Open finance should be introduced in the UK in a phased manner rather than a ‘big bang’, according to respondents to a Financial Conduct Authority (FCA) consultation.
Implementation costs, new or increased risks to consumers and questions of data ethics were among the other areas and concerns highlighted in answers to a ‘call for input’ designed to inform the watchdog’s regulatory approach to the emerging arena.
Open finance describes the extension of open banking data-sharing principles to enable third-party providers such as fintech companies to have access, with permission, to customers’ data across a far broader set of financial fields, such as insurance and investments. It has been described by professional services group KPMG as ‘fundamentally strategic’ and having ‘profound implications’ for the future of financial services and regulation.
The FCA’s call for input was launched in December 2019 and the authority has now published a 36-page ‘feedback statement’ summarising the 169 responses.
How to make it happen
Open finance is seen as the natural evolution of open banking, the rollout of which in the UK is overseen by the Open Banking Implementation Entity (OBIE). OBIE is funded by the UK’s nine largest banks and building societies, with its governance (and budget) determined by the Competition & Markets Authority (CMA), a non-ministerial government department. More than three million citizens and businesses are now using open banking-enabled products.
Respondents to the FCA’s call for input highlighted several factors that they felt had helped to progress open banking and that would also be needed to help maximise open finance’s potential: some form of compulsion (the so-called ‘CMA9’ banks were compelled to participate in open banking); a legislative and regulatory framework; common standards; and an implementation entity.
‘Many respondents, including consumer groups, stated that legislative compulsion had been the driver of open banking and open data schemes in other jurisdictions. They thought that some form of legislation or regulation could act as a catalyst for industry-led arrangements. They generally felt that the full benefits of open finance would require full participation, and that this would ultimately require legislation or regulation,’ the FCA report says.
The recently published conclusions of the HM Treasury-commissioned Fintech Strategic Review urged the government ‘to progress open finance as a mandatory regime’ and ‘in alignment with other smart data initiatives.’
Keep an eye on the costs
Most respondents to the FCA consultation said that open finance would require an equivalent entity to OBIE but opinions varied on who should be the central governing body for open finance or, if a new body is needed, how it should be constituted and funded.
OBIE’s costs for 2020 were about £36m (about $49.8m) – down from about £47.6m in 2019 – with income of about £3.4m in 2020, according to its annual report. With the implementation phase of open banking ending this year, the CMA has itself just run a consultation on the future governance of open banking (this closed on 29 March).
‘Several respondents said the cost of delivering open banking had exceeded what was originally expected,’ the FCA’s report notes. ‘They felt that, given this, further work would be needed to demonstrate both that open finance could be delivered at lower cost, and that there was demand for open finance.’
‘Respondents also highlighted that, given the potential costs involved, it was important to consider how the costs of open finance could be shared equitably,’ the report continues. ‘Respondents highlighted the extent to which costs could be disproportionate for smaller firms. Some respondents called for the use of additional and more cost-efficient architectural options that use federated services, such as a federated digital identity, to support open finance.’
Start where there is synergy
The call for input asked whether there was a natural order by which open finance would or should develop among sectors. ‘In general, responses did not indicate that a “big bang” approach to open finance was feasible or desirable,’ the FCA report says. ‘Respondents felt that implementing open finance should be proportionate, phased and ideally driven by consideration of credible consumer propositions and use-cases.’
It noted that some fields of finance, such as mortgages and consumer credit, have ‘obvious’ synergies with open banking but that features of other markets, such as insurance, pensions and investments, ‘may make open finance more challenging to implement’, such as the type and range of data that could be shared.
The FCA document points out that, since the call for input’s publication, both government and private sector have progressed numerous related initiatives. These include a commitment last September from the Department for Business, Energy & Industrial Strategy (BEIS) for legislation to mandate industry involvement in ‘smart data’ initiatives, which would include open finance; and various developments related to digital ID, including the establishment of a Digital Identity Unit (DIU) and publication of draft rules for the future use of digital ID in the private sector.
A cross-sector entity being worked on by BEIS previously referred to as the Smart Data Function should play a central role, according to respondents.
Build consumers’ confidence
Respondents generally agreed that open finance would create or increase risk. ‘They did not generally think any of these risks were impossible to manage but agreed that appropriate regulation would be essential to managing them and giving consumers the confidence to use open finance services,’ says the report.
The document breaks down the risks into categories such as artificial intelligence (AI), machine learning and data bias. Specific concerns cited include a risk of consumers being priced out completely from insurance products; a risk that less tech-savvy citizens lose out; the possibility that ‘customer desirability assessments’ could result in some customers losing services completely; that consumer difficulties could be entrenched if data on their behaviour in one context is used in other contexts; and that vulnerable citizens could benefit from open finance but may not consent to using it.
More generally, although the UK’s rollout of open banking is ahead of most countries, the FCA expects it to take ‘several years’ to see the ‘full extent of market development and innovation’. Its report adds: ‘Many [respondents] called for, and are working on, building compelling use cases to help with continued uptake. Several respondents suggested that, to raise awareness, we [the FCA] or the government should run a consumer education campaign setting out a customer’s rights to share data.’
The FCA says it will work with BEIS and the Treasury in the coming months to ‘form a view of what work is needed to inform judgments on the feasibility, timing and design of any secondary legislation relating to open finance’.
Global Government Fintech’s news story in March on the UK’s Competition and Markets Authority (CMA)’s consultation on open banking’s future governance
Global Government Fintech’s news story in February on the UK government’s publication of draft rules for digital ID in the private sector
Global Government Fintech’s interview in February with Pensions Dashboards Programme principal Chris Curry
Global Government Fintech’s news story in February on how the Philippines’ central bank had proposed the establishment of an ‘industry-led’ self-governing body as it looks to encourage the development of open finance