Following
the possibility provided by PSD2 of opening up banking data for third-party
access, the UK's Competition and Markets Authority instructed the 9
largest banks to do so at the request of the consumer. This initiative called
‘Open Banking' enables consumers to share their data with third-party providers
that can use the data to develop innovative financial products and to provide
‘traditional’ services in a more convenient way (see our post here).
Three years post this experiment and building on the experience gained from Open Banking, the UK’s Financial Conduct Authority may be ready to take the next step to ‘Open Finance’. The FCA published a Call for Input in December 2019 on the shift to Open Finance and following the receipt of a large number of responses from industry representatives it published its Feedback Statement in March 2021.
Open Finance refers to the extension of Open Banking-like data sharing to a wider range of financial products, such as savings, investments, pensions, and insurance. Open finance enables consumers and SMEs to access and share their data with third-party providers outside banking, which can then use that data to develop innovative products and services which meet consumers’ current and future needs. The idea is greater ownership and control of consumers and SME's over their data.
Open Finance could potentially offer significant benefits to
consumers, including increased competition, improved financial advice, and
improved access to a wider and more innovative range of financial products and
services. The FCA also sees this as an opportunity to enable access to
creditworthy but previously excluded consumers to financial services such as
credit.
In addition to consumers, SME’s would also benefit from open finance,
by improved integration
of payment, accounting, and lending platforms for internal management, leading
to greater cash flow control. SME's could better compare the products and
services available to them from a range of providers, and through this avenue,
they would benefit from greater access to commercial lending.
Overall, both consumers and SME's could gain access to a wider range of products and services, have greater control over their data, and could potentially better engage with their finances.
However, Open Finance would create or increase risks and raise new questions especially around data protection and digital identity. However, the FCA is also concerned that Open Finance would create or increase risks and raise new questions especially around data protection and digital identity. Further digitalization might deepen the exclusion of some consumer groups such as those that are less digitally savvy and greater responsibility might result in a choice of inappropriate or even dangerous financial products. The initiative will therefore have to be followed by an appropriate legislative and regulatory framework, common standards, and a designation of an implementation entity, as for Open Banking.
There is no doubt Open Finance could be highly beneficial for consumers, however, with greater control comes greater responsibility, and the big question from a consumer protection perspective is, are consumers ready to take this on?
