It’s still not magic: Framing the risks facing financial services in the Gen AI era
A new report from the London Foundation for Banking & Finance (LFBF) and the Institute and Faculty of Actuaries (IFoA), explores how generative AI is reshaping risk across the financial services sector.
‘It’s still not magic: framing the risks facing financial services in the Gen AI era’ updates earlier research from LFBF’s Centre for the Study of Financial Innovation (CSFI) first published in 2019. This new report reflecting the rapid rise of generative AI, large language models and increasingly agentic systems.
The report argues that AI risks cannot be separated from the benefits AI creates. The same technologies that improve efficiency, prediction and personalisation can also weaken transparency, increase exclusion and create new forms of systemic dependency.
The research groups AI risks into three broad categories: outcomes, operating environment and system-level risks. Across these areas, there are core challenges including: fairness, trust, truthfulness, security, governance, concentration and contagion. It also highlights wider concerns such as workforce disruption, environmental impact and AI asset bubble risk.
Drawing on surveys, expert interviews and analysis of regulatory and industry research, the report finds growing concern about the pace and scale of AI adoption in financial services. Among respondents, 70% agreed that AI-related risks are among the greatest facing the sector over the next five years, while 75% said those risks have increased substantially since generative AI became widely available.
Cyber threats and privacy breaches, misleading outputs and hallucinations, and talent or knowledge gaps were identified as the sector’s top AI risks. The report argues that generative AI creates new challenges because systems can produce outputs that are persuasive, useful and wrong at the same time. It also warns that “human in the loop” safeguards are only effective if people have the expertise, authority and time to challenge AI-generated outputs properly.
The report concludes that financial services will not simply use AI, but will also need to fund, insure and absorb the shocks created by the wider AI economic transition.
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