The UK's financial regulator, the Financial Conduct Authority, has issued a "Call for Input" in respect of its vision to extend Open Banking to financial services more generally (under the label of Open Finance). Unlike Open Banking, which is concerned with bank accounts and payment services only, the impact of Open Finance would be much wider, affecting mortgage providers, consumer credit firms, investment and pension funds, as well as general insurers and intermediaries.
This project has far reaching implications for the way that financial services are delivered and consumed in the UK in the future. It is vital that financial services firms take note of this Call for Input, contribute to ensure the best model for Open Finance is rolled-out and, where possible, start preparing now.
What is the experience with Open Banking?
Open Banking was introduced as part of the UK's implementation of the EU's Second Payment Services Directive (PSD2) that took effect on 13 January 2018. It allows customers to authorise third party service providers to access their payment account information (account information services) and to make payments on their behalf (payment initiation services). Open Banking originated as one of a package of measures imposed on the largest UK banks by the UK Competition and Markets Authority to increase competition in retail banking and allow customers to benefit from technological advances. In particular, it enables customers to share their data with third party providers through secure APIs and in doing so, have more control of their money and to be better able to compare products according to their personal profiles.
According to the FCA, it has seen encouraging levels of interest in Open Banking from firms and customers. While the delay in implementing Strong Customer Authentication requirements may have slowed the take up of Open Banking, over 135 new account information services and payment initiation services have been either registered or authorised and customer awareness is expected to continue to develop and grow. Despite its potential, however, Open Banking is currently limited in scope - it only gives consumers access to their payment account data; it does not offer consumers a holistic view of their finances. The FCA suggests that this could be remedied via Open Finance.
What is Open Finance and what are the advantages?
Open Finance, like Open Banking, is built on the concept that data provided by customers should be controlled by them. It takes this idea and seeks to apply it far more widely. Third party providers would be able to access the same information and perform the same functions as are available online to the relevant customer. In this respect, providers would have either or both of "read" and "write" access. Where the providers has "read-only" access, the provider could collect a customer’s financial data to present to them (perhaps aggregated with other data). Where the provider also has "write" access the provider could carry out or initiate transactions on the customer’s behalf (e.g. making an investment or applying for credit).
The FCA considers that Open Finance will promote the development (or the improvement) of services to the benefit of consumers and businesses. It will do this by strengthening competition, customers' financial capability and help improve inclusion for the disadvantaged or less affluent in society. Key areas where Open Finance has the potential to promote these outcomes are:
- Personal financial management dashboards – Customers could see their cash flow, savings, investments, spending, goals all in one place, which might prompt them to move excess money from their current account into an investment;
- Automating switching and renewals – Customers might more easily switch between utility companies and general insurance products enjoying better priced quotes based on their usage data;
- New advice and financial support services – Customers could more easily share fuller information about their personal circumstances and receive better and more affordable services;
- More accurate creditworthiness assessments – Third parties would be able to review customers' cash flows holistically and identify suitable credit products for businesses and consumers. This might result in cheaper finance or tailored debt advice for those in arrears. Besides these outcomes, Open Finance promises to drive increased efficiency in financial services firms' service lines and help them develop new ways of delivering products and of making decisions. The FCA recognises that while some areas of finance have closer synergies to payments (and will therefore be easier to extend Open Finance), there are other sectors such as insurance, pensions and investments where this may be more problematic.
What are risks with Open Finance?
The Call for Input also recognises that many of the outcomes in terms of customer benefits might be achieved through more conventional means and moreover, that the success of Open Finance is dependent on customers being prepared to engage and willing to allow third party providers access to their personal and financial data. In the light of increasing cyberattacks and the regulatory focus on improving firms' resilience to cyber risks, it is understandable that customer confidence may be an issue. As regards customer engagement, will this be limited to younger and more "savvy" customers or will there be take up from other groups who are less well served at the present time? The FCA refers to a "privacy premium" where those customers who are unwilling to share their data will pay more.
