Financial services firms must confront a series of "uncomfortable tensions" as generative AI becomes increasingly embedded in the sector, according to a new report from the London Foundation for Banking and Finance (LFBF) and the Institute and Faculty of Actuaries (IFoA).

The report, It's Still Not Magic: Framing the Risks Facing Financial Services in the Gen AI Era, warns that the same characteristics that make generative AI valuable also make it difficult to govern, explain and control. Based on a survey of 78 senior financial services professionals and observers, 70% of respondents said AI-related risks are among the greatest threats facing the sector over the next five years, while 75% believe those risks have increased significantly since generative AI became widely available.

Cyber threats, misleading outputs and skills gaps emerged as the three biggest concerns. The report argues that AI risks increasingly extend beyond individual firms, creating ecosystem-wide vulnerabilities through shared technologies, infrastructure and dependencies.

Keyur Patel, research associate at LFBF and author of the report, said: “The same characteristics that make AI useful in financial services also create many of the risks that make it so difficult to govern. The hard question is not just whether these risks can be mitigated, but how much risk we are willing to live with in exchange for the benefits.”

He added: “AI outputs can be useful, confident and wrong at the same time – and ‘mostly right’ can be dangerous.”

The report introduces a new framework that categorises nine AI risks across outcomes, operating environment and system-level impacts, acknowledging that many risks are the trade-off for benefits such as improved prediction, personalisation and automation.

Paul Sweeting, president of the IFoA, said: “AI is a defining force of our time. With our unique combination of technical skill, communication and professional oversight, actuaries must play a key role making sure that AI is working as it should.”

The findings come amid growing scrutiny of AI-generated content in professional services, following high-profile cases in which consultancy reports, including those from the ‘Big Four’ Deloitte and EY, were recently found to contain fabricated citations, inaccurate data and other AI-generated errors.

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