The Consumer Financial Protection Bureau (CFPB) has taken a clear position on the use of artificial intelligence (AI) in financial services: there are no exceptions to existing consumer protection laws for new technologies.

In an August 12 comment letter to Treasury Secretary Janet Yellen, the CFPB outlined its approach to regulating AI and other new technologies in the financial sector. The agency emphasized that innovation must not come at the expense of consumer protection or fair competition.

“Although institutions sometimes act as if there are exemptions from federal financial consumer protection laws for new technologies, that is not the case,” the CFPB explained in its letter. “Regulators have a statutory mandate to ensure that existing rules are enforced with respect to all technologies, including those marketed as new or innovative.”

The agency’s position comes as financial institutions increasingly use AI and machine learning technologies for everything from customer service to fraud detection and lending. While these technologies promise greater efficiency and potentially better outcomes for consumers, they also raise concerns about fairness, transparency and compliance with existing regulations.

CFPB Chief Counsel Seth Frotman and Chief Technologist Erie Meyer, who co-signed the letter, said the agency is closely monitoring the adoption of these technologies.

“If companies fail to use a new technology in a lawful way, they should not use that technology,” they write.

CFPB concerns

The CFPB highlighted several areas of concern, including automated customer service, fraud detection, and credit and underwriting decisions. The agency warned that AI-powered customer service tools may provide incorrect information, fail to enable meaningful dispute resolution, and increase privacy and security risks.

With respect to fraud detection, the CFPB noted that such activities conducted as part of a transaction for a consumer financial product or service must comply with applicable laws, including the Consumer Financial Protection Act and, in some cases, the Equal Credit Opportunity Act.

When it comes to lending and underwriting decisions, the agency stressed that the Equal Credit Opportunity Act applies regardless of the complexity of the technology used, “including when it comes to combating unlawful discrimination or explaining how certain credit decisions are made.”

The CFPB’s approach represents a departure from previous efforts to encourage innovation through regulatory “sandboxes” and no action letters. The agency found that these programs “fell short of their intended purpose of encouraging consumer-friendly innovation in financial markets” and sometimes resulted in key consumer protections being overridden.

Instead, the CFPB focuses on creating a level playing field for all market participants.

“Innovation is encouraged when regulators ensure that all market participants follow the same rules and compete on equal terms,” the letter says.

To achieve this goal, the agency has outlined several initiatives, including providing clear guidance on how existing laws should apply to new technologies, ensuring that regulations do not hamper competition or favor incumbents, tackling anti-competitive practices and proposing rules that make it easier for consumers to switch financial service providers.

AI in finance is gaining global attention

The CFPB’s stance is in line with a growing trend among regulators around the world to closely scrutinize the use of AI in financial services. In Europe, the AI ​​Act imposes strict rules on the use of AI systems in various sectors, including finance.

As part of its oversight efforts, the CFPB is taking steps to evaluate how companies test the algorithms they use to make credit decisions to ensure compliance with the law, including prohibiting discrimination based on protected characteristics. The agency is also closely monitoring how technology companies are expanding into bank-like services in virtual worlds and monitoring the potential misuse of generative AI tools for fraud.

In addition, the CFPB has proposed subjecting large technology companies that offer services such as digital wallets and payment apps to its supervisory process and bringing the oversight of their offering of consumer financial products or services in line with that of banks and other financial institutions.

As AI continues to reshape the financial services landscape, the CFPB’s position signals that regulators are committed to keeping pace with technological change. The agency concluded its letter by emphasizing that “artificial intelligence” is just one aspect of the rapid adoption of new technologies in the consumer financial market, which brings with it new risks and challenges that the CFPB is focused on.

Given this clear statement of intent, financial institutions and FinTech companies alike must carefully navigate the regulatory landscape as they seek to harness the power of AI and other emerging technologies. The CFPB’s approach means that innovation in financial services will likely occur within the framework of existing consumer protection laws, with no special exemptions for new technologies.