IC_FINPRO_20

Machine Learning in Financial Sector Use Cases

Student last name / first name:
SIEMASZKIEWICZ MICHAL

Date:

18.02.2020
1 Introduction

Machine learning and AI are growing technologies that enable computer to make mimic a natural person in thinking the way natural person

does and making a rational and the best choice. It can be used in predicting or automating some parts of jobs done by human.

AI has a big impact on every industry changing jobs and company behavior. Gartner says that leading organizations expect to double the

number of artificial intelligence projects in 2020. Banking is also affected and transformed by this technology. More jobs are being automated

by the usage of AI. Former Citigroup chief Vikram Pandit predicts that 30% of banking jobs could be cut out by AI in five years. Mizuho

Financial Group in Japan says it will use AI to replace 19,000 people by 2027.

There are several studies on Machine learning and Artificial intelligence and possible usage especially in fraud detection and other appliances

in Retail banking where there is a big number of data for the research available.

But there is no practical and no practical study focused on Wealth Management and Private Banking.

By examining the current needs of Private banks by interviews and questionnaires and applying different machine learning algorithms to the

data we can understand which use cases are feasible and how to build the machine learning models. Consulting and software company as

Orbium might better understand the Bank management needs and be able to take advisory role in this field and develop required skills. Will
machine learning and AI have an impact on Wealth management and What services can support the banks in their operations and how big is

the market for machine learning consulting and software for Banks especially private ones?

In my work I will perform quantitively-qualitative research on the applications of AI and Machine across industries for automation of jobs

and its effect on changing the global economy

This paper gives an overview of existing applications of artificial intelligence/machine learning (AI/ML) in Private Banking and selects

different samples to illustrate the application of AI and possible automation of jobs that will happen in the nearest future.

In my interviews I discussed with industry leaders in Switzerland working in medium-big Private Banks and consulting companies taking

part in AI implementation projects.

Based on this I will perform analysis and made estimates regarding percentage who expect artificial intelligence will affect the workforce in

the next five years, disruptive technologies in the financial sector industry, cumulative AI software revenue, top

use cases, world markets ,percentage who said the following technologies would have a high impact of disruption on their sector in 10 years,

and share of jobs requiring AI skills.

I have used following techniques in his study:

  Review of literature

 Statistical analysis

 Surveys analysis among decedents

The paper has a following structure:

 Introduction to focus interviews.

 Current landscape of the private banking and how they stand to database solutions / AI.

 Next section is Literature review – what is currently used in private banking, what do we know.

• The next section is dedicated to results of the survey

 Recommendation to the private banking – use cases, tools, highlights

• The final section concludes with a summary and analysis of how different private banks can effectively use computational

intelligence to improve their business.

The survey
1.1 What is AI

Oxford American Dictionary defines intelligence as “The ability to acquire and apply

knowledge and skills”.

Artificial Inteligence systems are Self-learning, autonomous systems designed to Sense, Comprehend, Act, and Learn, mimicking human

behavior

Artificial Intelligence enables machines to interact naturally with people, data and the environment. These systems create more intuitive

interactions and extend the capabilities of what either human or machine can do on their own.
Natural Language Processing

Natural Language Processing is a method of interacting with intelligent systems, using a natural language such as English, to enable
them to perform tasks as per instructions.
This technology analyses text to interpret sentence structures, their meaning and intention, using statistical methods and machine
learning.

VirtualAgents
Virtual agents are conversational, computer-generated characters or programsthat replace the online customer service
representationby responding to customer queries and questions as well as updating basic account information in the system.
It delivers voice and text information to the users via a web browser, kiosk, or mobile interface for resolving their problems.

Robotic Process Automation

Robotic Process Automation (RPA) uses software to automate manual, time-consuming, or routine processes, which can help in
reducing costs, reducing errors, improving efficiency, and increasing employee and customer satisfaction.
Once instructed and configured, Robotic Process Automation tools can process transactions, manipulate data, and communicate with
external systems in an autonomous way.

