European Union: Bridging The Gap Between RegTech And Artificial Intelligence: An Italian Perspective

Last Updated: 17 December 2018
Article by Giangiacomo Olivi and Francesco Armaroli
Most Popular Article in Italy, December 2018

Regulatory Technology (RegTech) is a niche of the rising Financial Technology (FinTech) ecosystem, which was born to provide technological solutions to complex regulatory compliance, litigation and contractual matters faced by banks and financial institutions in their everyday activities.

Over time, RegTech spread from banks and financial services to other sectors and industries, as the global demand for effective regulatory compliance tools grew in many areas of the law — from data privacy to antitrust, from anti-money laundering to consumer protection, from tax to cyber security.

The enablers of RegTech's shift change are based mainly on SaaS or API solutions through which human teams inside organizations can better interpret and put into practice global regulations and interpret the huge amount of data lying at the back of regulatory compliance analysis activities.

The scenario above is going to be disrupted completely by the rise of AI-powered RegTech technologies based on predictive analytics and deep learning. 

What are the main legal challenges connected to the use of AI-powered RegTech tools?

Today, human-machine interaction is becoming essential to almost every business decision. However, when deploying RegTech tools based on AI technologies, it is important to remember that (at least for now) they should be seen as a support to human decision-making powers only and not as independent agents.

For instance, EU data protection laws prohibit invasive automated processing operations without prior consent. In addition, the obligation to report someone to the authorities for money laundering shall be based on reasonable grounds, and the grant of loan is still subject to a human employee's final call.

However, for how long?

In addition to the above, three other important legal issues deserve attention: RegTech providers' liability regime, re-use of data and the protection of the intellectual property rights connected to AI-powered RegTech tools.

As to the former, RegTech providers usually bear no (or very limited) responsibilities concerning the actual use of their products and the possible consequences of the relevant automated-decisions affecting their clients' customers.

However, they may be responsible where it emerges that such automated-decisions are based on an originally biased AI algorithm, which, for instance, influenced someone's credit scoring, loan application, risk level calculation or KYC process. This possibility should be duly reflected in contractual arrangements between RegTech providers and their clients.

In addition, RegTech providers' possibility to re-use the collected data for their own research and development purposes is another key factor that should be highlighted adequately from a contractual perspective.

As FinTech firms' success is also based on open banking and access to data previously held only by financial institutions, so RegTech companies could benefit from a similar process from their clients' compliance data.

However, there are still legal guarantees that need to be taken into account: for instance, data protection laws prohibit the re-use of personal data in the absence of a valid legal basis for purposes different from those for which they were originally collected.

However, this principle does not apply to anonymous data. In fact, it should not be excluded that RegTech firms may also have an interest in being able to use such anonymous data to improve their services and sell them to other clients.

As data is the new oil, the possibility to exploit data effectively represents a new source of economic power. Therefore, anonymous data matter in this context is also included, as it is in all senses an intangible asset that can create value for businesses.

Finally, with regard to the protection of IP rights connected to AI-powered RegTech tools, the following should be noted. On the one hand, we have the debated issue of whether AI-related works can be better protected by copyright or if they are eligible for patent; on the other hand, there is the need to layer IP rights so as to shield different aspects of the various innovations connected to AI technologies.

How can RegTech companies do this? In fact, they should clearly define and protect their AIs with registrations and documentation, as well as clear agreements on IP rights licensing with clients and third parties. 

What are Italian regulators saying about RegTech?

With regard to Italy, at the moment only the Commissione Nazionale per le Società e la Borsa (the Italian financial conduct authority or CONSOB) spoke plainly about RegTech by saying that its effects could be beneficial not only for the Italian market in general but also for regulators. In addition, according to recent statements by one of CONSOB's high commissioners, it is likely that the authority will lead the creation of 'RegTech innovation lab' by next year in order to promote the development of the RegTech market in Italy.

This attempt follows the wake of the UK Financial Conduct Authority and that of other regulators around the world (from Australia to Korea, from the Netherlands to Switzerland), aimed at creating regulatory sandboxes where RegTech firms can 'experiment' their product on real data and, consequently, accelerate their research, development and marketability.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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