AI could supercharge productivity in Financial Services

Byline: Stephen Emerson, Managing Editor.

The march of new technology has the potential to positively transform productivity in the financial services sector with the opportunities to deliver strong financial returns over the next decade.

This was the view of the participants of a roundtable organised in partnership with The Business Magazine and Herrington Carmichael at the legal firm’s headquarters in Farnborough.

The roundtable discussed how the financial services sector will be transformed by new technology, in particular Artificial Intelligence (AI), with the change also opening new opportunities for wealth generation while at the same time creating a new frontier of risk.

New technology has potential to transform the industry, but the path ahead should be tackled with caution

Benefits

A report released in June by the City of London Corporation and KPMG predicted that AI could boost the UK economy by £35 billion over the next five years.

This increase across sub-sectors of financial services, including asset management and investment banking, is expected to be realised through upskilling workers’ AI proficiency and increased productivity.

The benefits of AI in improving job satisfaction were highlighted by Hannah King, Legal Director, Employment at Herrington Carmichael.

She said: “The report suggested that where AI has been introduced into elements of people’s roles, it has improved their job satisfaction in the region of 63 per cent. Bringing in AI into people’s roles alleviates them of the more process-driven mundane aspects, allowing them to spend more time on the fulfilling parts.”

Jeremy Hill, a director at private banking and wealth management firm SG Kleinwort Hambros, said that financial services, like many industries, would be transformed by seismic changes unfolding in the technology space.

He said: “For tech, the future is unchartered and just because things have happened in the past doesn’t mean they are going to happen again. We are on the verge of an enormous industrial revolution and all the ingredients are there to do exceptional things. Whether that’s with climate change, productivity or efficiency.”

The proliferation of cloud computing, which provides the infrastructure for AI applications, has opened many new revenue opportunities according to Dan James, Director and Head of Corporate Finance at Wilson Partners.

“The adoption of cloud-based technologies has significantly accelerated over the last five years as has the need for customers to have power at their fingertips with their mobile, laptop or table,” he said. “This has created new markets and new market opportunities for lots of new entrants and new sectors. 

“The real opportunity, internally for us, is for AI to change the way we do things. It is an opportunity to allow people to do what they enjoy doing, to add more value, and not get bogged down with procedural tasks.”

The ability of technology to increase productivity was highlighted by Guy Nieuwenhuys, Investment Director at Rockpool Investments, who underlined the role that AI will play in market analysis.

“There are lots of opportunities to make efficiencies in the way we do things, he said. “We focus on buy-and-build which can be quite a manual process to map the market, however there are massive opportunities around AI to improve that.

“I think there are huge opportunities and we’re only beginning to see what they look like at the moment.”

Lee Robbins, Director of Corporate Finance firm CapEQ, said that when it came to mergers and acquisitions, the speed in which AI can process data would increase efficiency and accuracy when it came to finding new targets.

He said: “It will help identify investors and buyers for clients as well as identify potential targets. I think that’s one of the things that the AI will do better in the future as it will cast the net wider.”

Alex Canham, Corporate Partner at Herrington Carmichael, said that increased use of AI would speed up data-heavy due diligence processes and free up advisors for strategic thinking.

He said: “From a corporate transaction context, it is going to really help with the due diligence process in terms of looking at documents and information-gathering. It will also help with document production, like board minutes and stock transfer forms.

“There is a clear time benefit because people can then be involved in giving more strategic advice.”

Stuart Thompson, Director at alternative lender ThinCats, said AI would help to make loan decisions quicker and reduce risk.

He said: “Most of what we do is around mergers and acquisitions. We’re not a volume-based lender and we’re probably doing about 80 deals a year into the lower mid-market space. I think AI will help us drive efficiencies for customers and analyse risk which ultimately means better outcomes for our customers, making the right decision quicker and also pricing more effectively.”

Rebecca Combes, Partner at Evelyn Partners, said that the financial services industry was rapidly opening up to AI and new technology, but many companies were still at the early stages of adoption.

She said: “Clients are more open to embracing digital services as it is opening up a whole new world for them and they are quite excited. We are already using a significant amount of AI tech within the way that we work, especially on routine compliance work. However, I think there is a lot of learning that has to be done for us as a firm and a profession.”