Deep Learning

Deep Learning allows a machine to process large datasets and recognize patterns for decision making using methods that are similar
to human brain’s neural networks.
Deep learning is used by organizations to analyze and predict online behavior, organize information, predict outcomes, and boost
the accuracy of other AI technologies, such as image analysis, face recognition, handwriting recognition, and speech recognition.

Predictive Analysis

1.2 Machine learning

Machine learning is the ability of computers or

algorithms to interpret

ambiguous data , such as text, speech, visual, and digital inputs, and

analyze them for meaningful insights .

Machine learning can help in

predicting and making

recommendations , detecting anomalies , performing classification ,

ranking , and decision making .

Machine Learning has achieved much success over the last two years. Standing at the intersection between Data Engineering, Artificial

Intelligence and Computer Science, its popularity has increased focus on both Data Engineering and the wider field of AI. This additional

focus on AI has led to a number of breakthroughs from DeepMind’s ability to learn and master a complex game like Go to Atlas’ ability to

athletically negotiate obstacles. However, more powerful AI requires ever more powerful computing and classical computing power is

already nudging the limitations of further miniaturisation. A step change in processing power is therefore required to support further

advances in AI.

Researchers at IBM and elsewhere will reach Quantum Supremacy in the next 12 months – this is the point at which Quantum Computing will

become more powerful than classical computing in certain problem domains. Once that happens, computing power will start to increase

exponentially again, and this time much more quickly that Moore’s law predicted for classical computing. However, Quantum Computers are

notoriously difficult to program and making full use of this additional power will not be easy with traditional programming techniques.

New research areas are now starting to blossom on the borderline between Quantum Computing and AI, linking the self-learning abilities of

AI with the exponential power that Quantum Computing will provide. Current research is focussed on Quantum Neural Networks, Quantum

Bayesian Networks and the wider field of Quantum Cognition, though other research areas will materialise over time.

Machine Learning already provides significant benefit to the banking community in areas as diverse as credit risk scoring, marketing,

customer segmentation, fraud detection, AML, chatbots, IT security, voice recognition and guided customer services scripting.
AI will in the coming years have an even greater impact on banking by providing support for strategic planning, ‘what if’ analysis, enhanced

knowledge representation linking customers and competitors, GDPR compliance, bias management, explanation and justification support to

assist with regulatory matters and management of banking operations. Quantum Computing will be the engine that enables this next stage of

the AI revolution.

The term Artificial Intelligence (AI) is often used synonymously with the term Machine Learning (ML) used in

computer science. For the purpose of this paper I will use AI to describe both techniques.

AI enables business outcomes through the ability to autonomously learn, adapt, and improve – at increasingly lower

costs.

1,3 Impact

While AI solutions remain complex to implement, the barriers to AI are being

lowered which serves to increase market pressures to capture value from AI
capabilities.
ARTIFICIAL INTELLIGENCE WILL CHANGE EVERYTHING
LOWER BARRIERS TO ENTRY WILL ONLY ACCELERATE THE RATE OF
COMPETITION.
The same combinatorial trends that make AI achievable today, are also being
harnessed by the competition.
The competitive landscape is also shifting as a new wave of AI-first businesses are
entering the market.
These new firms aren’t limited by legacy systems, distribution channels, or workforce
transformations.
The ‘Fast Follower’ model will be challenged.

EXPONENTIAL GROWTH ACCELERATES HIGH PERFORMING ORGANIZATIONS

AND WILL LEAVE THE SLOW MOVERS BEHIND.
AI is moving on an exponential growth curve with advancements accelerating each
year.
It’s easy to underestimate the potential for AI using historical or current growth rates.
High performing organizations have already recognized the potential and are investing
to infuse AI into the fabric of their organizations.

