AI in Regulated Systems: The Real Risk Isn’t Hallucination — It’s Execution Authority
AI is already operating inside regulated control environments. The risk surface is larger than most teams realize. In financial services, payments, lending, and compliance-heavy SaaS, AI systems are no longer experimental. They are influencing decisions that affect: Funds movement Customer eligibility Risk classifications Fraud escalation Compliance workflows In many organizations, these systems now sit adjacent to — or inside — processes that are audited, regulated, and contractually bound. Board discussions often focus on hallucination risk. That concern is reasonable. A model producing incorrect output with confidence can create reputational exposure. But in regulated environments, hallucination is rarely the primary architectural risk. The larger risk is structural. The larger risk emerges when probabilistic systems are allowed to directly affect regulated outcomes without deterministic controls that make those decisions auditable and defensible. ...