Artificial intelligence (AI) and environmental, social and governance are some of the industry’s favourite terms to throw around. AI promises to make a huge impact on every aspect of financial services, while ESG principles are important to abide by to ensure firms look after the planet and their people.
Recognising this, the financial services sector is calling out for clearer and proportionate regulations surrounding AI and ESG to help them realise the benefits these trends offer, according to new survey data from global law firm, DLA Piper.
In its global report, ‘Financial Futures: Disruption in global financial services‘, DLA Piper found that eight in ten respondents are optimistic about future industry growth prospects for the financial services industry, with UK (93 per cent) and US organisations (90 per cent) reporting the highest confidence. While banks appear to be the most optimistic (88 per cent), respondents from global fintechs feel the least positive about the future (72 per cent).
So what’s making the majority of firms and financial organisations so optimistic? According to the report, advancements in technology (71 per cent), the launch of new products and services to drive growth (55 per cent) and changing consumer and investor behaviours (38 per cent) are driving optimism about the future.
However, clarity and a proportionate approach are key as 58 per cent of respondents cite regulation complexity around technology as a key challenge globally, and nearly 73 per cent go on to say that current regulations stifle innovation efforts.
For firms looking at other locations for optimal conditions for growth, the US remains the most attractive market (35 per cent), followed by the EU (24 per cent).
AI: removing or creating challenges?
Whilst the majority of respondents (86 per cent) believe that AI will transform the sector, 53 per cent see AI as one of their main challenges.
Only 39 per cent are committed to hiring experts in the field of AI and imposing governance and oversight structures to maximise the related opportunities. Overall, half of the companies surveyed lack in-house specialists and are opting to work with specialist subcontractors. Without this internal talent, businesses risk falling behind the curve in the future.
Ethical AI concerns are highly documented, yet only 56 per cent of the organisations surveyed are developing ethical frameworks to guide their efforts. Without an ethical framework in place, businesses put themselves at risk of not meeting stakeholder, customer and board demands around AI deployments. DLA Piper explained that it is vital for businesses to have a clear plan and direction in place before they start their AI journey.
Despite not having frameworks to use, businesses report a clear understanding of the benefits AI can offer, such as managing regulatory compliance (63 per cent); followed by fraud detection and prevention (62 per cent). Twenty-one per cent of businesses are worried about compliance issues as they look to manage the cyber security and data protection risks associated with AI.
“While our survey shows a high level of optimism within the financial services sector, our research reveals a need for financial services organisations to go further in planning around resourcing and regulatory horizon scanning in order to navigate the opportunities that AI and other new technologies offer,” explained Mark Dwyer, global co-chair of the financial services sector group at DLA Piper.
Driving ESG agendas forward
As businesses grapple with changing ESG regulations across multiple jurisdictions, 46 per cent of businesses globally have ambitions to position themselves as a leader and innovator on sustainability and ESG.
The appetite to drive ESG agendas forward is clear, but businesses report concerns about achieving their goal. In fact, 56 per cent of respondents would like to see more ESG regulation to support them in meeting their objectives, and 43 per cent want to understand the current regulations better.
The negative external reputational risk of not complying with and need to comply with regulations are the biggest drivers for firms to engage in ESG activities (70 per cent and 52 per cent respectively). However, pressure from shareholders (36 per cent) and senior management (34 per cent) ranked lowest.
Almost half of the sector has ambitions to position their business as an ESG leader, whilst 34 per cent plan to replicate successful approaches by their peers. Not all organisations are so proactive. Nineteen per cent plan to wait until stakeholders and customers demand an approach, before making any decision.
Dwyer concludes: “It is clear that ESG factors are driving changes to activity in financial markets; from financing the enormous capital requirements for transition, to ensuring accurate reporting of environmental, social and governance metrics to facilitate choice for investors and supervision and stress-testing by regulators. It is therefore vital that leaders take note of the challenges and opportunities presented by ESG and define a clear plan. Both ESG and innovation will be key to business success long into the future.”
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