AI is getting a big

II. LITERATURE REVIEW

Acceleration in AI There has been remarkable growth in publications and also in

patent filings related to AI. Logic programming has been a first publication focus in

the early 80ies. From 1985 Machine Learning techniques are described with a

moderate growth until 2002, when the number of publications on that topic grew at

25% p.a. for 6 years. (WIPO, Tech Trends, 2019, p. 45). From 2013 Machine Learning

picked up again and was referenced in one out of three patents related to AI and
filings have increased at 28% p.a. in the observed period (2013-2016). Deep Learning

as a variant of Machine Learning has shown 175% annual growth in the same period.

It is also worth noting that after telecom and transportation, life and medical sciences

are the third most popular field of patent applications (WIPO, Tech Trends, 2019, p.

14). In the same period machine learning and life and medical sciences are mentioned

in patent filings among the most frequent combinations (WIPO, Tech Trends, 2019, p.

15), which Executive Master of European and International Business Law of the

University of St.Gallen M.B.L.-HSG Page 7 of 78 suggests that Machine Learning in

the health sector is among the fastest growing fields of innovation for AI. Figure 1:

“Patent families for top AI techniques by earliest priority year. Machine learning

grew by an average of 26 percent annually between 2011 and 2016” (WIPO, Tech

Trends, 2019, p. 42). Priority year refers to the year the first patent application in a

patent family was filed (priority application). 4.4 How Artificial Intelligence Works

Literature review

Ludwig, E. (2018) highlights the growing application of artificial intelligence (AI) in

banking and financial services industry. He describes how AI assists in analyzing

customer data for the purposes of credit scoring and arriving at loanable amounts.

He also prescribes for updating regulations to prevent misuse of AI

Lui, A., & Lamb, G. W. (2018) discuss that use of AI throws up a number of

challenges which could undermine customers’ trust and confidence. This article

points out that the algorithms used in AI application in banking have biases and

discriminate against certain races and gender [2]. Sarvady, G. (2017) examines the

extent of implementation and cost of AI channel strategy initiatives in the financial

service industry [3]. [4]. Nunn, Robin. 2018 addresses the issue of potential bias in AI

and advises that financial institutions would better balance AI applications with their

algorithmic bias against minority population. He claims that increased diversity at

workplaces can reduce the biases inherent in AI applications [5]. Satell, G. (2016)

broadly discusses ethical issues in artificial intelligence systems and emphasizes on

the need for designing an ethical learning environment, identifying bias in

algorithms, investigating ethical dilemmas, and setting higher moral standards [6].

Daks, M. (2018) focuses on the AI benefits for banks using the case study of the

acquisition of artificial intelligence company Layer 6 Inc. by TD Bank Group. He cites

examples of financial institutions using artificial intelligence model of third-party

providers [7]. FRPT Research in its finance industry snapshot examines the impact of

introducing artificial intelligence (AI) on jobs in Indian banks and states there will be

no loss of jobs. AI tools Authorized licensed use limited to: University of St. Gallen.

Downloaded on June 01,2020 at 21:28:14 UTC from IEEE Xplore. Restrictions apply.

2019 International Conference on Automation, Computational and Technology

Management (ICACTM) Amity University 343 such as chatbot simply complement

the efforts of human staff as shown in experiments of SBI and Yes Bank [8]. Guy A.

Messick. (2017) discusses the integration of artificial intelligence in the digital

ecosystems of the financial services industry and examines the role of AI in business

development and providing customized advice and services to consumers [9].

Meinert, M. C. (2018) discusses the role of (AI) in combating cybercrime in the

financial services industry and in enhancing customer experience and also the

likelihood of AI’s potential involvement in increasing cyber-attacks [10]. Forrester

Research Inc (White Paper) (2017), E-Book, Artificial Intelligence with the Human

Touch, contends that Artificial Intelligence can handle repetitive mundane but

cannot substitute human touch. The study explores how a blending of AI and human

touch can enhance customer experience [25].

2 Banking industry

The Financial Services industry has changed drastically over the last 10 years and

technological innovation is a key factor.

Regulatory drive to protect customers, their data and their rights in the next years

(e.g. GDPR, MIFID2)

Open Banking / PSDII open up banks data to external parties

Financial institutions’ focus on the decision to leave the European Union (‘Brexit’)

and the continued low interest rates will challenge growth

Rising incubents.

