- 12 Marks
FM – L2 – Q12 – Economic and regulatory environment
Question
KWE Bank is part of a large financial services group in Kumasi, KWE Group. KWE Bank provides personal loans to individuals. In order to determine whether a customer is an acceptable credit risk for a loan to be offered, KWE has used the information provided by the customer in their application form together with an employer’s salary reference.
KWE intends to introduce a more sophisticated credit risk assessment system to determine whether loans should be advanced to customers. This system will combine information from the credit application with any information about the customer held by KWE Group and unstructured information about the customer obtained from their online activity. This data will be analysed by an AI-based credit assessment system that uses machine learning to improve the accuracy of its credit assessments over time.
Required:
Outline three ways in which KWE’s new credit assessment system may lead to practices that are likely to be viewed as unfair.
Answer
The following unfair practices may arise from KWE’s new credit assessment system:
Inappropriate use of data
There is risk that KWE may be using customer data from within the KWE group that was not provided by the customer for the purpose of assessing creditworthiness. This information is therefore being processed by KWE without the customers permission. Such actions in relation to personal data may breach the Data Protection Act 2012.
Discrimination or bias
KWE uses an AI-based system incorporating machine learning to assess creditworthiness. The objective of this system will be to identify characteristics that increase the likelihood of defaulting. If this is its only objective an AI may ‘learn’ to develop decision criteria based on characteristics such as sex, race or religion which would represent unacceptable discrimination. Even if KWE takes steps to avoid this by not including certain types of data in the data set used by the system, through machine learning it may nevertheless identify a proxy for these characteristics on which to base credit decisions.
Exclusion from essential financial services
It is possible that the AI-based system used by KWE could determine that certain types of individuals are ineligible for loans. If other banks in Kumasi were to use similar systems this may lead to the undesirable outcome of certain sections of society being excluded from key financial services such as lending.
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