DIFC regulator to retain ‘tech-neutral approach’ on AI investment advice: Ian Johnston

Dubai: By now, it’s clear that some form of AI will soon be part of life itself.

Whether it’s tapping out some feature on your AI-packed smartphone. Or have some service delivered to you via a provider who has deployed AI to make it happen.

Or even make an investment decision based on whatever AI-enabled algorithms suggest.

In this ‘AI is everywhere’ scenario, should there be rules to govern AI and how it is deployed? Most specifically, when it comes to the investment space, given the risks that is always associated when advice is given on where and how investors should place their monies?

Ian Johnston is Chief Executive of Dubai Financial Services Authority (DFSA), the regulator responsible for companies licensed to operate in or out of the DIFC. And he has clear ideas on how AI – or any innovation in the financial services space – can be used.

Does DFSA have specific plans to introduce rules on how licensed DIFC companies can offer AI-linked financial investments? Or even advisory?

We take a technology neutral approach. We only get involved if there’s actual financial service being provided to the customer. As opposed to just improving or making more efficient the financial services that are there.

Within DIFC, there are more than 1,000 fintech businesses operating, and not all of what they offer need to be regulated.

Our role first is to recognise the benefits of the innovation a licensed firm aims to provide. As a regulator, we do all we can to support the development of such services in DIFC and Dubai generally. Then, the question is: ‘Do these services need to be regulated?’

If someone is offering better technology in terms of customer delivery, that’s not necessarily something we need to regulate. But once it becomes an investment product, once it becomes something offering investment advice and managing clients’ money, then we would look to regulate.

So, the DFSA already has rules governing how any investment advice suggested by AI or any such technology can be deployed?

We already have guidelines in respect of use of AI by financial services businesses. These are consistent with the UAE Central Bank and ESCA (Emirates Securities & Commodities Authority).

These deal with the usual risks one would face, such as what governance arrangements are in place.

And what the business is going to do in terms of any bias that might arise (from the advise suggested by AI). And how to manage these technology risks.

The guidelines are what we expect firms in DIFC to think about in respect of AI usage and other enabling technologies.

Do these guidelines specifically cover AI?

In the same way that we don’t specifically regular the computer programs, we will not specifically regulate AI.

We expect the financial services businesses to build into their risk management frameworks how they manage such risks. How they deal with specific governance issues that arise out of the use of AI and who’s accountable when things go wrong.

We expect businesses to factor in those risks into the risk management frameworks, rather than us saying ‘Here are specific rules around AI’. We do realise the phenomenal benefits that can be offered by using AI right.

Will these businesses have to put in place higher capital requirements before offering such services to clients?

It depends on what the application is. The best way to look at it is: ‘Are the innovations creating greater benefits for the offered financial services?’

One needs to look at it through the benefits it’s providing clients and investors in terms of access to the markets.

We realise new technology is definitely providing greater access to markets. Fintechs are able to provide much more efficiency, and therefore you have costs coming down (for the client).

It is also making a lot of products easier to deal with in terms of customer interface, usability.

So, you have tech and innovations providing lots of benefits to financial services customers generally, and a lot of that has been done from the DIFC.

So, there’s no need for higher capital?

If you are holding client’s money, by taking a deposit, for instance, that requires a higher level of capital. For simply offering investment advice, with no client money involved, there’s far less capital.

Those rules are in place.

It was in 2017 that DFSA introduced something called the innovation testing license. It’s like a regulatory sandbox, where we give the opportunity for firms with truly innovative ideas to test the viability and the operability of the product in a limited, regulated environment.

But only within a limited client base.

If that technology is proven, and becomes a full financial service, it would get regulated in the normal way.

The innovation testing license was a good way for firms to come in and test their ideas and see whether the technology works. It’s been a successful program with more than 200 firms who went through it.

What about fintechs? Don’t they need an updated rulebook to go by?

In tech space, if there’s robo financial advice, we would treat it in the same way as any other financial advice. Yes, it’s different tech being used with less human interface with the client, but it’s providing actual investment advice. That’s still regulated.

I sit on the board of IOSCO (International Organisation of Securities Commissions), the global standards setting body for securities regulation for capital markets and for funds.

The guidelines they’ve published in respect of innovation, in respect of tokenization and crypto, the DFSA regime is in line with that.

The way we approach this is regardless of technology that’s used by the fintech. What matters is any risk to the investor deserves the same sort of regulatory treatment.