Based on the evaluation of banking IT innovations, the core banking systems in the

banking industry as well as the

existing FMI, several actors have the potential for influencing

the genesis of a future CFMI. First, actors with customer-

oriented IT solutions, such as Apple, Google and

Microsoft, and, to a certain extent also PFM software companies

and telecommunication providers, already have solutions

in place at the customer interface. Many providers are

currently aiming at positioning themselves at the interface to

the customer. For example, Google has already collected

bank licenses in more than 100 countries worldwide,

Facebook offers alternative currencies for its users and the

Apple AppStore already counts almost 16,000 apps related

to financial services (www.148apps.biz/app-store-metrics).

These non-banks constantly add new services and hardware

for customer interaction. An example is the German telecommunications

provider Telekom who has developed a secure

infrastructure for mobile payment which can be used by many

customers and banks. Remarkably, the structure of the existing

software ecosystems already reflects the three CFMI requirements

(see Table 2). While the consumer companies could

bring in competencies in the areas of the common interface

(e.g. for administrating the services), multiple channel and

provider access, and the shared transaction infrastructure

(e.g. for charging the services), these consumer ecosystems

fail to offer a common frontend which is explicitly designed

for the description and visualization of financial services.

They lack interoperability among the included services in

the service marketplace and the institutional regimes are either

loose (Google) or strict (Apple). In both cases the marketplace

providers are also the rule makers and, thus, these companies

have individual interests without having the independence of

federal institutions that would be necessary as regulator institutions

in the context of the CFMI.

Second, actors with banking-oriented IT solutions benefit

from the specificity of banking and interbank operations.

This critical domain-specific know-how is embedded in the

broad variety of banking IT innovations which was observed

at banks as well as new financial service providers

(see Table 1). To overcome the current isolated solutions

and to facilitate the aggregation of financial services, the

core banking systems and the FMI could provide a valuable

contribution. With the advent of standardized core banking

application systems, bank communities are emerging which

use similar functionalities for front, middle and back office

processes of the same software. These service-oriented application

solutions are accredited enabling potentials for

Change of demography

Mayor factos behind implementing AI projects

3 Existing AI use cases in Financial sector

Machine Learning has achieved much success over the last two years. Standing at the

intersection between Data Engineering, Artificial Intelligence and Computer Science,

its popularity has increased focus on both Data Engineering and the wider field of

AI. This additional focus on AI has led to a number of breakthroughs from

DeepMind’s ability to learn and master a complex game like Go to Atlas’ ability to

athletically negotiate obstacles. However, more powerful AI requires ever more

powerful computing and classical computing power is already nudging the

limitations of further miniaturisation. A step change in processing power is therefore

required to support further advances in AI.

There are a several existing use cases in the financial sector where AI is already

widely used. Especially in investment and retail banking.

The world’s largest investment group –

BlackRock with more than $6 trillion assets under

management (AUM) has a dedicated AI lab to assist its

operations. Several other global organizations are in the

process of embracing AI to add value to their clients by

improving their forecast. Swiss Bank UBS has recently

revamped its trading floor by introducing two new AI systems.

Robo advisors

AI powered Robo-advisors are being significantly adopted by Wealth Management

Firms to offer advise as a low-cost service for customers in mass markets.

Hybrid robo advisors are gaining traction with high net worth individuals who have

an affinity towards human interaction when it comes to investing

2.4 AI market overiveiw and trends

• Clients increasingly starting to invest in AI technologies and capabilities

• Virtual Agents are coming to the fore and encapsulate decoupling of service

delivery from labour arbitrage

• To boost their organization’s competitiveness, insurance executives believe

they should innovate including through investments in AI technologies,

notably machine learning and deep learning.

 • Banking clients are moving beyond process to interaction elevating customer

experience and moving staff to higher value added roles

• Competitors continue to actively acquire / build AI capabilities

• A large number of niche AI vendors continue to emerge across the AI

spectrum

• Vendors are moving towards the in Open Source AI space

Key AI market trends

2.4 AI vendors

In this secition I will describe most important AI vendors and start-ups that are

active in wealth management and private banking.

