Wilson, a partner in the Princeton, New Jersey, office of Reed Smith. Ms. Wilson specializes in advising, litigating, and trying cases concerning financial services clients’ use of artificial intelligence.

Q: H ow did the financial services industry get interested in AI?

A: A rtificial intelligence (AI) is not new. The term AI

was first coined in 1955 and “machine learning” (ML) was coined in 1959. Broadly speaking, AI is a method that teaches machines to learn. ML is a sub-category of AI that relies on data and algorithms to make predictions about certain desired outcomes.

As AI continues to mature and become more sophisticated, it enables banks to manage a significant amount of data in compressed timeframes.

Banks are using AI to make marketing predictions about customers’ preferences, detect fraud, and respond to customers’ inquiries via chatbots.

Moreover, the financial services industry sees AI as a way to expand its customer base. For example, ML is used to determine the feasibility of using alternative data in making lending decisions.

Presently, a major focus by federal administrative agencies that regulate financial services entities is determining how ML is being used in making lending decisions. The agencies’ objectives are to eliminate “algorithmic bias” in any decision making.

Q: W hat trends do you expect in 2022?

A: M ore regulatory focus. Entities, such as the

regulated entities to ensure that any AI being used for decision making is not based on biased data being inputted into the algorithms.

For example, on February 23, 2022, the CFPB outlined a proposal for upcoming joint rulemaking to prevent algorithmic bias in automated home valuation models. Less than a month later, on March 16, CFPB announced it is expanding its supervisory procedures to include whether discriminatory conduct could constitute unfair practices in violation of the Dodd-Frank Act. Other federal agencies, the U.S. Congress, and several states are also involved in these issues.

Q: W hat are some best practices for GCs and companies as they consider this technology?

A: W hile there is huge upside for AI in financial

services, it is not a “magic wand.” In instances where data is being used to make decisions about an individual’s access to a banking product, the data and the process must be interrogated proactively from start to finish. This is because regulators are demanding that financial services firms use data in a fair and transparent way and understand how the algorithm works.

Q: H ow can outside counsel help GCs and their teams?

A: T his is a dynamic area. Even for companies

with internal counsel and teams focused on state and federal regulatory and legislative issues, it can be hard to keep up on the “latest and greatest.”

Outside counsel stay on top of the furious pace of developments. Additionally, they engage in ongoing dialog among regulators, academics, research scientists, and FinTech businesses to best counsel clients.

Consumer Financial Protection Bureau (“CFPB”), have taken greater notice and are requiring EMERGING TRENDS INTERVIEW SERIES

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EMERGING TRENDS SERIES NETWORK About the BIHC Network & Emerging Trends The Black In-House Counsel (BIHC) Network works with legal departments and law firms to advance Diversity, Equity, and Inclusion in the legal profession. We create content, events, networks, and professional development training for corporate legal departments and law firms. A key part of our mission is to showcase the talents of leading lawyers of color in top law firms to in-house legal departments.

Emerging Trends features insights from leading partners of color on key trends shaping the business landscape over the next 12 months. Each Emerging Trends briefing provides concise information on what general counsel and boards need to know about and best practices in how to approach this topic.

BIHC is pleased to hear from the following Reed Smith partners in the Emerging Trends Series:

Elizabeth Brandon

Liza Craig

Partner

Partner

DALLAS Commercial Litigation

WASHINGTON, D.C. Global Regulatory Enforcement

Anthony Crawford

Stephanie Wilson

Partner

Partner

NEW YORK Insurance Coverage

PRINCETON, NEW JERSEY Business & Finance – Financial Industry EMERGING TRENDS INTERVIEW SERIES

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