From Open Banking to Open Finance
- Hogan Lovells
Open Banking has already led to the launch of new products and services in the UK that help consumers and businesses make the most of their money.
The Financial Conduct Authority (FCA) is now considering the potentially transformative benefits of ‘Open Finance’ – the extension of Open Banking-like data sharing and third-party access to a wider range of financial sectors and products.
A call for input from a range of stakeholders including banks, consumers and FinTech firms will help the UK’s financial services regulator explore the opportunities and risks arising from Open Finance and inform future policy in this area.
Perhaps the most interesting area of the FCA’s call relates to the potential risks that Open Finance could create. These include:
- The exclusion of particular categories of customers – for example, 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. 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, third party providers oversimplify choice – or if firms do not offer equal access to third party providers
- Operational concerns, including upfront costs of investing for established firms that could take away from other development opportunities.
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. So, IT development and change management will 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 third-party providers to have strong views on problems the current regulatory framework creates.
Open Banking – and the development of Open Finance – mark the beginning of a transformative journey for financial services.
Feedback to its call for input will shape the FCA’s approach to policy in the next few years – and inevitably will shape firms’ priorities too. So it’s vital that stakeholders ensure all the potential risks, as well as opportunities, are firmly on the FCA’s agenda.
Responses to the FCA’s Call for Input can be sent online, by email or by post and must be received by 1 October 2020.
Hogan Lovells is an American-British law firm co-headquartered in London and Washington, D.C.