FINTECH is expected to revolutionise the financial services industry and, with its long history of both leading the sector and developing new technologies, Scotland is well placed to be at the forefront of that.

However, with the artificial intelligence that lies behind all fintech applications programmed to work with limited or no human intervention, one of the UK’s most senior judges has warned that the swift development of the sector “poses significant challenges to our law”. That, in turn, may pose challenges to the further development of the sector.

Delivering a speech on ‘The Perils and Pitfalls of Financial Technology’ at the University of Edinburgh last week, Supreme Court Justice Lord Hodge, who joined the UK’s highest court from the Court of Session bench in 2013, looked at whether the law could adapt to cope with the challenges posed by the rise of fintech.

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Though he noted that enabling machines to analyse data should “contribute to a more efficient financial system”, Lord Hodge pointed out that both financial institutions and internet companies have come under increased scrutiny for the way they handle that data. This, and the fact that artificial intelligence is allowing fintech businesses to develop new ways of transacting business, “poses a challenge to the legal systems of the United Kingdom”, he said.

“Much of the literature on the challenges posed by [artificial intelligence] and machine learning has focused on robotics, including the development of weapons and driverless cars,” he said. “Perhaps the principal concern is the attribution of responsibility for the acts and omissions of robots.”

Looking in particular at contract law, the judge said that while “English law and Scots law should not have much difficulty with questions about parties’ intention to enter into contracts and the interpretation of the contracts”, problems could arise if “computers are developed to use machine learning to optimise the transactions which they enter into”.

“If businesses were to use computers with machine learning capability to deal with other computers with similar ability, they could autonomously generate transactions which would not fit easily into our contract law,” he said.

“Could one party to the contract turn to the other and say ‘that wasn’t the deal’? Or should the law say that those who willingly use computers with machine learning to effect their transactions are to be taken as intending to be contractually bound by the deals which those autonomous machines make?

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“If a financial institution could walk away from a machine-created transaction, that might create chaos in the commercial world. If there is to be a contract drafted or adapted by machines, there will have to be significant development to our law of contract which will require careful and imaginative consideration.”

Similarly, the judge believes laws in areas such as negligence and property will also have to be updated in order to “attribute liability for harm caused by machines exercising artificial intelligence” and to “cope with the assets which are the product of fintech”.

“Questions of the attribution of liability are arising in relation to driverless cars. There the principal concern is to have remedies for personal injury and damage to property caused by the vehicle,” he said.

“Similar but more difficult questions will arise in relation to attribution of liability and causation in the context of transactions performed by fintech. Is liability for harm caused by the decisions of the machine to be imposed on the producer of the machine on a product liability model? Or should the owner or organisation which operates the machine be answerable for such harm?

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"More fundamentally, in a market system in which it is entirely legal to impose economic harm on a competitor if one trades within the boundaries of the law, how do you define what is an economic wrong resulting from the autonomous acts of machines?”

Property law, meanwhile, would need to “recognise a new form of intangible moveable property” to be able to deal with digital currencies.

Ultimately, Lord Hodge said that for the UK to remain at the forefront of fintech, our laws and regulatory systems need to be developed “to facilitate the use of such technology”.