• IBM: Accenture has a well-established formal Global Business Partnership

with IBM to enable and grow Accenture Integration services for IBM

Technology. Accentures approach to working with IBM Watson can be found

in Waston Stage 0 Deck

• Microsoft / Amazon / Google: Formal allainces in place with pockets of work

across Accenture. No formal approach to AI delivery yet

3.1 Product offering using recommender system.

In private banks a lot of time is spent on building the offering for the clients. There is a huge range of

products that can offered and often clients are not offered ones that could be interested in.

One of possible solution would be to implements machine learning recommender system that might

help personalize client offering. This is widely used now in ecommerce– and could be re-used –

offering tailored banking financial products, upselling other services and helping to convert prospects

into consumers.
Private banks gather a lot of information regarding their client situation and risk appetite for AML

and regulatory purposes -much of it could be re-used to build the value for the bank. Those

algorithms would serve mostly as a support to the client advisor or be used to send personalized

mailings with offering.

This could add a lot of value to the clients – they would get products that would fit their needs –

which would increase their satisfaction and convince to use the service of the bank more often.

Also, it is difficult to build tailor-made offering and takes a lot of time – which is important to

optimize to save costs for the banks.

This would be a complex problem as there could be a few challenges in building good model. One big

challenge could be how to train the model – the product offering is mostly done face to face and not

well documented which factors lead to the purchase. Is it possible to build a model based on that

data? Also, many clients use wealth managers to make investments leaving the bank without

information on the past trades – they might need to be convinced to share the data. We also lack

information on if the client liked the product or not.

Furthermore, financial products change in a fast manner and this also would have to be considered

and reflect all changes and new products quickly.

Lastly GDPR and other data protection regulations could cause problems to process personal data.

To build a recommender system considering the problems above one possible solution would be to

use hybrid content-collaborative based recommendation. Such solution is used for example in

LinkedIn: To determine whether a company a user may want to follow. The collaborative filtering

information is checking whether the company is like the ones a user already followed. The content

information includes whether attributes i.e. industry match between the user and the company.

For content-based clients and products would have their attributes describing their characteristics and

the system would recommend product if those two matches.

For example, a certain set of features for clients could: age, family member, life events, job, risk

appetite, investing objective etc.

And products attribute like Industry, type, risk rate, location etc.
For collaborative filtering algorithm could compare to similar products bought by the client in the past

or to look forward – what are similar clients buying currently.

Potential algorithm for this problem could be a Deep neural network (DNN) – which could capture

more complex relationships between different attributes.

Deep learning models can be powerful in combining collaborative-filtering and content-based

information.

How to evaluate the model can be difficult as we sometimes it is not easy to determine how really the

client liked what he got. But we can try to evaluate it basing on simple binary metric: product was

either selected or not by the user or not. The goal would be to recommend as much as possible and not

avoid completely recommending less relevant ones – not to reduce the number of products

recommended.

So ideally, we would like to improve recall and accept lower precision.

To use recommender system, it would need to take the data from both client CRM systems where

KYC is stored as also product offering system which could be part of core system or external. So

potential integration of data might be needed.

The module itself that provides recommendations be a part of Bank’s CRM or client advisor cockpit

where he manages the client. Also, could be implemented as a part of marketing campaigns.

Potential non-technical problem would be the fact that the model would need to be used by

relationship managers actively. They could be reluctant to rely on technology as they feel they know

the client the best. Also, clients might be reluctant to share the data require to build the model.

