(MENAFN- The Arabian Post)

Banks and insurers across South Africa are being confronted with a shifting regulatory landscape as the Financial Sector Conduct Authority and the South African Reserve Bank, through its Prudential Authority, move to formalise oversight of artificial intelligence across the financial sector. Their inaugural report on the topic reveals a growing, though still tentative, embrace of AI - and flags significant risks around data governance, transparency, and systemic stability across institutions.

The 2025 FSCA–PA report draws on more than 2,000 survey responses from banks, insurers, payment providers and asset managers, supplemented by a comprehensive databook. It shows that just over half of banking institutions currently deploy AI, with roughly half of payment providers doing the same. Investment intentions are skewed: some institutions plan modest outlays below R1 million, while more than half of bank respondents expect to invest upward of R20 million in AI technologies over the course of 2024.

Most existing AI usage concentrates on lower- and medium-impact applications: fraud detection, anti-money laundering, compliance monitoring, process automation, customer support and internal operations. Deployment of generative AI for marketing or back-office tasks is growing, yet high-stakes decision-making tasks - such as credit scoring, underwriting or risk- modelling - remain largely off-limits, owing to concerns over explainability, data quality and regulatory compliance.

The regulatory framework now being laid out expects institutions to adopt a risk-based classification for AI systems, implement strong model governance, maintain human oversight for high-impact use cases, and ensure transparent disclosure when automated decisions affect consumers. Tight alignment with the country's data protection law, the Protection of Personal Information Act, and existing cybersecurity and market-conduct regulations is stipulated. Regulators are also pushing for accountability at board level, clear data governance structures, and steps to guard against bias, discrimination and reputational risk.

See also Walmart Sets Foot on South African Soil

While the shift reflects global trends among regulators who view AI as a strategic priority in financial services, challenges remain. The report notes that only a minority of institutions currently use explainability tools such as SHAP or LIME; many lack dedicated AI-governance teams; and fair-testing and bias-assessment protocols are patchy at best. Third-party vendor risks, data sovereignty issues, and skills shortages are recurring hurdles.

Observers of AI regulation in emerging markets warn that the path ahead may be uneven. A recent survey spanning 27 regulators in emerging economies - commissioned by the World Bank - found few African financial supervisors have board-level AI strategies and most lack the infrastructure or staff to monitor AI-related risks at scale. The study emphasises that human judgment and discretion must remain central, even as supervisory agencies begin to deploy AI for risk forecasting, compliance analysis, or anomaly detection.

For leading banks in South Africa - including those often dubbed the“big four” - the FSCA–PA report represents both guidance and warning. Institutions that move to integrate AI for high-volume tasks such as fraud detection or KYC compliance may gain in efficiency and cost-effectiveness. Yet they will also face heightened regulatory scrutiny over governance, accountability and transparency. The effectiveness of AI adoption will likely depend less on the sophistication of algorithms than on the strength and maturity of internal controls, data practices and human oversight.

As FSCA and PA signal a shift from permissive experimentation to supervisory oversight, the financial sector stands at a crossroads. Institutions must weigh the promise of AI-driven efficiency and innovation against the emerging demands for ethical standards, governance rigour and consumer protection as the technology becomes woven into core banking and insurance services.

See also Oversight Visit Highlights Eastern Cape's Farming Challenges

Notice an issue? Arabian Post strives to deliver the most accurate and reliable information to its readers. If you believe you have identified an error or inconsistency in this article, please don't hesitate to contact our editorial team at editor[at]thearabianpost[dot]com. We are committed to promptly addressing any concerns and ensuring the highest level of journalistic integrity.

MENAFN26112025000152002308ID1110399336