Speech by Sheldon Mills, Director of Competition at the FCA, delivered at The Investments and Savings Alliance (TISA) Open Finance Conference, London.
Speaker: Sheldon Mills, Director of Competition
Event: The Investments and Savings Alliance (TISA) Open Finance Conference
Delivered: 18 November 2019
Note: this is the speech as drafted and may differ from the delivered version
- Open Finance has the potential to improve access within Financial Services, and could substantively change the nature of competition.
- Open Finance is part of a broader data-sharing initiative and will require coordination and consistency across sectors.
- We want Open Finance to develop in a competitive environment where the right incentives exist for all players to participate, and which delivers good outcomes for consumers.
Open Finance is an area of significant interest to the FCA, and today I’d like to highlight the opportunities it provides businesses, consumers and the regulator. I’d also like to touch on some of the challenges we observe, some of which are already materialising, others on the horizon, and the possible solutions to those challenges.
It’s no small task to predict the future of financial services, particularly in the current climate of uncertainty, but there are certainly key themes that we can and should be aware of. The emergence of Big Data. Personalised pricing. Trust-less Markets. These are all factors which, handled incorrectly, could pose significant harm to markets, consumers and enhancing competition in the interest of consumers. But if they can develop in the right framework, these trends could provide significant benefits to the financial services sector.
Amongst the wide set of solutions offered by concepts like data portability and Digital ID, Open Finance is emerging as one of the key avenues to realising these benefits. It has the potential to improve the way consumers and small and medium-sized enterprises (SMEs) manage their finances, to improve the way firms interact with each other and with their customers, and to transform the face of competition in financial services markets. And speaking to a group of individuals who are thinking intensely about what Open Finance technology can deliver for UK financial services, I’m sure you’ll agree, that’s just the tip of the iceberg.
The potential for Open Finance underpins its appeal to firms, consumers (and regulator) alike. It’s why we’ve included Open Finance in our 2019-2020 Business Plan, and why we’ve taken such a proactive approach in engaging with industry on what it could look like in practice. As the vision for open finance evolves, it’s crucial that we ensure the industry has the space and right environment to help develop concept into reality. TISA’s event today is a great example of this.
As the sector regulator, the FCA is keen to engage with Open Finance in a way which unlocks consumer benefits and balances the potential risks. But that challenge is not just one for financial services alone. Ultimately, the rationale for this position lies with the benefits we see Open Finance delivering, and the potential challenges we can see a role for us in mitigating.
The Benefits of Open Finance
But what do we mean by Open Finance? Open Finance is an opportunity. An opportunity to build on the conceptual framework of Open Banking and allow consumers and SMEs to access and share their data with third party providers who can then use that data to develop innovative products and services which meet their needs today and in the future.
Many of you will be aware of how the 'nuts and bolts' of Open Finance could work in practice. Taking our cue from Open Banking, we think about Open Finance in terms of open Application Programme Interfaces (APIs). These APIs allow Third Party Providers to create financial products, services and applications which leverage user data - provided with consent - to share across verified firms. But Open Finance also captures a desire to consider the role of transparency in data usage, storage, and portability which could unlock benefits for users and providers across the suite of financial service products.
Moving away from the detail for a moment though, even the simplest exposition of the potential for Open Finance is a powerful example of how it could change the consumer financial services experience: Imagine one morning on your way to work you open an app that shows you the history and insights of every financial product you own. Your current account history and spending habits. Your savings and investments. Your mortgage balance and projected pension pot. All in one place. All a couple of button clicks away.
Now you’re all extremely familiar with that example. Conceptually (if not practically) it’s been done to death. But it provides a very simple and powerful exposition of one of the core benefits of Open Finance: Access. Access to information. Access to advice. Access to your products whenever, and wherever you want them. Why is this so important to us?
Well, take our portfolio of Competition work. Over the last 5 or so years, we’ve looked at 10 markets across retail and wholesale markets. Now, one of the consistent defining features of retail markets, is that some consumers are less engaged than others. This poses problems for public policy. It opens up debate on the role of consumer decision-making in financial services, and the implications of where the responsibility for those decisions lies: firm or consumer? Recently, consumers have taken on the lion’s share of the responsibility, and with that shift comes the difficulty around making the right choice.Or should I say, the most suitable choice, the choice that is most aligned to a consumer's needs and desires. Now, on the one hand, of course the consumer is the best judge of this – no-one, (not even the regulator), knows better in this regard. But it would be unrealistic for us to say that those decisions are easy.
Our pioneering work in the field of behavioural science tells us that consumers are susceptible to behavioural biases which make financial decisions particularly complex and challenging. Frankly as soon as I walk out of the building and my mind is off the job I probably succumb to every behavioural bias the FCA has identified. And these challenges are further amplified when we realise that our typical approach to mitigating these biases (mostly disclosure remedies), is relatively ineffective in helping to improve consumer decision-making. But Open Finance has the capability to transform that decision-making process. It has the potential to drastically increase consumers’ access to information about their products and spending habits. And in doing so, it could significantly alter the way we think about remedy-design and disclosure remedies in the presence of behavioural biases and consumer disengagement.
[Open finance] could significantly alter the way we think about remedy-design, and disclosure remedies in the presence of behavioural biases and consumer disengagement.
