An increasing reliance on artificial intelligence by banks, insurers and hedge funds could have unintended consequences and threaten the financial system's stability, warns a report from a top global watchdog.

FS firms are increasingly using AI and machine learning for a host of reasons, from credit quality assessment to price and market insurance contracts to client interaction automation to finding data signals for trading to regulatory compliance.

In a report, the Financial Stability Board (FSB) says that while AI can contribute to a more efficient financial system, helping companies and regulators, it also throws up a number of risks.

For example, FS firms are liable to become increasingly dependent on third party technology providers, which could "lead to the emergence of new systemically important players that could fall outside the regulatory perimeter".

Meanwhile, a lack of interpretability or auditability of AI and machine learning methods could become a macro-level risk. Similarly, a widespread use of opaque models may result in unintended consequences.

Says the FSB: "As with any new product or service, it will be important to assess uses of AI and machine learning in view of their risks, including adherence to relevant protocols on data privacy, conduct risks, and cybersecurity.

"Adequate testing and ‘training’ of tools with unbiased data and feedback mechanisms is important to ensure applications do what they are intended to do."