Last week I received a newsletter from Conor Grennan – The Infinite Focus Group: AI In Marketing he explained how to use AI to create product feedback and it's a fascinating concept. He frequently writes about how to approach AI with the right mindset, rather than learning a multitude of prompts. I believe he's onto something, but I also find it incredibly useful to observe how others are utilising AI and then consider how we might adapt those ideas to the world of finance.
This week, I take a lesson from Conor's approach and created a focus group of Chief Executives asking them to provide candid feedback to the Prudential Regulatory Authority Dear CEO letter UK Deposit Takers Supervision: 2024 priorities. To be clear these are ai created CEOs.
Method behind the madness
To write this letter I worked with ChatGPTin a step-by-step process and thereby combined human and AI skills together. The steps were:
Identifying the Task: The initial request was to explore how CEOs would respond to a letter from the PRA outlining its 2024 priorities for UK deposit takers. This exploration was aimed at understanding the potential private sentiments and strategic considerations of these CEOs under the umbrella of Chatham House rules.
Generating CEO Responses: To realistically simulate these responses, ChatGPT dissected the PRA's letter, identifying key themes such as governance, risk management, credit risk, and operational resilience. Then together we created three distinct CEO profiles—small, medium, and large deposit takers—each with its unique set of challenges and perspectives.
Simulating a Roundtable Discussion: Building on an initial response, we expanded the scope to include a broader array of voices, simulating a roundtable discussion involving 15 CEOs. This step was designed to capture a diversity of opinions and strategic priorities reflective of the entire sector.
Analysing Themes and Sentiments: From the individual responses, we identified common themes and underlying sentiments. This analysis revealed concerns about resource constraints, the need for more tailored guidance, the challenges of operational and technological resilience, and a desire for closer engagement with the PRA, among others.
Drafting the Collective Letter: Using the insights gained, we drafted a letter from the collective of CEOs to the PRA. This letter candidly articulated the sector's feedback on the 2024 priorities, highlighting areas of concern and proposing constructive suggestions for how the PRA could further support banks in meeting these challenges. This summary not only highlights the steps taken to create a dialogue between the banking sector and its regulator but also underscores the potential of using creative simulations to gather insights and foster constructive conversations within the financial industry.
This is the collective synthetic response
Draft Letter from CEOs to the PRA
Dear David Bailey and Laura Wallis,
We, a collective of CEOs from across the UK deposit-taking sector, appreciate the opportunity to respond to the Prudential Regulation Authority's (PRA) 2024 priorities. This letter reflects a unified stance, capturing diverse perspectives from small, medium, and large institutions. We commend the PRA's comprehensive approach and share the commitment to maintaining a resilient, robust financial system. However, we wish to provide honest feedback and constructive suggestions on areas where we believe the PRA could further support the sector in meeting these priorities.
Resource Constraints vs. Regulatory Expectations
There is a palpable concern among smaller and medium-sized banks regarding the challenges of meeting regulatory expectations with limited resources. The detailed and complex nature of the requirements, especially around operational resilience and technological innovations, presents significant hurdles. We suggest the PRA could offer more tailored guidance and support mechanisms, such as forums or shared resources, to help smaller institutions navigate these challenges more effectively.
Operational and Technological Resilience
The focus on operational resilience is crucial, yet the scale of compliance varies significantly across the sector. While larger banks have the resources to invest in sophisticated IT infrastructure, smaller banks struggle with the same expectations. More practical steps and examples of how to achieve these goals, considering the size and scale of operations, would be immensely beneficial. Additionally, a clear framework for assessing and mitigating cyber threats, applicable to banks of all sizes, would be appreciated.
Credit Risk Management in an Uncertain Economy
The economic landscape presents a universal challenge, with the management of credit risk at the forefront. Enhanced dialogue around balancing risk management with supporting growth would help banks navigate these uncertainties. The PRA could also facilitate peer sharing of best practices in credit risk management to foster a more resilient banking sector.
Climate-related Financial Risks
While there is a sector-wide commitment to addressing climate-related financial risks, there is also a request for more specific guidance. Detailed case studies, best practice sharing, and workshops could help banks at various stages of integrating climate risk management into their frameworks.
Talent and Succession Planning
For smaller banks, attracting and retaining executive talent is a significant challenge. The PRA could support by highlighting pathways for leadership development within the sector and facilitating mentorship programs that ensure the continuity of strong governance and risk management practices.
Data and Model Risk Management
The pace of change and the volume of data present ongoing challenges. We propose the PRA could provide clearer guidelines on data governance and model risk management, perhaps through a series of workshops or consultation sessions, to help banks better navigate these areas.
Engagement with Regulators
A recurring theme is the desire for more open, ongoing dialogue with the PRA. Regular roundtable discussions or feedback sessions on emerging regulations could enhance understanding and compliance across the sector. Such engagement would be particularly valuable in addressing novel risks and ensuring alignment on regulatory expectations.
Conclusion
In closing, we wish to emphasize our collective dedication to meeting the PRA's priorities and contributing to the stability and resilience of the UK financial system. We believe that through constructive dialogue and collaboration, we can address the challenges identified and work together towards our mutual goals. We look forward to the PRA's support and guidance in these areas and to establishing a more interactive and supportive regulatory relationship.
Yours sincerely,
[Signatures of the CEOs]
This letter aims to constructively articulate the collective feedback and suggestions from the CEOs of small, medium, and large deposit-taking institutions, focusing on areas where the PRA could provide additional support to facilitate compliance and promote a resilient banking sector.
