It is not too long ago (approximately 3 years), when the UK became the leader in Open Banking and since then many countries around the world have aimed to imitate the UK example. A combination of regulatory developments (PSD2 in the EU and the formation of the OBIE in the UK) have meant that customer current account data was opened up to third party providers (TPPs), that are now able to use that data to initiate payments or aggregate financial information for consumers and present them with a partial picture of their financial lives. Driven by regulatory efforts to standardise technical standards for sharing that data, the UK has experienced a higher adoption rate of these services compared to the EU. So what comes next?
On the 17th December 2019, the UK’s Financial Conduct Authority (FCA) consulted on the concept of Open Finance - an initiative aimed at giving back full control of financial data to consumers and allowing them to have a more accurate picture of their financial state. This means that third party providers (TPPs), with their customers’ consent, will be able to gain access to mortgage, investment, insurance, savings, pension and potentially other more granular data. Open Banking has only opened up current account information, which was a substantial first step, but it is not sufficient to enable customers to fully plan their financial future or have full control over their financial decisions.
We discussed the various use cases arising from Open Finance previously in a whitepaper available here. To offer some short examples, through Open Finance, consumers can aggregate their pensions under one umbrella and make an informed decision on whether they should put more money in their pension pot. Consumers could also receive personalised financial services and advice. Based on the FCA’s views, consumers could even choose to instruct their savings provider to switch their savings pot to a different product, if there was a better alternative. Looking ahead, beyond the fantastic proposition of Open Finance, questions remain around how these use cases are prioritised, how they should be implemented and what is the role of the regulator in this space.
Making the case for the revolution
The problem statement that Open Finance is trying to address is two fold: (a) the complexity of accessing data and changing/switching to personalised financial services and (b) the general lack of consumer engagement with their financial products. Making the Open Finance consumer journey smoother and more intuitive is likely to solve both of these problems, whilst ensuring that businesses and consumers do not purchase financial products that are not suitable for them. For example, the FCA has recently found that around 2,000 pension advisers have given potentially unsuitable advice on pension transfers due to inadequate fact finding. Had these advisers had access to more data about their customers then it is likely that the advice provided would have been more suitable.
Overall, the benefits from Open Finance can be classified into four main categories:
Innovation: financial products can be better tailored to suit individual circumstances and needs. This could in turn mean lower premiums for some customers.
Competition: through the provision of more innovative customer services, market players would have to be more competitive to entice customers. Advice: advisers will have access to a wider pool of information about their customers’ financial lives, thus allowing them to offer more tailored and relevant advice.
Access: more information about a potential consumer can lead to previously excluded customers gaining access to basic financial services. The FCA has estimated that about 1.3 million UK adults were 'unbanked' in 2019. Open Finance is able to solve this issue to a great extent by utilising data, enabling consumers who would typically not have access to a basic financial services to receive them.
With all this in mind, it is evident that Open Finance can bring about a revolution in the way that we look at financial services. Both the EU and other countries around the world have initiated discussions on when and how best to implement such initiatives.
A prioritisation matrix fit for the future
The FCA has recently published its feedback statement on its vision for Open Finance. The key activities that the regulator has identified as potential drivers of this initiative were: pensions, investments, savings and credit. This is a sensible approach as it encompasses the majority of financial activities of a consumer. But can it all be achieved at the same time or would a more sequential approach make more sense?
We propose that the UK financial ecosystem is well equipped to deliver these changes simultaneously insofar as sufficient coordination and planning are built into the roadmap. Simultaneity of implementation is important for two key reasons:
Demand for such services: the entire idea of Open Finance is built around the concept of providing a holistic view of financial profiles. If even one of the key sectors identified by the FCA were missing, it would mean that the full financial view would be incomplete. A financial advisor for example, would find it more challenging to offer fully tailored financial advice on investments if they do not have information on the pension contributions of their customer. An insurance provider may not be able to estimate the appropriate premium if they do not have information about credit worthiness or mortgages held by the customer. Partial information is, of course, less valuable than full information, so sequential implementation may mean that Open Finance only takes off once all of the recommended financial services are added under its umbrella.
Lessons from Open Banking: the UK finds itself in a unique position compared to the rest of the world due to the success story delivered by the CMA and the Open Banking Implementation Entity. Open Finance would be standing on the shoulders of giants in this case as both the industry and regulators have a great level of expertise by now on how to form the main foundations for open initiatives: setting technical standards, overseeing compliance, delivering smooth user journeys. These are all lessons that the UK could apply to the implementation of Open Finance and place itself ahead of the curve. In addition, the future entity that will be overseeing the UK’s Open Banking remedies is currently being considered by the CMA. The sooner the Open Finance initiatives are formed, the more natural and organic the integration of those services could be under the future entity’s remit.
The regulator’s role
The topic of data access, control and sharing has received unprecedented attention from regulators and public policy bodies. It is another indication of the importance of this topic but also an acknowledgement that a coordinated approach is necessary in order to deliver all its benefits.
Looking beyond the FCA’s recent feedback statement on Open Finance, the Department for Business, Energy and Industrial Strategy (BEIS) said that it will legislate to make it possible to require industry involvement in Smart Data initiatives, including Open Finance. The Kalifa Review, commissioned by HM Treasury also acknowledges the importance of Open Finance in determining the future of the fintech sector in the UK and proposes an alliance between industry and government to deliver that objective. The Department for Digital, Culture, Media and Sport (DCMS) has focused its efforts on delivering a digital identity that would support a smoother implementation of open initiatives such as Open Finance. Clearly a crowded regulatory space with many stakeholders and various visions.
It is against this backdrop that we consider that a centralised approach needs to be taken in order to ensure the success of Open Finance. The FCA, being the main regulator for most of the firms that would deliver this initiative should take the driver's seat here. It not only has the expertise in financial services but also has the powers to implement, supervise and enforce legislative requirements on the ecosystem. As is proposed in the feedback statement, the regulator will work alongside both the industry and other stakeholders to legislate and mandate this initiative.
We strongly believe that without a legal framework, it is unlikely that the ecosystem would deliver in a timely manner as the commercial incentives are not there just yet. This is exactly why we support a stronger sense of urgency in this domain. We consider that a clear roadmap needs to be put forward, with key milestones that the industry should deliver. Alongside the roadmap, a clear distinction of supervisory remits and regulatory roles in supporting its implementation need to be agreed with other public policy bodies. Again, regulatory efforts, although delivered by different regulators, need to work towards a common goal and follow the FCA’s vision for this sector. Finally, lessons from the Open Banking experience need to be fully absorbed into the delivery of Open Finance: consumers to be placed at the forefront and the industry playing field needs to be leveled, through the comprehensive legislative infrastructure.