3.2 ON-boarding process and KYC

Know Your Customer (KYC) is the process in Financial Services to identify the

customers and gather data required for AML. KYC is very expensive process –

involves many bank employees and requires storage of the data

3.3 Financial Advisor

THE

CHALLENGE HNI’s demand a high level of customization

and personalization of recommendations that are provided by

Wealth Managers Most IA’s tend to suggest a similar set of

recommendations (products instruments) to a set of customers

Also, star IA’s are in demand for the higher portfolio returns that

they have been able to generate

OUR

SOLUTION FinAd Buddy (Financial Advisor Buddy) is a

tool which has two components an analytical piece and an

Artificial Intelligence piece

The

analytical piece compares the performance of a portfolio

against a benchmark and other top performing customer portfolios

Thus the asset manager can determine if a portfolio performance is

due to better asset allocation ( or due to better stock

selection (

The

AI piece provides the IA a unique, personalized set of product

recommendations suitable to each client portfolio (product suitability

mapping) This is done using statistical models and based on

tagging both the instruments and customers under various

categories

CLIENT

BENEFITS The FinAd buddy when implemented will

offer the following measurable benefits to clients

Increased customer stickiness due to personalized product

recommendations


Increased customer satisfaction

Higher bandwidth to IA to focus on value add activities

Reduced error in recommending products

Unique value proposition enabling increase in revenue

through new customer acquisition

3.4 Financial crime

THE FINANCIAL CRIME LANDSCAPE CONTINUES TO

EVOLVE…

Increased exposure

to Emerging Threats

Increased Cost

Pressures

Accenture’s 2018 Compliance Risk Study1 - based on a survey of 150 leading Compliance officers

across global

banking, capital markets and insurance institutions - indicates that Compliance functions have

matured but they

should continue to enhance their capabilities and increase efficiency to combat emerging threats and

challenges.

To address these challenges, it is key to process more data accurately, quickly and in a way which

proactively identifies emerging

threats.

Rising costs of AML compliance are well known, with research suggesting

international banks spend up to £1 billion annually on AML compliance and

supporting processes.2

Evolutions in technology and crime mean an ever-changing list of threats for banks

to be aware of across their client base and potential counterparties.

1. How Much Data is Produced Every Day, Mikal Khoso. Access at:

https://www.northeastern.edu/levelblog/2016/05/13/how-much-data-produced-every-day/

2. Accenture 2018 Compliance Risk Study, Accenture 2018. Access at: https://www.accenture.com/ca-

en/insight-2018-compliance-risk-study-financial-services

; Future Financial Crime Risks, British Banking Association and Lexis Nexis, 2015. Access at:

https://www.bba.org.uk/wp-content/uploads/2015/12/Future-

Financial-Crime-Risks-DIGITAL-final.pdf.

Over looking key

information

As the world becomes more connected, data across countries, languages and

media sources provide more haystacks to search through, without necessarily

increasing the number of needles to find.

A key challenge is understanding the impacts of increasing data volumes on legacy processes like

Anti-money Laundering (AML),

Know Your Customer (KYC), Adverse Media and Sanctions and Politically Exposed Persons (PEPs)

screening. With 2.5 exabytes of

data being created every day, the amount of information that can be checked is being outpaced by

what should be checked.1 As

client numbers increase, current processes raise the risk of

2. PEPs and Sanctions

4.

Behavioral Monitoring 3.

Smart Investigations 1. Adverse Media

Ripjar’s

platform provides

continuous monitoring of

adverse media at scale. Using

machine learning to classify

news articles and unique identity

resolution analytics to provide

accurate alerts in real time and

significantly reduce the burden

on analysts.

Real

time monitoring for

sanctions vs payments or

intelligence gathering for

potential matches vs Sanctions

or PEP lists in client population.

Can also be used to improve

client matching alongside

existing tools, approaches and

capabilities.

Better filtering, weighting and

prioritizing of investigations into

potential financial crime risk by

leveraging multiple sources of

information to determine the

likely risk associated with a

customer or pseudo customer.

Monitoring of changes in

customer behavior , providing

intelligence on changes in the

circumstance, new relationships

or changes in transaction

patterns that may indicate

financial crime risk.

As threats continue to emerge, the industry should take steps to keep pace. Our partnership equips

you with the

latest tools to proactively identify risk.

●
4 Key AI Challenges and considerations

Considerations in implementing AI projects.

