The Financial Conduct Authority (FCA) has identified “inappropriate technology-led asset management decisions” as one of five issues in the investment management sector that could undermine stability. Writing in its annual “Sector Views” publication, the regulator said such decisions could result in “harmful side effects”.
The proportion of assets invested through technology-led decision-making was small but growing, and “the speed of machine reactions could have serious consequences,” it said.
“If artificial intelligence using an algorithm were to make an inappropriate asset management decision, any resulting losses could be quickly compounded,” it added.
“Greater use of Big Data and developments in artificial intelligence are likely to see growing use of machine-based decision making by asset managers in security selection, asset allocation and trade execution.”
Another issue identified by the FCA was that “significant” harmful side effects could arise from failure or disruption at one or more of the small number of custody banks and administration service providers in the sector.
Significant harmful side effects could also result from failure at one or more of the small number of firms relied on for outsourced technology services, according to the FCA.
Outsourcing to third party technology providers was growing, which meant that the proportion of assets potentially affected was increasing, the regulator said.
“Any increase in levels of outsourcing, which could exacerbate the likelihood of firm or technology failure, may be offset by increased regulatory focus on third party service provision oversight,” it added.
The FCA also said barriers to successful cyber-enabled financial crime were falling due to technological advances, which increased “the availability and commoditisation of sophisticated cyber-attack tools”.
The general trend linking these issues, the regulator’s report suggested, was “increasing use of automation in financial services and greater outsourcing”.
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