Concerns

Despite the opportunities afforded by technology, caution was also sounded about the ethical use of some AI applications.

Louise Jeffreys, Managing Director at Gunner & Co, noted that in some parts of the industry, AI chatbots were being used to prospect business where it was not always clear, for the end user, that they were not dealing with a real person.

She said: “Some companies are using social media to build up initial engagement with B2B conversations then move these into the sales teams to make that real world negotiation. At the moment we’re quite happy to use mass email as a technology.

“I think this could be considered as an extension of that. I think being upfront with people that they are interacting with a chatbot is key so that they know what to expect and will not be disappointed.”

He said: “Some of the hallucinations can be quite amusing if you spot them but not so much if you don’t. The biases are rooted in the history of biases whether that is gender bias or race bias, for example. If the AI picks up on this then the decisions and information it is giving you could be potentially very damaging.

Stephen Baker, Partner and Head of Dispute Resolution at Herrington Carmichael, cautioned that, as Generative AI technology was still at an early stage, there was the risk of hallucinations, bias and over reliance. AI hallucinations are incorrect or misleading results that AI models generate. These errors can be caused by many factors, including insufficient training data, incorrect assumptions made by the model, or biases in the data used to train the model.

“We need to make sure that AI is used as a tool – like a hammer is to a blacksmith rather than as a replacement.”

Matt Jenkin, Employment Partner at Herrington Carmichael, echoed concerns over hallucinations and said that human checks on output remained vital.

He added: “We’re still seeing too many hallucinations with generative AI content.

“We’re starting to see a flow of questions and advice around employment issues that are created by AI being used in the workplace.”

Luke Hanratty, Partner at accountancy firm Saffery, said the expanding use of AI would mean an increase in the complexity of fraud and this posed a due diligence challenge.

He said: “We also have to consider that not only will AI be able to detect fraud, but it will also be able to commit fraud. How are you going to be able to spot that when you are doing your due diligence or audit? It is only going to be by applying your own AI so there is going to be an arms race on this front so that these threats can be identified and flagged in good time.”

The sources of data powering Generative AI models were also discussed, with questions raised by participants over data sources and the destination of input.

Saffery’s Luke Hanratty said: “It is inevitable that AI will play a bigger role in audit and due diligence. However, I think it is currently being held back by concerns over what data is going into AI models.”

Alex Canham of Herrington Carmichael also said that AI was making the due diligence process for company buyers opaque, especially when it came to intellectual property.

He said: “The due diligence landscape has changed. Traditionally people have looked at what you are selling in terms of the staff, property, key contracts but the growth of tech has changed this.

“The importance of tech due diligence is increasing. As people create more bespoke things with AI, it opens questions as to what parts of the product they own. Did they create it themselves? What external licenses do they have?”

Human interaction

The level of human involvement was a key in determining how fast AI would be rolled out in the financial services industry, according to Jeremy Hill of SG Kleinwort Hambros.

He said: “Banks like Kleinwort Hambros are 200 years old and there is a lot of legacy data as part of our fabric therefore the opportunity to speed up how we operate is huge. The uncertainty is around how much people want some human interaction which is an enormous call.”

Mark Chapman, Commercial and Regulatory Partner at Herrington Carmichael, expanded on the importance of human interaction when using AI in the legal profession.

He said: “We are starting to use AI to do contract reviews as it can summarise data across large volumes of documents. The results are still quite variable in that sometimes it can be not bad and other times it can spectacularly wrong. There is a balance to be had in terms of professional judgment which is key.”

Roundtable participants agreed that many mundane tasks, normally carried out by junior staff members, would increasingly be carried out by AI in the future. However, this also raised concerns about how new recruits would learn and progress.

Dan James of Wilson Partners expanded on this point. “Getting stuck into data and analysis is how you learn and is a valuable process, he said. “We are potentially going to be asking people to jump straight out of qualification into being a commercial analyst without having really figured out where all the data comes from and how to put it together. Bridging that gap could be quite challenging.”

Matt Jenkin of Herrington Carmichael also highlighted the skills shortage that, like many industries, would be increasingly felt by the financial services sector.