Legal/Regulatory

Exposure of sensitive/confidential data in dark datasets may have legal/financial

consequences

With GDPR and regulatory rules, it is even more important that the laws of countries must be adapted

and thus, appear a new generation of data scientist and technological experts with a clear orientation

for regulatory advising or legislators consultancy, initiating the path to a consensual data

management.

IP/Competitive Risk

Exposure of proprietary/strategic data in dark datasets may have significant impact

on business

Reputation

Any data breach could have significant impact on reputation, especially if concerning

customer or sensitive data

Employee Relations

Monitoring programs, automation and shifts in the technology landscape can cause

concern with employees

Curiosity Over Value

Without proper management, time and money could be wasted on open-ended

fishing expeditions

5 Summary:

The results from the research has shown that the advance of artificial intelligence in numerous

industries will result in more developed and more horizontally assimilated companies

And would create additional revenue streams for companies that are able to leverage ai automation.

Low skilled work will diminish and no longer be needed as can easily be automated.

Summary of Conclusions Our analysis has shown that if we manage to solve the

fundamental technical and practical challenges around AI, we implicitly also have

solved the regulatory challenges and reduce liability risks related to any AI products

or services offered. Regulatory requirements are converging to aligned classification

 of AI devices as medical devices and consistent requirements of good practices for

their validation. Minimum requirements are conceptually set forth in actual or

proposed regulation. Current good practice of implementation is however

dynamically evolving. Manufacturers enjoy quite some autonomy in terms of their

ability to market these devices without formal regulatory approval, at this stage at

least in the EU. For Software as a Medical Device within a defined intended use, this

approach is also being considered in the US. The US pre-certification program is not

dissimilar to the EU approach in substance, with respect to trusting competent

manufacturers to ensure safety and quality of their devices and holding them

accountable. This environment necessitates a robust Quality Management System for

medical devices, fit for purpose to include AI devices, adaptive and permitting short

development cycles. The data driven nature of AI also calls for continuous and

formal real-world monitoring including re-evaluation of performance and bias of any

AI medical device. The privacy challenges of personal data minimization and further

processing related to intrinsically data hungry AI applications can be solved with a

systematic, transparent and proactive approach to data collection, consent and data

infrastructure. We also have pointed at technical solutions (i.e. Differential Privacy)

for prevalent re-identification risk through incremental combination of de-identified

or so claimed “anonymous” datasets. Differential Privacy has become available in AI

SaaS solutions now. We recognize, this is an area of Executive Master of European

and International Business Law of the University of St.Gallen M.B.L.-HSG Page 61 of

78 continued active and promising research, as it permits to prevent and control re-

identification rather than just relying on contractual re-identification and re-

combination prohibitions. This technique combined with a secure data sharing

platform, may allow boosting acceptance of data sharing and AI in the health sector

and result in corresponding adoption and growth. Contractual data combination

prohibitions are insufficient and defeating the purpose and power of Big Data and AI

applications. For claimed anonymized EU subject data, such prohibitions are absurd,
 as they also imply that re-identification may still be possible and therefore

“anonymous” data is indeed not irreversibly anonymous as required per GDPR. If

manufacturers transparently and prudently describe intended use of AI devices and

offer any autonomous AI device interaction only based on express consent and with

transparent information on reliability as well as a possibility for the user to intervene

or require human intervention, then liability from any conforming medical device is

well controlled. Direct liability and separate legal entities for AI devices seem

unlikely to emerge, despite some discussion on this subject. Rather, mandatory

insurance may be imposed on manufacturers of e.g. autonomous AI devices to

ensure user access to redress. Finally, the protection of intellectual property in data

base collections and related derivative works may not have been an area on which

Pharma historically have focused. If manufacturers undertake significant effort and

investment in AI and data collection and curation, it may be useful to evaluate IP

strategy and licensing in these interconnected domains to protect such effort.

