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    AI Regulations for Financial Services: Hong Kong

    Artificial intelligence (AI) is poised to affect every aspect of the world economy and play a significant role in the global financial system, leading financial regulators around the world to take various steps to address the impact of AI on their areas of responsibility. The economic risks of AI to the financial systems include everything from the potential for consumer and institutional fraud to algorithmic discrimination and AI-enabled cybersecurity risks. The impacts of AI on consumers, banks, nonbank financial institutions, and the financial system’s stability are all concerns to be investigated and potentially addressed by regulators.

    It is the goal of Perficient’s Financial Services consultants to help financial services executives, whether they lead banks, bank branches, bank holding companies, broker-dealers, financial advisors, insurance companies or investment management firms, the knowledge to know the status of AI regulation and the risk and regulatory trend of AI regulation not only in the US, but around the world where their firms are likely to have investment and trading operations.

    In the summer of 2024, the Hong Kong Monetary Authority (“HKMA”) issued multiple guidance documents to financial services firms covering their use of artificial intelligence in both customer-facing applications as well as anti-money laundering and detecting and countering terrorist financing (“AML/CTF”). Specifically, the HKMA issued:

    1. The guiding principles issued by the HKMA on August 19, 2024 (“GenAI”) in customer-facing applications (“GenAI Guidelines”). The GenAI Guidelines built on a previous HKMA circular “Consumer Protection in respect of Use of Big Data Analytics and Artificial Intelligence by Authorized Institutions” dated November 5, 2019 (“2019 BDAI Guiding Principles”) and provide specific guidelines to financial services firms on the use of GenAI; and
    2. An AML/CTF circular issued by the HKMA on September 9, 2024, that requires financial services firms with operations in Hong Kong to:
      1. undertake a study to consider the feasibility of using artificial intelligence in tackling AML/CTF, and
      2. submit the feasibility study and an implementation plan to the HKMA by the end of March 2025.

    Leveraging the 2019 BDAI Guiding Principles as a foundation, the GenAI Guidelines adopts the same core principles of governance and accountability, fairness, transparency and disclosure, and data privacy and protection, but introduces additional requirements to address the specific challenges presented by GenAI.

    Core PrinciplesRequirements under GenAI Guidelines
    Governance and AccountabilityThe board and senior management of financial services firms should remain accountable for all GenAI-driven decisions and processes and should thoroughly consider the potential impact of GenAI applications on customers through an appropriate committee which sits within the firm’s governance framework. The board and senior management should ensure the following:
    • Clearly defined scope of customer-facing GenAI applications to avoid GenAI usage in unintended areas;
    • Proper policies and procedures and related control measures for responsible GenAI use in customer-facing applications; and
    • Proper validation of GenAI models, including a “human-in-the-loop” approach in early stages, i.e. having a human retain control in the decision-making process, to ensure the model-generated outputs are accurate and not misleading.
    FairnessFinancial services firms are responsible for ensuring that GenAI models produce objective, consistent, ethical, and fair outcomes for customers. This includes:
    • That model generated outputs do not lead to unfair outcomes for customers. As part of this, firms are expected to consider different approaches that may be deployed in GenAI models, such as
      1.       anonymizing certain data categories; and
      2.       using comprehensive and fair datasets; and
      3.       making adjustments to remove bias during validation and review; and
    • During the early deployment stage, provide customers with an option to opt out of GenAI use and request human intervention on GenAI-generated decisions as far as practicable. If an “opt-out” option is unavailable, AIs should provide channels for customers to request review of GenAI-generated decisions.
    Transparency and DisclosureFinancial Services firms should:
    • Provide appropriate transparency to customers regarding GenAI applications; and
    • Disclose the use of GenAI to customers; and
    • Communicate the use, purpose, and limitations of GenAI models to enhance customer understanding.
    Data Privacy and ProtectionFinancial Services firms should:
    • Implement effective protection measures for customer data; and
    • Where personal data are collected and processed by GenAI applications, comply with the Personal Data (Privacy) Ordinance, including the relevant recommendations and good practices issued by the Office of the Privacy Commissioner for Personal Data, such as the:
    1. “Guidance on the Ethical Development and Use of Artificial Intelligence” issued on August 18, 2021, and
    2. “Artificial Intelligence: Model Personal Data Protection Framework” issued on June 11, 2024.

    Consistent with the HKMA’s recognition of the potential use of GenAI in consumer protection in the GenAI Guidelines, the HKMA Circular also indicates that the HKMA recognizes the considerable benefits that may come from the deployment of AI in improving AML/CTF. In particular, the HKMA Circular notes that the use of AI powered systems “take into account a broad range of contextual information focusing not only on individual transactions, but also the active risk profile and past transaction patterns of customers…These systems have proved to be more effective and efficient than conventional rules-based transaction monitoring systems commonly used by covered firms.”

    Given this, the HKMA has indicated that financial services firms with operations in Hong Kong should:

    • give due consideration to adopting AI in their AML/CTF monitoring systems to enable them to stay effective and efficient; and
    • undertake a feasibility study in relation to the adoption of AI in their AML/CTF monitoring systems and based on the outcome of that review, should formulate an implementation plan.

    The feasibility study and implementation plan should be signed off at the board level and submitted to the HKMA by March 31, 2025.

    Source: Read More 

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