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Manage the compliance risk posed by AI

Sep 29, 2023

Artificial intelligence (AI) is all over the news lately. In simple terms, AI is the ability of a computer to do tasks that are usually done by humans (because the tasks typically require human intelligence or some form of human discernment).

One form of AI is already driving every interaction with Alexa, Siri and Google Assistant. Newer cars have integrated the technology to cut down on distracted driving. Customer service chatbots rely on it.

AI influences daily decision-making more than many people are aware of.

AI is quickly making its way into finance, too.

How AI can help

AI has many benefits for financial institutions. It can automate tasks, freeing up time for staff to focus on other areas.

AI can enhance the customer service experience by allowing instant chats, feedback and solutions. It may also help to detect fraud more quickly, optimize investments and predict trends.

These benefits can help to increase productivity, provide more individualized service and lower costs.

AI can be used to draft correspondence or answer consumer questions after hours.

AI’s potential to advance the industry continues to evolve.

Growing concerns

The technology is also causing apprehension. One risk area is the role of AI in lending decisions, which the Consumer Financial Protection Bureau (CFPB) has raised as a concern.

If AI algorithms use historical data that reflects biased lending decisions or systemic disparities, those will only be heightened by the use of AI. If the algorithm is written using bias, intentional or unintentional, based on factors such as race, gender or location, the use of AI can perpetuate those biases through recommendations to approve or not approve a loan.

The CFPB has prioritized attention on this modern-day potential redlining. While a computer analyzing the data would appear to take out human bias, the opposite has been found to be true in recent academic studies. CFPB Director Rohit Chopra has stated that when consumers and regulators do not know how decisions are made by AI, consumers are unable to participate in a fair and competitive market free from bias.

The CFPB recently released a new issue spotlight on the expansive adoption and use of chatbots by financial institutions. The bureau has received numerous complaints from consumers not receiving timely, straightforward answers. The spotlight raised several risks, including noncompliance with federal consumer financial protection laws, diminished customer service, and trust and consumer harm.

Ethical and security risks

If AI is used to solicit customers for new products or services, it is likely based on the use of existing customer data held by the financial institution. This could result in a breach of privacy laws. To control the risk, financial institutions can ensure that the prospect of using customer data for AI is disclosed in contractual agreements.

How to prepare for AI compliance risks

A key component is designing an appropriate governance framework. Each institution should assess its particular AI uses, risk profile and risk tolerance, and design governance frameworks to fit its circumstances. Here are some other tactical steps to consider taking to manage compliance risk as AI becomes incorporated into your processes and practices:

  • Financial institutions should identify areas where AI cannot replace humans. The systems lack judgment and context, and the risk must be mitigated accordingly.
  • Institutions should also remain cognizant of poor data quality and the potential for machine learning and possible AI attacks.
  • Good management of AI should involve a human-centric approach. The first line of defense against discriminatory AI should include some form of manual review.
  • Remain cognizant of how the use of these algorithms can affect the decisions being made.
  • Ensure that AI uses are properly vetted before launching into widespread adoption. While the potential for increased productivity and cost savings is great, if something goes wrong in the implementation, putting your reputation on the line could come with a high cost.

How Wipfli can help

While AI is becoming an important part of your institution’s digital transformation, the ethical and security issues it raises are significant. Wipfli specialists can help your financial institution navigate the challenges and opportunities. Our regulatory compliance team offers clarity — cutting through to make the future work for you and help you stay in compliance with the right tech strategy.

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Kristen L. Eustis, CRCM
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