The European Union established the world’s first comprehensive law for artificial intelligence. The AI Act creates a new standard for technology. It sets boundaries for developers and users of AI systems across all sectors, including finance.
This legislation follows a risk-based structure and sorts AI technologies into categories of risk, from minimal to unacceptable. The goal is to foster innovation while ensuring that AI systems operating within the EU are safe and respect fundamental rights. The regulation's global reach means any company offering AI services in the EU market must comply, regardless of where it is based. Financial institutions are now examining their use of AI for credit scoring, fraud detection, and advisory services to prepare for the new requirements.
What is the EU AI Act?
The EU AI Act is a legal framework designed to regulate artificial intelligence systems. It is the first of its kind on a continental scale. The European Commission first proposed the Act in April 2021, and the European Parliament gave its final approval in March 2024.
The law aims to create a uniform set of rules for AI development and deployment inside the European Union. Its primary objective is to build trust in AI technologies. It seeks to protect the health, safety, and fundamental rights of people from potential harms caused by artificial intelligence. The Act applies to providers who place AI systems on the market and to users who deploy them in a professional capacity .
How does the AI Act categorise AI systems?
The legislation classifies AI systems based on the level of risk they introduce. There are four main categories.
1. Unacceptable Risk: This category includes AI systems considered a clear threat to people's safety, livelihoods, and rights. These systems are banned entirely. Examples include social scoring by governments and real-time remote biometric identification in public spaces for law enforcement, with some narrow exceptions.
3. Limited Risk: This group includes AI systems with specific transparency obligations. For instance, when people interact with a chatbot, they must be informed they are communicating with a machine. AI-generated content, often called deepfakes, must be labeled as artificially created.
4. Minimal Risk: The vast majority of AI systems are expected to fall into this category. The Act does not impose legal obligations on these systems, though providers can voluntarily adopt codes of conduct. Examples include AI-enabled video games or spam filters.
The law creates a clear distinction between different uses of AI. It focuses regulatory attention on the applications with the highest potential for harm.
What are the main requirements for high-risk AI?
High-risk AI systems face the most significant compliance duties. Providers of these systems must meet several key requirements before and during their operation. A fundamental demand is the implementation of a risk management system. This system must be continuously updated throughout the AI system's lifecycle.
Data quality is another critical area. The datasets used to train high-risk AI models must be relevant, representative, and free of errors and biases to the greatest extent possible. This prevents discriminatory outcomes. Providers must also create detailed technical documentation that explains the system's purpose and how it was built. This documentation proves compliance with the law.
Human oversight is a core principle. High-risk systems must be designed to allow for effective human supervision. People should be able to intervene or stop a system if it behaves unexpectedly or produces unsafe results. Finally, these systems must exhibit a high level of robustness, security, and accuracy to function reliably as intended.
How will the AI Act affect the financial services industry?
The financial services industry is a primary focus of the AI Act. Many common fintech applications are classified as high-risk. For example, AI systems used to evaluate the creditworthiness of individuals or establish their credit scores are high-risk. This means banks and lenders using such tools must ensure they meet all the stringent requirements, including bias testing and transparency.
AI systems for risk assessment and pricing in life and health insurance are also considered high-risk. Insurers must be able to explain how their algorithms work and prove they do not lead to unfair discrimination. The Act also affects AI used for recruitment in financial firms and for monitoring employee performance. The regulation aims to protect individuals from opaque or biased automated decision-making in critical areas like access to finance and employment. Financial institutions must now document and audit their AI systems with a new level of diligence.
When will the rules be enforced?
The AI Act will not become fully enforceable overnight. Its application will happen in stages. The provisions banning unacceptable-risk AI systems will apply six months after the law enters into force . Rules for general-purpose AI models will apply after 12 months. The complete set of regulations, including those for high-risk systems, will be fully applicable 24 months after the law’s entry into force, giving companies time to adapt. The deadlines create a clear timeline for businesses to bring their operations into compliance. Enforcement will be handled by national authorities in each EU member state, coordinated by a new European AI Board. The regulation entered into force in 2024, but the a general date of application of 2 August 2026.
What are the consequences of non-compliance?
The penalties for failing to comply with the AI Act are substantial. Fines are structured based on the type of infringement and the size of the company involved. For using a banned AI application, a company could be fined up to €35 million or 7% of its global annual turnover, whichever is higher.
Violations of the obligations for high-risk systems can result in fines of up to €15 million or 3% of global turnover. Providing incorrect information to authorities carries penalties of up to €7.5 million or 1.5% of global turnover. These figures demonstrate the EU's serious commitment to enforcing its new AI rulebook. The potential financial impact makes compliance a top priority for all affected organizations.
How do you navigate the new compliance landscape?
Adapting to the AI Act presents both a regulatory challenge and a technical one. Financial institutions must translate the law’s principles into concrete software features and system architectures. The new standards demand robust, transparent, and secure solutions, especially within complex environments like payment processing and transaction monitoring.
For many, this will require a deep bench of engineering talent familiar with building compliant financial software. Working with Ximedes --who specialise in secure, reliable fintech development-- can help institutions ensure their systems meet these new legal benchmarks while continuing to innovate.
