Keeping robot finance fair


Futurists tell us we are on the brink of a fourth industrial revolution. This one is all about the digital and technological disruption of how we used to do things.

Previous industrial revolutions saw many blue-collar manufacturing jobs replaced by machines, or disappear overseas to low-labour-cost countries. Developed economies like Australia successfully transitioned their labour force to white-collar service jobs. Now these jobs are themselves under threat, and the financial services sector is not immune.

As digital start ups enter the finance market, the traditional banking sector is being challenged to keep up. Picture: Getty Images

Many transactional services are moving online, or are being replaced by offshore call centres and, increasingly, by virtual services – robots or artificial intelligence systems. Yet the finance sector has also embraced and thrived on the opportunities created by digital disruption.

The traditional banking sector in particular is constantly challenged by new, nimble and highly competitive operators, and must either change the tune of its service provision or face commercial oblivion.

The finance sector has in fact been remarkably resilient to change. In the ongoing capitalist battle of creative destruction, financial institutions seem to have had markedly greater longevity than manufacturing corporations. That could be explained by a sustained lack of competition, but it may also reflect an ability to adapt to new circumstances and adopt new technology like ATMs and internet banking, whenever and wherever they arise.

There is no need for the financial establishment to significantly invest in research and development itself. Banking corporations have adopted a similar strategy to big pharmaceuticals – let independent niche operators innovate and create start-ups and ventures, and when they succeed, simply buy them. For example, the successful Australian upstarts specialising in low-cost mortgage lending (Aussie and RAMS) were eventually bought by the traditional banks (CBA and Westpac, respectively).

The sector’s resilience is not just due to an ability to cope remarkably well with external pressure. Finance has become increasingly innovative and continuously reinvents itself to reduce the costs of regulation as well as the delivery of better products and services for customers.

Regulators and legislators often struggle to keep pace with the latest developments in investment assets, financial advice and risk management. That often leaves new providers operating in a regulatory vacuum that only gets filled once things have gone terribly wrong, or once lobbying pressure by the sector itself becomes too strong to ignore.

The cost of unregulated innovation on the public could be significant. Consider, for example, the fact that financial innovations like portfolio insurance and collateralised debt obligations contributed to the 1987 stock market crash and the 2007-08 global financial crisis, respectively. Rather than wait for legislation and regulation to catch up, we should therefore ask ourselves whether the ethics underpinning these innovations pass the morality test.

New technologies could make the finance sector fairer by removing human foibles and errors, but they could also neglect to offers clients a duty of care. Picture: Mark Finn/Unsplash

Digital technology will arguably improve market access for new (niche) financial institutions, as well as competition, and make markets and services more efficient. Robot trading and advice can significantly reduce fees, improve transparency, and make financial services more accessible. There is even a suggestion that robot finance will democratise the sector and lead to a more just and fair financial system for all. Human foibles and manifestations of conflicts of interest can simply be switched off.

Taking out human interaction could transform a possibly immoral finance sector to an entirely amoral one where moral considerations simply have no role to play.

Unfortunately, this dehumanisation of finance raises its own ethical concerns. As finance sector legislation/regulation often significantly lags developments and practices, how can we be sure that financial entrepreneurs even consider the ethical implications of their new business models? After all, financial institutions often innovate to reduce the cost of regulation on conducting financial transactions.

These concerns extend from breaches of client information privacy to, more generally, neglect of a duty to clients. Perhaps surprisingly, they seem to have increased with the introduction of digital technology service platforms. While the platforms are notionally neutral, they don’t recognise a client’s financial sophistication or lack thereof.

This digital revolution is rapidly replacing physical markets and bank branches and employees with online platforms and smartphone technology. Even the world of financial advice, which is still clinging to face-to-face transactions, might well be replaced by robot advice in the near future. The platforms are cheap to develop, easy to implement, and effectively marketed.

This creates an entirely new competitive landscape, with start-ups and small players specialising in specific services instantly becoming competitive entrants. Whereas regulators used to impose the same regimes on incumbents and newcomers, who were thereby disadvantaged, they now seem to provide regulatory exception to new initiatives. Public distrust of the finance sector has weakened the lobbying power of the incumbents and convinced the regulators to encourage innovation and competition by newcomers.

The price paid, however, is possibly unchecked unethical behaviour by the innovators.

This is an edited extract from ‘A Matter of Trust: The practice of ethics in finance’ by Paul Kofman and Clare Payne, published by Melbourne University Press. More information is available here.

Banner image: Getty Images



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