The development of fintech – financial technology – and artificial intelligence poses a challenge to the UK's legal systems which will require "innovative regulation", along with legislation, according to Supreme Court Justice Lord Hodge.
In a lecture entitled "The Potential and Perils of Financial Technology – Can the Law adapt to cope?", given as the first Ediunburgh FinTech Law Lecture at the University of Edinburgh, Lord Hodge recognised the potential benefits of the new technology for the financial services industry, and consumers, before turning to the legal issues that it creates.
Aside from the risks of data misuse, and the need to protect consumers from risky financial products, Lord Hodge identified the following among the various challenges posed to the UK's legal systems:
- in contract law, the implications if computers are developed to use machine learning to optimise the transactions they enter into, with the attendant "risk of unintended consequences": "Questions about the intention to enter into legal relations, to whom that intention is to be attributed and how the terms of a computer-generated contract are to be recorded to achieve legal validity and interpreted will require innovative thinking;"
- in delict and tort, the law "will need to be revised to attribute liability for harm caused by machines exercising AI": questions of liability are already arising in relation to driverless cars, and "Similar but more difficult questions will arise in relation to attribution of liability and causation in the context of transactions performed by Fintech";
- in property law, an extension of the traditional categories of English law has been proposed to recognise "virtual choses in possession" as a new form of property, and Scots law would need to recognise a new form of intangible moveable property; the question whether the AI involved in fintech should give rise to intellectual property is another matter that needs to be addressed;
- and another option to explore is whether to give a computer separate legal personality. "While at first blush, that may sound far-fetched, there is no reason in principle why the law cannot create such personality. English law has for a long time allowed an office occupied by a natural person to be a corporation sole, the separate legal personality of a “one-person” company has been recognised since 1897 and, more recently, in Bumper Development Corporation (1991), it has recognised the separate legal personality in Indian law of a ruined temple which was little more than a pile of stones."
Turning to how the law should be adapted, Lord Hodge continued: "It will be clear from what I have said up till now that it is not practicable to develop the common law through case law to create a suitable legal regime for fintech. The judiciary does not have the institutional competence to do so. The changes in the law which are required are not interstitial law the making of which is the long-recognised task of judges; they will require interdisciplinary policy- making and consultation which a court cannot perform when resolving individual disputes and developing case law."
He suggested a collaboration involving Government and "aiming to produce facilitative legislation" was probably needed. And "If fintech is to achieve its potential and contribute to the economic welfare of this country and other countries, legal reform and regulatory change cannot be confined to the domestic market but must aspire to promote cross-border financial transactions and to facilitate international trade."
International model laws such as the UNCITRAL codes for international trade might be adopted; and legal development might also be assisted by "regulatory sandboxes", as developed by the UK's Financial Conduct Authority, which allow private firms to test new products and services on a small scale with suitable safeguards and supervision, which "enables the regulator to assist in identifying safeguards to protect consumers which should be built into such products and services".
Lord Hodge concluded: "Data is power, and AI is power. Can the law cope? My answer is yes, but it will require legislation. There also needs to be innovative regulation. Further, there is a need for international agreement on legal and regulatory norms if fintech is to achieve its potential in wealth creation and poverty reduction through cross-border transactions while maintaining market integrity and protecting the consumer."