He said: “Trying to find AI-enabled recruits is like finding hen’s teeth at the moment. If you want to find a specialist in Chat GPT, you are going to struggle. The financial services sector is up against a hugely competitive market out there.

“Attracting talent will be challenging, especially with headlines about the impact that AI will have on the numbers of people employed in the sector.”

Director of Accounting at AI-powered bookkeeping firm Jenesys, Marc Sevitz, said that the technology his firm was developing could help with the expected tech skills shortage in the financial services sector.

He said: “For us it is important to work ethically, and we are saying let’s not

use AI to replace bookkeepers and accountants but how can we help them become more efficient by getting live data to them to help shape their decisions.”

Regulator role

The advance of technology posed serious challenges for the UK’s Financial Conduct Authority and other financial regulators around the world. The roundtable discussed how the regulator could keep pace with this change to protect the industry while ensuring that the UK was not left behind strategically.

Mark Chapman of Herrington Carmichael said: “From a global perspective, will country regulators be able to do what needs to be done? Professional bodies around the professional services, including legal and accounting, need to come together to say what they need from countrywide regulations, and these are then fed back to the regulator. I think the trick is to have a regulator that’s super nimble because we’re going through technological change that we have never seen before.”

Guy Nieuwenhuys of Rockpool Investments said smart regulation that adapted as AI technology progressed would be key to ensuring that the UK kept its competitive edge.

He said: “With AI and regulation, I would hope that no measures are in place that provide a shock to the system. There needs to be a gradual approach.”

Stuart Thompson said regulation around AI would hit the volume end of the financial services market first before filtering down to lenders like his own firm ThinCats.

He said: “We view the impact on AI and financial services being on the volume end of the business such as those involved in opening credit and mortgage applications. We see them as setting the benchmark for how AI and tech will drive this market and then that will slowly water down to us.

“We are doing 80 deals a year so we have to weigh up in terms of what the impact is going to have on our business.”

Mark Wharrier, Director of niche investment house Scientific Partners, said that investors were increasingly considering how vulnerable target companies were to being disrupted.

He said: “I think there is a risk in any business, and you have to think about a business’s competitive advantages, how durable they are and how reliant it is on technology and people. It’s about how competitive a business can be in the long term. It’s not just about one factor, it’s the whole basket.”

By the time this report is published, a new government will have been elected, with pre-election polls predicting a Labour government with a comfortable majority. The roundtable agreed that the changeover of political leaders and major events domestically and internationally over the last decade had led to uncertainty which had in turn slowed down corporate transactions.

Guy Nieuwenhuys of Rockpool Investments said: “We have had a turbulent few years with Brexit and the Liz Truss effect on interest rates. This unstable environment is never good for dealmaking. With a new government coming in, there is the opportunity to create some stability in terms of getting control of interest rates and inflation.”

Roundtable participants said they hoped that a stabilised political environment would encourage a flow in dealmaking but said that interest rates and potential rises in Capital Gains Tax remained key blockers.

Alex Canham of Herrington Carmichael said: “I have had a lot of conversations with clients who are thinking of selling but are not quite there, in terms of making a decision. There is a lot of nervousness around what the next government will do with regard to Capital Gains Tax. Most people I have spoken to have said they are going to hold off until they have an idea of what is going on next year.”

While the Conservatives had committed to not raising Capital Gains Tax for people selling their businesses before the election, Labour had, until publication, refused to commit to a similar promise.

Louise Jeffreys of Gunner & Co said: “Over the last six years there has been uncertainty for business owners as to whether they should sell their businesses. In these environments, where people have owned their businesses for decades, there needs to be a catalyst to make a sale happen. There are enough buyers out there for the sale to be positioned as an opportunity rather than a fire sale.”

Mark Wharrier of Scientific Partners said that global uncertainty in supply chains could also create opportunities for UK companies, particularly those with a security focus.

He said: “There was a broadening out of supply chains and with Russia going into Ukraine that is going to continue. This should be an opportunity for companies that have national security characteristics because we are moving towards operating in a more secured environment. The barriers to entry for overseas companies will become much more difficult.”

The above roundtable, produced in partnership with The Business Magazine and Herrington Carmichael, is the third in a series of roundtables with the previous two events focusing on hospitality and construction.

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