Executive Master of European and International Business Law of the University of

St.Gallen M.B.L.-HSG Page 62 of 78 10 Table of Abbreviations AGI Artificial General

Intelligence AI Artificial Intelligence. Defined as By AI we refer to systems, which

use external data to learn and adapt their behavior, action or output accordingly.

AIMDD Active Implantable Medical Devices Directive (90/385/EEC) ANN Artificial

Neural Networks Art Article ASI Artificial Superintelligence AUC Area Under the

Curve. Metrics for the performance of a device (specificity and sensitivity) and are

widely used, yet have their limitations as well Big Data Processing of huge and

diverse datasets from multiple sources with use of new technologies previously

impossible by traditional means. Often in connection with RWD. bn billion(s) Bot

Derived from Robot, lacking the physical support typical for a Robot. Computer

program largely executing a task without human intervention. CBT Cognitive

Behavioral Therapy (CBT) CDRH FDA Center for Devices and Radiological Health

Chatbot A bot, which interacts with users via natural language interface. Typically
 responding to first level support questions or helping user navigation. Also referred

to as Conversational Agents. EC European Commission EMA European Medicines

Agency FCC Federal Communications Commission FDA U. S. Food and Drug

Administration FHE Fully Homomorphy Encryption G7 Canada, France, Germany,

Italy, Japan, the United Kingdom, and the United States (leading economies at the

time of formation of this Executive Master of European and International Business

Law of the University of St.Gallen M.B.L.-HSG Page 63 of 78 informal group) GDPR

EU General Data Protection Regulation GHTF Global Harmonization Task Force on

Medical Devices. Predecessor of IMDRF GxP Good [x] Practice, generalize

abbreviation to designate good practice in several fields. Derived from Good

Manufacturing Practice (GMP), Good Development Practice (GDP), Good Laboratory

Practices (GLP), Good Research Practice (GRP), Good Pharmacovigilancee Practices

(GPP). HCP Health Care Professional HHS U.S. Department of Health & Human

Services HIPAA U.S. Health Insurance Portability and Accountability Act HLEG

European Commission’s High-Level Expert Group on Artificial Intelligence IEC

International Electrotechnical Commission IEC62304 “IEC 62304:2006 Medical device

software -- Software life cycle processes. Defines the life cycle requirements for

medical device software. The set of processes, activities, and tasks described in this

standard establishes a common framework for medical device software life cycle

processes.” (ISO, 2006) IMDRF International Medical Device Regulators Forum IP

Intellectual Property ISO International Organization for Standardization ISO13485

“ISO 13485:2016 Medical devices -- Quality management systems -- Requirements for

regulatory purposes” “ISO 13485:2016 specifies requirements for a quality

management system where an organization needs to demonstrate its ability to

provide medical devices and related services that consistently meet customer and

applicable regulatory requirements.” (ISO, 2016) IT Information Technology m

million(s) MDD Medical Devices Directive (93/42/EEC) Executive Master of

European and International Business Law of the University of St.Gallen M.B.L.-HSG

 Page 64 of 78 MDR EU Medical Device Regulation ML Machine Learning MLaaS

Machine Learning as a Service NEST National Evaluation System for health

Technology NLP Natural Language Processing OECD Organisation for Economic

Co-operation and Development ONC Office of the National Coordinator for Health

Information Technology p. page PHI Personal Health Information ROC Receiver

Operating Characteristics. Metrics for the performance of a device (specificity and

sensitivity) and are widely used, yet have their limitations as well PMA Premarket

Approval Application R&D Research and Development RWD Real World Data RWE

Real World Evidence RWP Real World Performance SaaS Software as a Service SAE

Society of Automotive Engineers SaMD Software as a Medical Device is “defined as

software intended to be used for one or more medical purposes that perform these

purposes without being part of a hardware medical device (…)” (IMDRF Software as

a Medical Device (SaMD) Working Group, 2014, p. 5) SR Streamlined Review TRIPS

The Agreement on Trade Related Aspects of Intellectual Property Rights UN United

Nations WCT WIPO Copyright Treaty WIPO World Intellectual Property

Organization WTO World Trade Organization

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