The chair of the Financial Conduct Authority (FCA) and Payment Systems Regulator (PSR) has warned that FinTech cannot be complacent in the face of algorithms taking over.

Speaking at an event in London yesterday, Charles Randell explained that algorithms are now everywhere in digital services, noting that some have suggested in the future democracy will be replaced by an algocracy, where algorithms decide everything on our behalf.

“The UK FinTech industry is world leading and bursting with new ideas,” he stated. “But there is no room for complacency.”

Randell said three factors could come together to make an algocracy more than just science fiction:

• Big Data: rapid advances in the ability to store data cheaply have created enormous and detailed datasets about many different aspects of our lives. The largest of these datasets are held and controlled by a small number of big corporations. As we move towards the Internet of Things, where our cars, our homes, our electrical appliances, our watches, our fitbits and our phones produce more and more data, these datasets could explode further.
• Artificial intelligence (AI) and machine learning: vast improvements in processing power means that corporations can mine these Big Data sets for patterns more effectively than ever before. Whereas in the past firms could only target broad groups of consumers, these patterns can now be turned into conclusions about us as individuals. They can make predictions about our future behaviour, and then decide which products and services we should be offered and on which terms.
• Behavioural science: as firms understand more about human behaviour, they are able to target their sales efforts using ‘nudges’ which exploit our decision-making biases, informed by the Big Data about us that they hold. Some nudges may be in consumers’ interests, as with auto-enrolment for pensions, but there is the potential for them to be used against our interests too.

Randell referred to some real world examples to demonstrate the good and bad of algorithms. In the first camp, he put forward services like microinsurance, where AI promises to increase coverage for people on low incomes by improving risk modelling.

On the bad side, Randell cited some credit card companies in the US started cutting cardholders’ credit limits when charges appeared for marriage guidance counselling, since marriage breakdown is highly correlated with debt default.

There were also media reports earlier this year claiming that price comparison websites quoted significantly higher car insurance premiums for people with names suggesting they are members of ethnic minorities.

“We need to anticipate the fundamental questions which Big Data, artificial intelligence and behavioural science present, and make sure that we innovate ethically to shape the answers,” stated Randell. “Society in general and policy makers in particular need to think about how to mitigate the risk that an algocracy exacerbates social exclusion and worsens access to financial services in the way that it identifies the most profitable or the most risky customers.”

The availability and use of very detailed personal data about consumers may call the purpose of some existing business models into question, Randell cautioned, citing insurance as an example.

“The social benefits of pooling risk may be eroded if insurance is ‘over-personalised’ and becomes unaffordable for people whose genetic inheritance identifies them as high risk,” he explained. “Equally, there is a danger, in time, of excluding those who have an impoverished data history and cannot provide the number of inputs the algorithm requires.”

However, new ways to explore existing datasets could open up financial services to those who have been excluded from them by traditional ways of making decisions. FinTech firms are already using transactional data to identify creditworthy loan and mortgage customers who would be excluded from these products by traditional credit scoring risk assessments because of irregular earnings histories or long periods of renting, Randell pointed out.

“Technological innovation in financial services brings together two of the UK’s greatest assets and gives us the opportunity to lead the world in FinTech,” Randell told his audience. “I would like the UK regulatory community to add another asset – the leadership in regulation that it has already shown through programmes like the FCA’s Project Innovate and the Sandbox, while safeguarding high standards of consumer protection.”

He argued that the UK needs to contribute to new standards for data ethics when harnessing the power of Big Data. “The financial world is currently full of exciting new ideas, but sustainable financial innovation will be built on purpose, people and trust, which have been the key ingredients of the best financial businesses for centuries.”

Share Story: