The regulator’s challenge in the age of AI

• The recent surge in AI regulation discussions necessitates a focus on downstream challenges - the urgent need for regulatory skill-building in the digital age.
• As AI adoption grows across sectors like banking, telecommunications and insurance, the need to enhance regulatory capabilities becomes paramount.

Scope and Rapid Advancements

• Generative AI products demonstrate vast applications and rapid service quality improvement.
• This indicates a strong potential for widespread adoption across the economy.
• The Economist Intelligence Unit highlights AI utilisation in banking, credit card companies, risk assessment, fraud detection, digital marketing, e-commerce, and the insurance industry.
• The transformative impact of AI prompts regulatory bodies to prepare for paradigm shifts in professional practices and norms.

Transformations in Professions

• AI's integration into bookkeeping, accounting, legal practices, and other professions may reshape traditional roles.
• The RBI and SEBI have initiated AI tools for regulatory supervision, recognizing the need to adapt to transformative changes.

Regulatory Frameworks and Skill-building

• Several countries have implemented initial regulatory frameworks for AI.
• However, the regulatory agencies face the challenge of building the necessary capabilities for the effective implementation.
• Hiring external firms and experts, as seen with the RBI contracting McKinsey and Accenture, is a step forward.
• However, agencies must develop the ability to evaluate the external inputs.

Algorithmic Auditing

• Some regulators globally have begun exploring the concept of Algorithmic auditing.
• It is the audit of each part of a model’s life cycle to gain a better understanding of how the model works, and whether its use leads to potentially problematic outcomes.
• However, it requires the regulators to understand and implement these practices.

Building Regulatory Capabilities

• The necessity for effective regulation is emphasised, as private sector incentives alone may be inadequate.
• The central question is not whether capabilities should be developed but how to achieve this at the current scale and with speed.
• Relying solely on outside expertise is seen as a short-term strategy, and a systemic approach to building capabilities is crucial.
• The central government must take a lead in understanding and replicating the transition to a digital state.