The European Securities and Markets Authority (ESMA) issued a Statement providing initial guidance to firms using artificial intelligence technologies (AI) when they provide investment services to retail clients.
When using AI, ESMA expects firms to comply with relevant MiFID II requirements, particularly when it comes to organizational aspects, conduct of business, and their regulatory obligation to act in the best interest of the client.
Although AI technologies offer potential benefits to firms and clients, they also pose inherent risks, such as:
- Algorithmic biases and data quality issues;
- Opaque decision-making by a firm’s staff members;
- Overreliance on AI by both firms and clients for decision-making; and
- Privacy and security concerns linked to the collection, storage, and processing of the large amount of data needed by AI systems.
Potential uses of AI by investment firm which would be covered by requirements under MiFID II include customer support, fraud detection, risk management, compliance, and support to firms in the provision of investment advice and portfolio management.
“Upholding MiFID II requirements and prioritizing clients’ best interests serve as guiding principles for investment firms leveraging AI. By fostering transparency, implementing robust risk management practices, and compliance with legal requirements, ESMA would aim to help firms ensure they harness the potential of AI while safeguarding investors’ confidence and protection,” according to the statement.