Modernizing Financial Risk Management: OSFI's Draft Guideline On AI Model Risk Management

The Office of the Superintendent of Financial Institutions (OSFI) recently released an updated draft of Guideline E-23 Model Risk Management (Draft Guideline) setting expectations related to enterprise-wide artificial intelligence (AI) model risk management. The Draft Guideline is the first overhaul of the model risk management framework since it was first issued in September 2017 (2017 Guideline). Interested parties can provide comments until March 22, 2024, with a final guideline taking effect in July 2025.

The Draft Guideline recognizes that organizations are increasingly relying on models to drive decision-making, which could expose them to financial loss from flawed decision-making, operational loses, and reputational damage. To capture the risk posed by AI, the Draft Guideline modernizes the definition of "model" in the 2017 Guideline to explicitly include AI and machine learning methods. Unlike the 2017 Guideline, the Draft Guideline broadens its scope to