Artificial intelligence (AI) is rapidly moving from experimentation to operational reality. From contract review tools and customer service automation to fraud detection and decision-support systems, organisations across the financial services sector and other highly regulated sectors are increasingly incorporating AI into business operations.

The opportunities are significant. However, so are the legal, governance and operational risks.

For regulated entities, the question is no longer whether AI will be used within the organisation. The question is whether appropriate governance frameworks are in place to ensure AI is deployed responsibly, transparently and consistently with regulatory expectations.

Why AI Governance Matters

Many organisations have focused their attention on cyber security, privacy and operational resilience in response to increasing regulatory scrutiny. However, AI creates a new layer of risk that cuts across each of these disciplines.

Poorly governed AI systems can create:

·         Inaccurate or misleading outputs

·         Privacy and confidentiality breaches

·         Intellectual property concerns

·         Unintended bias or discriminatory outcomes

·         Operational and reputational risks

·         Challenges in demonstrating oversight and accountability

Importantly, regulators are increasingly focused on governance and accountability rather than technology alone. Organisations remain responsible for decisions made using AI, even where those decisions are supported by third-party vendors or automated systems.

The Governance Challenges Organisations Are Facing

Many organisations are adopting AI faster than their governance frameworks can evolve.

Common questions we see include:

·         Who is authorised to use AI tools?

·         What information can be entered into public AI platforms?

·         When should AI-generated outputs be independently verified?

·         How should AI risks be incorporated into existing risk management frameworks?

·         Who owns accountability for AI-related decisions?

·         How should contracts address AI functionality provided by suppliers?

Without clear answers, organisations risk inconsistent practices across teams and business units.

Start With a Clear AI Policy

A practical AI policy is often the most effective starting point.

Rather than attempting to cover every possible future use case, organisations should focus on establishing clear principles and minimum requirements.

A well-drafted AI policy should address:

·       Acceptable Use

Define which AI tools are approved and the purposes for which they may be used.

·       Data Handling Requirements

Set clear restrictions around:

o    Customer information

o    Personal information

o    Confidential information

o    Commercially sensitive information

o    Third-party data

·       Human Oversight

Specify when human review is required and who is responsible for validating outputs before decisions are made.

·       Accountability

Clearly identify business owners responsible for AI-enabled processes and systems.

·       Monitoring and Review

Establish mechanisms for periodic review, testing and governance reporting.

As many organisations have already discovered in the policy space, having a document is only part of the solution. Policies must be implemented, understood and actively maintained to remain effective.

Don't Forget Your Suppliers

Many organisations are not building their own AI platforms. Instead, AI functionality is increasingly embedded within existing software products and outsourced services.

 

This means supplier contracts are becoming an important part of AI governance.

 

When reviewing technology agreements, organisations should consider:

·         Whether AI functionality can be introduced without notice

·         Data ownership and usage rights

·         Training and improvement rights over customer data

·         Transparency obligations

·         Audit rights

·         Security requirements

·         Liability allocation

·         Compliance with applicable privacy and regulatory obligations

 These considerations align closely with broader third-party risk management expectations and operational resilience obligations that many regulated entities are already addressing.

A Governance Issue, Not Just an IT Issue

One of the most common mistakes organisations make is treating AI as solely a technology initiative.

In practice, effective AI governance requires collaboration across:

·         Legal

·         Risk

·         Compliance

·         Cyber security

·         Procurement

·         Human resources

·         Business operations

This multidisciplinary approach helps ensure legal obligations, ethical considerations and operational risks are addressed before issues arise.

Questions Boards and Executives Should Be Asking

As AI adoption increases, directors and executive teams should consider:

1.       Do we know where AI is currently being used within the organisation?

2.       Is AI specifically addressed within our governance framework?

3.       Have we established clear approval and oversight processes?

4.       Have we assessed supplier-generated AI risks?

5.       Are staff trained on acceptable AI use?

6.       Can we demonstrate effective oversight if challenged by regulators or stakeholders?

If the answer to any of these questions is unclear, there may be an opportunity to strengthen governance arrangements before risk events occur.

Final Thoughts

AI has the potential to deliver substantial operational benefits. However, successful adoption requires more than new technology. It requires clear governance, accountability and practical frameworks that support safe and effective use.

Organisations that establish these foundations early will be better positioned to leverage AI confidently while meeting regulatory, legal and stakeholder expectations.

How MM Legal+ Can Help

At MM Legal+, we assist organisations with AI governance frameworks, policy development, technology contracting, privacy considerations, supplier risk management and broader regulatory compliance obligations.

Need assistance reviewing your AI governance framework, policies, or technology contracts? Contact MM Legal+ to discuss how we can help.