Policy of artificial intelligence in the financial markets

Technology is and has always been a crucial part of finance.

From the first promissory notes (banknotes) in the Netherlands and China, there was a race with counterfeiters that parasitically undermined trust. As in political communication, technology is the message, rather than merely “a tool”: when it comes to money, trust is not just instrumental, it is fundamental.

With cashless payments being the norm and social media platforms weαving an additional layer of involvement in our social data web – Amazon, Google, Facebook, Apple – Artificial Intelligence (AI) is already in our wallets, business, and financial affairs.

In a non-western setting, one may refer to the Chinese “social rating” system, which allows the state to value and evaluate social behaviour patterns, creating a link to individual credit rating. That is a far-reaching “Panopticon” structure that would be unthinkable without AI. The centre of this political discussion is moving to Asia and the Pacific, gravitating towards new money and markets that are remoulding our society and our politics.

New Europe sought out Maurizio Raffone in Japan. We ask him to open a window in a discussion that is not perhaps sufficiently public. We discuss the political implications of deploying AI in international finance. Graduating from Cambridge to work for over 20 years in European capital markets, Maurizio cut his teeth in institutions like Credit Suisse, Deutsche Bank and UniCredit, before moving to Tokyo on behalf of Commerzbank. Now he is his own boss. He runs Finetiq, an advisory firm that is part of the Japanese startup scene.

Fin Tech (Financial Technology) refers to financial services and it is a sector with technology at its core. Much like cell power is at the heart of the emerging car industry, AI and blockchain technologies power FinTech development.

AI is about enhancing productivity and customer experience by automating processes and making sense of the vast amount of available data. It is also about power.

Finetiq is a management consultancy helping firms in Japan and Hong Kong situate themselves in this transforming financial ecosystem, by harnessing power. Tokyo is an interesting place to be, given a government that wants the city to be an innovation centre. Tokyo is a cosmopolis, with strong local firms, strong international presence, technical know-how and educated investors. This is a good place to learn what will happen tomorrow and Maurizio is a good guide.

New Europe (NE): AI appears to be an accelerator of decision-making time to maximise profit. How do you preserve financial accountability in such a bullet-speed framework?

Maurizio Raffone (MR): This is actually a crucial requirement of financial services, as with Europe’s MiFID2 regulations. I don’t see speed in-itself as an issue but rather the potential black-box nature of some of the analytics behind AI’s decision-making processes. Regulators are aware of this potential risk and are making provisions to ensure ultimate accountability is retained by the regulated financial firms in all circumstances.

One of the Korean companies we work with (Knowru) are engaging finance machine learning specialists, embedding tools in their software specifically designed to provide a strong and clear audit trail that can be traced back to a source. This is a nice feature: if, for example, a consumer is denied a credit card, he/she can be told why. But this feature achieves more than that: it allows us to understand the value drivers of their AI’s decision-making and are able to calibrate their models and parameters continuously. They are building “the character” of their company.

This is why the narrative is changing to some extent and these days there is much more talk of developing AI tools for decision-enhancing purposes rather than decision-making, which incidentally reinstates the significance of humans in the process.

NE: AI has been recently implicated in political campaigning, as in the Cambridge Analytica – Facebook scandal in the UK and the US. Can you imagine a situation where artificial intelligence can be weaponized in financial markets, inducing for example a sovereign debt crisis?

(MR): Algorithmic trading is a form of AI that has been blamed in the past for financial misdoings, such as the Flash Crash of 2010. Yes, some AI technology can be malicious and be used to engineer a sovereign debt crisis or any sort of distressed market situation.

However, financial gains from smarter-than-the-next AI are in my opinion totally legitimate, legally and morally. There are strong regulations that aim to prevent market manipulation (which was essentially the issue behind the Flash Crash) but often the tools available to financial watchdogs are not as sophisticated as those used by malicious perpetrators.

