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ASIC warns of AI FOMO, flags regulation

By Keith Ford
3 minute read

ASIC chair Joe Longo says that with AI adoption surging in wholesale markets, there is a real danger that entities could rush too fast without proper protections in place.

Speaking at the ISDA/AFMA Forum in Sydney on Tuesday, the Australian Securities and Investments Commission (ASIC) chair said that while wholesale markets have often been early adopters of new technology, there still needs to be caution when dealing with generative AI.

“While everyone, from consumers to corporates is talking about AI as a brand-new thing, we in this room know that the financial markets have been at the forefront with algorithmic trading and using AI in electronic markets for over a decade,” Mr Longo said.

“We can expect AI to continue to drive efficiencies in risk management and operations, such as price prediction, hedging, fraud detection, and so on.

“But at the same time, AI remains an area of rapid change and expansion. Recent developments, especially in the field of generative AI, represent a step change, and potentially create new and different risks and issues.”

He added that from a regulatory point of view, there is little in the way of consensus globally on how to deal with AI, with different jurisdictions taking considerably divergent paths.

“The European Commission has led by proposing an AI law. It takes a risk-based approach, while prohibiting some particular forms of AI. In the UK, a ‘pro-innovation’ devolved regulatory model is proposed. China and Canada are proposing laws directed at regulating uses of AI,” Mr Longo said.

“Our own government recently issued a thoughtful discussion paper, Safe and Responsible AI in Australia, seeking input on how Australia should approach this question.”

The ASIC chair stressed that the regulator is focused on the “safety and integrity of the financial ecosystem”.

“I want to take this opportunity, as an aside, to emphasise that ASIC has AI as a high and important priority. Not just in regards to wholesale markets, but also its role in — and for — the whole economy, including consumers and small business,” he said.

“But what I want to talk more about here is the danger that the fear of being ‘left behind’ will drive some uses of tech that have unintended consequences. There is a very real danger here that entities may rush too quickly into innovations without applying appropriate controls and proper governance.”

Mr Longo added that entities need to remember that while technology changes, their focus on robust governance should not.

“This is nothing new — just because the technology has changed, nobody should think that means your existing obligations around good governance have changed with it. They haven’t,” he said.

“But it’s all too easy to forget this in the face of such rapid and unprecedented change. Easy — and dangerous.”

Consultation imminent

Moreover, Mr Longo announced ASIC plans to consult on expanding automated order processing rules to futures markets to reflect developments with AI next financial year.

“We are also planning to update our electronic trading guidance for the same reason,” the ASIC chair said.

He also added that the regulator will continue to scan the environment to understand how AI is being applied and the risks and opportunities attached to those methods of application.

“We will look at other developments in this space as well, such as crypto tech — digitisation of assets, carbon markets, FX, and lending.

“There must be an important focus on controls alignment with innovation. Our expectation is for appropriate controls to be part of the design phase and in place before new tech is switched on.

“It’s important that the whole financial market ecosystem works to uplift controls — just as a convoy must go at the pace of its slowest vessel, so too is the financial ecosystem reduced to the strength of its weakest link.”