Following fast on the heels of Open Banking and PSD2, the UK Financial Conduct Authority (FCA) recently published a call for input to explore opportunities and risks arising from open finance. Responses to the call for input can be submitted through an online response form by 17 March 2020 – now is the time to make sure your voice is heard.
Don't worry if you're not sure where to start with your response – we're here to help with our Quick Start guide.
What do you mean by Open Finance?
The FCA puts forward a definition of open finance, which is based on:
- a financial services customer who consents to a Third Party Provider (TPP) accessing their financial data in order to offer tailored products and services;
- TPPs being permitted to (1) collect financial data to present to the customer ("read" access) and (2) initiate transactions on the customer's behalf ("write access").
In other words, requiring all financial services providers to securely expose customer data to third parties to enable the provision of innovative services and improve customer outcomes, in the same way as banking is being transformed already.
Some of the benefits the FCA sees open finance bringing to the market are: personal financial management dashboards, automated switching and renewals, new advice and support services and more accurate creditworthiness assessments. These are, of course, the benefits it expects to see from Open Banking, so the key question is the extent to which access to additional financial services products will enhance and improve these services – and of course whether the cost-benefit analysis justifies the move.
There is an assumption that access would be provided through APIs on the basis that the FCA considers APIs a better route of access than using a modified customer interface, by reducing barriers for TPPs and enhancing security.
I'm not a bank – should I care?
In a word – yes! The FCA is looking at a very broad cross-section of financial services. As well as banks and payment institutions, this consultation is relevant to consumer credit firms, general insurers and insurance intermediaries, investment managers, life insurers and pension providers and mortgage lenders (amongst others).
Why is the FCA so keen?
The FCA is looking to lead the public debate on open finance and has set up an advisory group to drive forward its future strategy. The advice of that group, which comprises industry experts; consumer and business representatives; government departments and academics, has also been published.
The FCA clearly believes that the progress of open banking to date, and the customer propositions it has given rise to, has already been sufficient to justify the principle of open banking. This has prompted it to consider the benefits that could be achieved by expanding the principle into other areas of financial services.
The first questions it asks are what actions it can take to ensure the potential of open banking is maximised and for views on what open banking teaches us about the development of open finance. There will of course be a wide range of views on these questions and it will be important for the regulators to hear all of them.
Who's going to pay for this?
This is probably the biggest question of all, and is not explicitly answered by the FCA. The implication of the consultation, however, is that account providers would be expected to fund their own costs of complying with any new rules. This is not surprising, given that open banking and PSD2 interfaces had to be developed and funded by the account providers. The consultation does, however, recognise that the cost may not be insignificant and that it is difficult to identify the actual costs of delivering open banking since there is inevitably some overlap with work that would have been required in any case. Many banks will probably feel that the overlap is minimal and that the costs can be more easily identified than the FCA thinks! The FCA does leave open the possibility of providers charging for use of APIs (something effectively prohibited under PSD2), which may make the proposition more attractive.
Risks arising from open finance
Perhaps the most interesting area of the call for input relates
to the FCA's identification of potential risks that open
finance could create:
- The exclusion of particular categories of customers (e.g. those who opt out of data sharing) and disadvantageous pricing for those customers;
- Misuse of customer data;
- Poor consumer outcomes, for example, auto-switching could lead to disengagement from customers or customers being solely focused on price over other factors affecting suitability, and reducing friction associated with larger transactions may lead to harm where advice is not taken;
- A negative impact on competition if, for example, firms try to tailor products to match dashboard features, TPPs over-simplify choice or if firms do not offer equal access to TPPs;
- Operational concerns including upfront costs of investing for established firms that could take away from other development opportunities.
Whilst these are the obvious risks, providers will want to consider both whether the FCA has accurately evaluated and articulated these risks, and whether there are other risks the FCA has not yet identified. It is not clear, for example, how the FCA's proposals would fit with existing initiatives such as the pensions dashboard.
For existing providers, operational concerns alone are likely to be a significant risk given that open finance is an ambitious project to deliver at the same time as dealing with ever-moving goalposts in relation to Brexit. As with banks, many other large-scale financial institutions are reliant on legacy IT systems that were not designed for the internet age or for interoperability. IT development and change management will therefore be big concerns, likely to have an impact on the desirability and feasibility of both the timetable and scope of the open finance project.
The FCA also asks whether the existing regulatory framework is adequate to contain all risks outlined. Until we have a firmer idea of the scope of open finance, it is perhaps too early to comment on this conclusively, but we expect both well-established financial institutions and TPPs to have strong views on problems the current regulatory framework creates. Now is the time to ensure these problems are on the FCA's agenda.
What happens next?
This call for input gives firms an insight into the FCA's vision for the future of the UK financial services market. The FCA asks firms a series of questions at the beginning of a transformative journey for financial services. The FCA's questions will shape its approach to policy in the next few years – and, therefore, shape firms' agendas too. Now is the time to have your say.
The FCA plans to publish a feedback statement in summer 2020.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.