Generative AI is creating major new risks for financial services firms that are becoming harder to govern as AI becomes embedded across operations and the wider financial system.
This is according to a new report from the London Foundation for Banking and Finance (LFBF) and the Institute and Faculty of Actuaries (IFoA).
The report titled, ‘It’s still not magic: Framing the risks facing financial services in the Gen AI era’, found that 70 per cent of senior financial services practitioners believe AI-related risks are among the biggest threats facing the sector over the next five years, while 75 per cent said risks have increased significantly since generative AI became widely available.
The top concerns identified were cyber threats, misleading outputs and knowledge gaps. The report warns that generative AI is reshaping the risk landscape due to its accessibility, persuasive capabilities and growing use in everyday financial operations.
It also highlights the rise of “ecosystem risks”, in which AI adoption by individual firms can create broader vulnerabilities and shared points of failure across the financial system.
The report’s AI risk framework identifies nine risks, grouping them into outcomes, operating environment and system risks and says stronger governance and risk management will be needed as AI adoption accelerates.
LFBF Research Associate and report author Keyur Patel says: “The same characteristics that make AI useful in financial services also create many of the risks that make it so difficult to govern. The hard question, then, is not just whether these risks can be mitigated, but how much risk we are willing to live with in exchange for the benefits. That is why a recurring theme in this report is ‘uncomfortable tensions’: the same machinery can widen inclusion and sharpen exclusion; ‘human in the loop’ is not the same as human control; and concentration is baked into how AI systems are built. Generative AI gives these tensions new force. It lowers barriers to use, makes AI feel relatable and trustworthy, and is increasingly embedded in how financial institutions think and work. That matters because AI outputs can be useful, confident and wrong at the same time – and ‘mostly right’ can be dangerous.”
IFoA president Paul Sweeting says: “AI is a defining force of our time. The IFoA’s Artificial Intelligence and Emerging Technologies Practice Board is exploring how transformative technologies are reshaping actuarial practice and influencing broader societal systems. It is also exploring what we need to do to seize the opportunities and manage the risks associated with AI-adoption. With our unique combination of technical skill, communication and professional oversight, actuaries must play a key role making sure that AI is working as it should.”