The Synthetic versus The Real World
The approach of using AI to simulate responses in a focus group setting, like the one we've created with synthetically generated CEO perspectives, offers a unique and efficient way to anticipate and analyse complex reactions to regulatory changes or other significant industry developments. However, when considering how closely these synthetic responses might align with real-world feedback from CEOs, several factors come into play.
Real CEOs bring a depth of experience, intuition, and personal judgment to their decision-making processes that are shaped by years of industry involvement, personal experiences, and a nuanced understanding of their specific business context. While AI can generate responses based on a vast dataset and identify patterns or sentiments that are likely to emerge, it might not fully capture the individual complexities and the depth of strategic thinking unique to each human CEO.
Real-world feedback is influenced by the current economic climate, geopolitical tensions, recent market events, and emerging industry trends. Although AI incorporates a broad range of data up to its last training update, its ability to factor in the very latest events or subtle shifts in market sentiment is limited by its training cut-off point.
CEOs' decisions and feedback are not solely based on data and strategic considerations; they also reflect ethical values, emotional intelligence, and personal leadership styles. These aspects can profoundly influence how CEOs perceive and respond to regulatory changes. AI-generated responses may not fully encapsulate these human elements, which add significant depth and variability to real-world feedback.
CEOs operate within the context of their organisations' cultures and are influenced by a wide range of stakeholders, including employees, customers, shareholders, and regulatory bodies. Their responses to regulatory changes are often crafted to align with these varied interests. While AI can simulate responses based on generalised scenarios, capturing the unique corporate culture and specific stakeholder dynamics of each firm would be challenging.
AI-generated responses can be remarkably insightful, especially in identifying broad trends and general sentiments. They can provide a useful approximation of how CEOs might respond to certain stimuli, acting as a cost-effective and efficient way to gather initial insights. However, the predictive accuracy of these simulations in matching the exact responses of real CEOs under similar conditions would inherently have limitations.
While AI-generated focus groups offer valuable perspectives and can serve as a powerful tool for scenario planning and strategic insights, they should be viewed as a complement to, rather than a substitute for, engaging directly with real-world executives. The unique value of these exercises lies in their ability to highlight potential areas of concern, generate novel ideas, and stimulate further discussion among actual decision-makers, rather than precisely predicting specific feedback from individuals.
Regulators Could Benefit
The Prudential Regulation Authority could significantly benefit from utilising a feedback process similar to the one we discussed before finalising and issuing guidance letters. This approach presents several key advantages.
By simulating responses from a diverse array of banking sector CEOs before finalising their letters, the PRA can gain insights into how their guidance might be received across the spectrum of institutions they regulate. This could lead to adjustments in their recommendations to ensure they are not only ambitious in terms of regulatory standards but also practical and achievable across different scales of operation. Pre-emptive feedback can highlight areas where additional clarity is needed, ensuring the final letter addresses real-world applicability and implementation challenges more effectively.
Simulated feedback processes would enable the PRA to understand better the current economic, operational, and competitive pressures facing banks. This nuanced understanding can make the regulatory guidance more responsive and sensitive, ensuring that expectations are aligned with what is feasible and reasonable under current conditions.
Engaging in a synthetic feedback process, even internally, underscores a commitment to a collaborative approach to regulation. It signals to regulated entities that the PRA is considerate of their operational realities and is seeking to issue guidance that supports not just compliance but also the sector's overall health and competitiveness. This can strengthen the relationship between the regulator and the regulated, promoting a more open, trust-based dialogue.
Is this of Use to You?
Synthetic focus groups, constructed through advanced AI simulations, represent a new approach for businesses seeking to improve their decision-making and innovation.
Synthetic focus groups enable companies to test scenarios and strategies in a controlled environment, providing valuable foresight into potential challenges thereby offering the potential to enhance strategic planning and decision-making processes.
For product development, synthetic focus groups can offer a wealth of insights into consumer preferences, expectations, and aversions. By generating diverse consumer perspectives on new products or services, companies can refine their offerings, tailor their marketing strategies, and innovate with greater confidence in alignment with market needs and trends.
Synthetic focus groups can also simulate customer reactions to changes in service, pricing, or policies, providing businesses with a nuanced understanding of what drives customer satisfaction and loyalty. This insight allows companies to address issues, personalise customer interactions, and build stronger relationships with their target audience.
For businesses looking to enter new markets or expand their presence, synthetic focus groups can simulate the responses of different market segments, including potential customers, competitors, and regulators. This enables businesses to anticipate challenges, understand competitive dynamics, and design market entry strategies that are informed.
Companies facing stringent regulatory environments or aiming to enhance their social responsibility efforts can use synthetic focus groups to gauge the impact of their compliance strategies and CSR initiatives. This helps ensure that their actions not only meet regulatory requirements but also resonate positively, reinforcing the company's commitment to ethical practices and societal well-being.
What’s happened is that AI has provided us with new tools that can handle problems differently. In this case, we can craft policy before it’s written so it’s more in tune with the target audience and therefore more effective. What is striking is the speed and low cost of undertaking detailed research, it has the potential to improve aspects of business that in the past would have needed expensive consultants.
Thank you, Conor, for your insight that triggered my interest here. I’m a great believer that AI is about experimentation and practice, you don’t need to be an IT expert just curious and willing to give it a go.