Algorithmic Trust: Evaluating the Ethical and Regulatory Challenges of AI in Financial Services

Abstract

The decision-making process, risk assessment programs, customer relationship programs and fraud detection are some of the domains that artificial intelligence (AI) has developed in the financial services as it is being introduced at an alarming rate. There are also advanced ethical and regulatory concerns despite the fact that the systems governed by AI are effective and most accurate in forecasts. The paper discusses the concept of algorithmic trust and how the concepts of transparency, accountability, fairness, and explainability affect the stakeholder trust of the AI-enhanced financial ecosystems. Financial institutions have switched to credit scoring, replaced by robots instead of advice, algorithmic trading or anti-money laundering, but opaque models and data bias can encourage discrimination, compromise privacy and create systematic vulnerabilities. The article is the critical review of the regulation response to the situation in other foreign jurisdictions that encompass the data protection models, the model regulation principles, and the AI-specific regulation. It also touches upon the problem of audit of black-box algorithms and how it is possible to observe laws of consumer protection and why there is a necessity of trade-off on innovation and reduction of risks. To offer a logical remedy of enhancing accountability of algorithms, the paper shall be anchored on interdisciplinary prisms of financial regulation, such as ethics and technology regulation. Some of the recommendations include the needs of the increased model explainability, algorithmic self-auditing, viable data governance and the multi-border collaboration with regulation. By the combination of the technological advancement and the institutional trust, the study demonstrates that the active types of the governance should be proactive in the efforts of the protection of equity without overworking innovation. The findings can be used in the general discussion of the responsible AI in the financial industry and give feedback that could be useful to the policy makers, regulators and banking institutions that may be interested in adopting a more digitized, transparent and ethics-focused AI in the financial system.