Similarly, there are potential competition and operations risks. One particular competition concern arises from the manner in which Open Finance is implemented. If firms are not required or do not in practice offer equal access, competitors might find themselves at a disadvantage. This was a concern voiced by third party providers over access to payment accounts through "dedicated interfaces" i.e. would they afford equivalent access to customers' interfaces. As for operational risk, resilience of firms' systems is key, and firms will likely have to make significant improvements in preparation for Open Finance to be ready for outages and malicious attacks. The FCA points out that investment in this area will, of course, take away resource from other areas of firms' businesses.
Other potential risks referred to by the FCA are less obvious. For example, in terms of poor customer outcomes, it is suggested that "reducing friction" in customer relationships associated with execution-only services could increase the chances of harm to a consumer where they would have been better off taking advice. The FCA also suggests that auto-switching could result in consumers becoming less engaged and, over time, less aware of whether products are still suitable for them.
How best to achieve Open Finance?
Although third party providers existed prior to PSD2, through regulatory recognition and the provision of a regulatory framework, they have been able to develop their services and, of course, account service providers must now afford them access to payment accounts.
The question arises to what extent is regulation necessary and desirable in order to extend Open Banking to wider financial services. In considering Open Finance, an analysis is needed to decide whether any specific activity is currently a regulated activity and, where it is not, HM Treasury will need to decide whether a provider should be regulated and subject to FCA standards and supervision. (If so, this would follow the FCA's recent extension of its Principles for Businesses (and certain conduct of business rules) to the new payment services firms, in a step which went beyond that required under PSD2.)
The Call for Input asks whether Open Finance is likely to develop without the FCA's regulatory intervention. To consider this question the FCA identifies various issues and prerequisites. These are:
- Incentives – Are these sufficient for established firms to provide access?
- Feasibility and cost – Are firms able to develop and willing to offer the access needed to support Open Finance? What are the costs and barriers involved?
- Interoperability and cohesion – What common standards are required for Open Finance to develop? For example, API standards and security protocols.
- Data rights – Is there an adequate framework in place? If not, what would it be, and how would it be provided? The rights to data under the GDPR are not the same as ongoing, real time access as allowed by Open Banking.
What principles are needed to drive Open Finance?
The FCA has drawn up draft principles governing the way forward for Open Finance which it suggests should be developed in partnership with the Government and the financial services sector. These principles set the parameters of what will need to be in place to achieve Open Finance's goals.
- Users' right to share their data in real-time
- Users' right to instruct a third party provider to act on their behalf
- Users' right to be in control of their data and transact and share data securely
- Cohesion across Open Finance (e.g., the development of API standards is done in a way that promotes interoperability, efficiency and usability for all users)
- Common provision of a minimum set of standardised data and transactions via open standard APIs
- Third party provider right of access
- Accessibility of key product information (to allow third party provides to compare products and to help give guidance or advice)
A further question on which the FCA seeks feedback is about the potential roles it should play in supporting Open Finance. These range from supporting industry codes, providing industry forums, helping to develop a common API standard, to being more hands on with respect to developing a regulatory framework and making rules. The FCA suggests that it can also use its Innovate Project and the regulatory sandbox to help new innovative services in this area come to market.
What are the next steps for firms?
Feedback is due by 17 March 2020. The FCA is to work closely with the Government — given the wide application of Open Finance to many sectors — and it plans to publish a feedback statement in the summer.
The consultation paper represents an opportunity for firms to contribute to the development of policy in this area. While the FCA considers that Open Banking has been successful and that Open Finance is the means to introducing more innovation and competition (and it is backed by the Government in this view), there is an opportunity to learn the lessons from the roll-out of Open Banking, and to improve the model before it is applied more widely. Given that Open Finance will be coming sooner or later, firms should also start preparing to ensure that they can gain a competitive advantage and by investing in their operational resilience better protect themselves and their customers from the inevitable outages and cyberattacks.