ESMA Provides Guidance on Use of Artificial Intelligence in Financial Services

The European Securities and Markets Authority (ESMA), the EU's financial markets regulator and supervisor, has issued a statement providing initial guidance to firms using Artificial Intelligence (AI) technologies when providing investment services to retail clients. This guidance comes amidst the European Union's recent approval of the groundbreaking AI Act, a comprehensive rulebook governing AI applications across the 27-nation bloc.

While acknowledging the potential benefits of AI technologies, ESMA has highlighted the inherent risks associated with their use, such as algorithmic biases, data quality issues, opaque decision-making, overreliance on AI for decision-making, and privacy and security concerns related to the collection, storage, and processing of large amounts of data required by AI systems.

When using AI, ESMA expects firms to comply with relevant requirements under the Markets in Financial Instruments Directive (MiFID II), particularly regarding organizational aspects, conduct of business, and their regulatory obligation to act in the best interest of the client.

The recently approved AI Act adopts a risk-based approach, banning certain "unacceptable risk" AI practices while imposing strict requirements on "high-risk" applications in areas like employment and critical infrastructure. While the guidance from ESMA focuses specifically on AI use in investment services, it aligns with the broader EU effort to ensure trust, transparency, and accountability in the development and deployment of AI technologies.

Potential uses of AI by investment firms covered by MiFID II requirements and ESMA's guidance include customer support, fraud detection, risk management, compliance, and support in the provision of investment advice and portfolio management.

ESMA and the National Competent Authorities (NCAs) will continue monitoring the use of AI in investment services and the relevant EU legal framework, including the newly approved AI Act, to determine if further action is needed in this area.

The ESMA guidance aims to provide a framework for investment firms to responsibly adopt AI technologies while mitigating potential risks, ensuring compliance with existing regulations, and aligning with the broader objectives of the EU's AI Act to promote trust and accountability in AI development and use.

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