Where I see potentially more issues are in the unregulated markets or grey zones. Technology companies moving into financial services and the decentralization of finance make it very hard for regulators to ensure preventive actions. For example, the peer-to-peer lending market is one that in many countries flies under the radar of regulators. In practice if not officially, AI is often used to perform underwriting decisions. Malicious use of technology could hurt a country’s economy, particularly in some of the emerging markets.

Lastly, I see AI potentially being weaponized to launch mass-scale fraud. Madoff’s scandal was a very low tech affair. Just think what he could have done if he used AI to manipulate the books and move cash faster to keep his Ponzi scheme alive.

Nevertheless, I do not want to give the impression is that we are sitting on the software-equivalent of nuclear bombs. AI can be used just as much in alerting, preventing and reacting to malicious intent. The recent focus in SupTech, technology applied to the supervisory role of financial regulators is a testament of the efforts being made to ensure AI and other emerging technologies are kept in check.

NE: AI is deployed by multinational firms, in a global financial system. If we find it difficult to tax multinationals, can we really tame their robotic capability? Is AI an accelerator of inequality between workers, firms, and ultimately nations?

(MR) AI is a productivity-enhancing tool and therefore, if done correctly, it would bring more business, lower costs and/or increase revenues. Enhanced corporate performance should feed into the issue of taxing multinationals and the growing inequality gap. Therefore, I do not see the taming of the robots as a solution to the problem, except as a potentially palliative measure at best.

In my mind, the solution is political and requires cooperation in dragging fair, efficient, and global taxation regimes. This is an area where AI can actually be a very useful tool and help tax auditors track the correct money trail of financial transactions to its rightful source.

At the consumer level, AI algorithms could actually provide individuals with know-how and access to financial services previously only accessible to the few. Robo-advisory is a sub-set of the FinTech industry looking to bring investment management expertise to the masses at a fraction of the cost of a private banker.

Finally, with regards to people working in the financial industry, AI inevitably will have an impact on jobs, just like many other technologies have done in the past and will inevitably do in the future. The smarter government policies will focus on supporting the affected individuals re-tool themselves for a different job market. Smarter companies will actually support that process as it will improve employee productivity, retention and, ultimately, happiness.

NE: What do you think of taxing automation to fund a transition to the new labour market?

(MR) I believe that promising technology should not be stifled with taxes as it will distort its use. I think spending in supporting education, labour upskilling and flexible working practices like side hustles should be a priority of any government and incentives should be offered to companies that retain, train and support employees’ transition into the fourth industrial revolution.

I go back to the basic concept that companies need to earn money and do well in order to pay taxes and therefore policies that help the improvement of corporate practices and productivity should ultimately feed into a healthier balance sheet for sovereign entities too.

However, there are specific areas where perhaps a different approach is worth considering and where tax raising can be channeled more effectively into. With the ageing population issue, especially in Japan, there is a growing need for senior citizens’ services around financial management. The Bank of Japan came out in June with an initial roadmap on how to support FinTech development as well as financial literacy to address exactly this issue.

(NE) You have experience in operating both in European and in Asian financial markets. Does AI have different ethical barriers and cultures, just like humans?

(MR) The application of AI in financial services is a highly sensitive subject everywhere because it taps into people’s fear of losing control of their finances. However, there are certainly regional and country-specific ethical considerations that are important when developing a business model that focuses heavily on AI. For example, privacy concerns in Japan are very high and there is little data sharing among companies, making the development of AI algorithms a more challenging proposition compared to the US or even Europe, as the algos rely on large and deep datasets in order to optimize their predictive power.

On the other hand, digital assistants are a popular way for Japanese companies to deliver AI-powered solutions, as the generally cute-looking interface imported from the manga culture resonates very well with consumers in Japan.

Japan is, however, keen to import best practices and cutting-edge solutions from overseas and there are a number of publicly funded acceleration and localization support programs for foreign firms that specialize in FinTech and AI to come and get to know the local eco-system. The Tokyo Metropolitan Government runs a yearly FinTech boot camp aimed at foreign firms and provides overseas businesspeople with free advice on corporate, legal and tax matters through its Tokyo One-Stop Business Establishment Center.

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