Financial Services Firms Rate AI Among Top Five-Year Risks
A joint report from the London Foundation for Banking and Finance and the Institute and Faculty of Actuaries introduces a framework for managing AI risks across financial services. The research finds that seven in ten senior practitioners consider AI risks among the greatest threats to their sector over the next five years.
The report, titled 'It's still not magic: Framing the risks facing financial services in the Gen AI era', identifies nine distinct risks grouped into three categories: outcomes, operating environment, and system-level dynamics. It updates a 2019 predecessor and directly addresses how generative AI has shifted the risk picture since becoming widely available.
The Tension Between Benefit and Risk
The same features that make generative AI valuable create governance problems. The technology can present false information with apparent authority-what researchers call "hallucination"-while remaining accessible, persuasive and easy to embed in daily workflows.
Three risks topped the survey responses: cyber threats, misleading outputs, and knowledge gaps among staff. Seventy-five percent of respondents said AI risks to their sector have increased substantially since generative AI became widely available.
The framework treats these as trade-offs rather than standalone problems. Sharper prediction, deeper personalization, greater scale, and more autonomous decision-making all carry corresponding risks that cannot be fully eliminated.
Ecosystem Risks Across the Financial System
As firms build AI deeper into their infrastructure, many of the most complex risks operate at the ecosystem level. A decision that makes sense for one institution can create hidden dependencies and shared points of failure across the broader financial system.
Keyur Patel, LFBF Research Associate and report author, highlighted the core tension: "The same characteristics that make AI useful in financial services also create many of the risks that make it so difficult to govern."
He noted that AI outputs can be "useful, confident and wrong at the same time," and that "mostly right" carries particular danger in financial contexts. The report identifies other tensions: the same machinery can both widen financial inclusion and sharpen exclusion; "human in the loop" differs from genuine human control; and concentration is built into how AI systems function.
What Risk Management Can Address
Better risk management, governance, and regulation can moderate many of these risks, though not eliminate them entirely. The framework provides financial services firms with a structure to trace how AI risk moves through their operations-from customer outcomes to firm-level deployment to system-wide dynamics.
Paul Sweeting, IFoA President, said actuaries must play a key role in ensuring AI operates as intended. "With our unique combination of technical skill, communication and professional oversight, actuaries must play a key role making sure that AI is working as it should."
For professionals in finance, understanding this framework matters because AI governance is no longer a technical question. It's becoming a business and regulatory necessity.
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