The Securities and Exchange Board of India (SEBI) is pushing for greater transparency and security in the use of artificial intelligence (AI) tools by Investment Advisers (IAs) and Research Analysts (RAs). In a recent consultation paper, SEBI emphasized that IAs and RAs who employ AI tools in their services must clearly disclose the extent of their usage to clients. This move aims to ensure that clients fully understand how AI influences their investment decisions and can make informed choices about their advisory services.
AI tools can definitely enhance efficiency but may also expose sensitive data if not properly safeguarded. The possibility of a data breach underscores the need for strong security measures and clear disclosure to clients about the extent of AI tool usage. While it can significantly improve the advisory landscape, it should complement, not replace, human judgment and expertise. India's diverse financial landscape demands personalized advice that AI alone cannot provide.
SEBI's consultation paper addresses the growing role of AI in the financial advisory sector, with tools like OpenAI's ChatGPT and Google (NASDAQ:GOOGL)'s Gemini increasingly being used for tasks such as data analysis and summarization. While these AI tools offer human-like interactions and can boost productivity, SEBI warns that they may not always provide accurate or meaningful outputs, particularly in complex, security-specific scenarios that require a deep understanding of a client’s financial situation and goals.
Furthermore, SEBI pointed out that AI tools might not fully comply with regulatory requirements for risk profiling and suitability assessments, which are critical components of personalized investment advice. This raises concerns about the adequacy of AI-generated recommendations and the potential risks to clients.
In light of these concerns, SEBI proposed that IAs and RAs using AI tools must fully disclose their usage to prospective clients, allowing them to make informed decisions about continuing or discontinuing their services. SEBI also emphasized that, regardless of the extent of AI tool usage, the responsibility for data security and compliance with regulatory provisions lies solely with the IA or RA.
In addition to these proposals, SEBI is also considering the creation of a closed ecosystem for fee collection by registered IAs and RAs. This mechanism would help investors ensure their payments are going to registered entities, thereby protecting them from unregistered advisers and analysts who could otherwise exploit the system.
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