AI adoption: Navigating the risks and opportunities for fund managers
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Artificial Intelligence (AI) is creating new opportunities for innovation among fund managers around the world, including here in Aotearoa New Zealand. Amy Cavanaugh, Head of Transformation, explains governance guardrails and risk controls are not about slowing innovation, but ensuring the industry remains fair, transparent and aligned with investor interests.
New Zealand fund managers have a long-standing track record of innovation – from pioneering portfolio diversification and reimagining fund and fee structures, to enhancing customer service platforms and advice models. All of these innovations are underpinned by risk assessments and overseen by governance protocols. AI is simply the next chapter in a history of innovation.
The Financial Markets Authority (FMA) has been clear in its AI guidance. Regulated entities need to be able to explain how AI works, particularly where they influence investor outcomes. The Financial Markets Conduct Act (FMCA) requires managers to avoid misleading conduct and ensure investors get clear, accurate information. If an AI tool results in a member being misinformed or disadvantaged, that’s more than an operational hiccup – that’s a potential compliance breach.
For supervisors, the challenge is how do we protect investors’ interests without creating unnecessary burdens for managers? As a supervisor, we’re here to ask the right questions early, focussing on accountability, transparency and fairness, and supporting managers to embed guardrails as they innovate. When governance is built in from the start, innovation is safer, more scalable, and ultimately more trusted by investors.
Striking the balance between innovation and investor protection
Public Trust’s role as a supervisor isn’t to slow things down, but to make sure innovation doesn’t outpace the controls that keep it safe.
This means creating space for managers to explain new tools or ways of working – whether that’s AI, automation or new investment models. Take chatbots as an example. They can improve member engagement by giving quick answers, but if they aren’t governed properly, there’s a risk of incorrect information or bias creeping in.
The reality is that technology will keep introducing new risks – bias in algorithms, cyber vulnerabilities and reliance on third parties. If those risks are managed openly and transparently, innovation can actually strengthen trust in the system.
The balance between innovation and investor protection isn’t a trade-off, it’s about making sure governance and innovation stay in conversation, not in conflict.
Innovation is encouraged
The FMA’s guidance on both AI and cyber resilience gives managers a clear signal – innovation is encouraged, but it should be explainable, accountable and resilient. That’s when supervisors can help, by holding up the governance mirror so managers can move fast without creating hidden risks.
The FMCA puts investor interests front and centre. That applies just as much to how managers adopt AI or manage cyber risk as it does to traditional investment decisions. Weak oversight of those areas could be seen as a governance failure.
In Australia, examples are emerging of managed funds adopting AI to support investment decision making. Minotaur Capital, an Australian hedge fund, has pioneered the use of AI-driven models to analyse large datasets and identify investment opportunities. This approach highlights both the innovative potential of AI and the importance of robust governance to ensure fair and transparent outcomes for investors.
It’s not about putting the brakes on
Fund managers rightly aim for seamless, efficient client experiences. However increased speed and convenience can introduce risks around data security, fairness, and transparency, if they are developed by technology teams in isolation from risk and compliance functions.
Supervisors support the balance of innovation and regulation by being the guardrails, not the roadblocks. Our role is to make sure seamless and fast doesn’t come at the expense of safe and fair.
The FMCA is built on fair dealing and confident participation. If a seamless process misleads members or exposes them to hidden risks, that undermines both. Supervisors can help managers make sure innovation enhances, not erodes, those principles.
As the industry evolves and grows in the next decade, good supervision will still mean the same thing: ensuring investors have confidence that their interests are protected. The tools and risks may change, but the principle doesn’t.
Public Trust supervises over $57 billion in KiwiSaver funds, including four of the six default schemes, playing a critical role in ensuring robust oversight and governance across these providers.