As we consider our regulatory toolkit through our assessment of the 'Future of Regulation', the possibilities Open Finance could offer in unlocking new ways to use our pre-existing tools will become increasingly important. But aside from the improvement to our pre-existing toolkit, there are also the ideas that could change the consumer experience, and indeed the trajectory of their lives entirely, particularly for those at the fringes of financial services.
We could see previously excluded, but creditworthy, consumers gaining access to cheaper credit, and feeling empowered to interact with other financial services sectors. And you can start to see how this evolves into a package which works in the interest of consumers: advice, frictionless changes between products, information on spending whenever you want or need it. All of which happens with full responsibility and, potentially, control resting with the consumer. As consumers become responsible for more of their own financial decisions, advice becomes especially important. It’s something the FCA has been considering very carefully in our Retail Distribution Review and Financial Advice Market Review. Advice should be easy to understand and accessible at any time. Harnessing the data which open finance could provide, means more individually tailored advice can be given to help consumers manage their financial responsibilities. But of course, it’s not just consumer benefits that prompt our interest in Open Finance.
The UK has been praised for its leadership in the development of Open Banking, and we can build on that reputation to be known as a place where small businesses can thrive.
Small and Medium Enterprises (SMEs) also stand to benefit. Open Finance would allow improved integration of payment, accounting, and lending platforms for internal management, leading to greater cash flow control. They 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. The UK has been praised for its leadership in the development of Open Banking, and we can build on that reputation to be known as a place where small businesses can thrive.
Challenges on the horizon
So, I’ve touched on the benefits which Open Finance can bring, but it’s worth turning our attention to some of the challenges it might create. Many of these issues are not new. In fact, in many cases, they are issues the FCA is currently grappling with, or attempting to proactively address. And we can think about them across broad thematic categories. First considering consumer protection, we can think about 'Fairness in Price Discrimination', something that has been in focus for the FCA for the last couple of years.
With greater access to a wider range of data, the potential for Open Finance to help facilitate personalised pricing to almost an individual basis could result in winners and losers: some may see more competitive outcomes while for others, their personal data leads to greater discrimination.
Automatic enrolment and switching are interesting case studies of this in practice. How much responsibility should sit with the consumer in making switching or enrolment decisions, when product providers can use automation to reduce frictions in a switching process, but potentially do so based on a consumer’s propensity to switch. Sticking with the consumer protection lens, we also must continue think about vulnerability in a dynamic context.
Affinity with technology, while important now, may become one of the key characteristics of vulnerability as we transition into Open Finance. Access gaps may emerge between the technologically savvy and those who cannot adopt those technologies. Access to markets, and market structures feeds into a consideration of how markets and Competition will function in practice within an Open Finance environment. Take insurance for example, where pooling of risk is critical to delivering insurance for those most at risk. This could be threatened in a world where those consumers are priced out of the market. But we clearly need to look beyond our traditional regulatory economic framework to consider emerging challenges.
For example, in light of the changes in access to data and sharing of information, we cannot lose sight of the ethics of data usage. It is crucial that we ensure data is held securely and used in an ethical manner. Of course, there is a challenge there for the FCA as a regulator to help firms to understand what ethical data usage looks like in practice. And also, a responsibility for us to work with partners such as the Competition Markets Authority and Information Commissioner’s Office who have interests and powers in this space. But there is also very clearly a role for industry to think about how they ensure the correct protection and usage of consumer data is in place to help develop and maintain trust in the system.
This is particularly important when we think about how consent works in an Open Finance environment. Consumers should be able to see where their data is, understand with whom it has been shared, and retain the power to easily revoke their consent at any time. And that’s just the start. How do we then reconcile the principle with the practicalities, the fact that revoking the consent doesn’t erase the data which has already been shared? We must also remain mindful that with increased data sharing, the potential for increased risk of scams and fraud is a very real consideration. This is something we can and have thought proactively about, and I’ll touch on it briefly later.
Consumers should be able to see where their data is, understand with whom it has been shared, and retain the power to easily revoke their consent at any time.
Equally, the challenges are not purely focussed on consumer outcomes, but also on the nature of competition and the journey firms may need to take to adapt to Open Finance. The cost of infrastructure may be daunting for firms who are already facing cost-cutting measures and tighter bottom lines. Of course, this a decision for firms which will be balanced against the benefits and incentives, something I’ll come to later. But within this challenge lies an opportunity: the opportunity to use pre-existing advances in technology and developments across sectors to help realise our ambitions for Open Finance. The obvious starting point for this discussion is Open Banking.
Lessons from Open Banking
We want Open Finance to develop in a way which works in the interests of consumers, which mean that Open Banking can and should be part of the Open Finance journey. As many of you are aware, Open Banking was launched within PSD2, and it fits squarely with the FCA’s objective to promote effective competition in consumers’ interests. Banking is an interesting competition case study: consumers tend to stick with the same current account provider – and often opt to take other financial products out with the same provider. And while that doesn’t necessarily imply poor outcomes for consumers, it is not good for incentivising competition.
The presence of competition is what ensures all firms have the incentive to innovate and improve their product offerings to customers. Open Banking’s ambition is to improve the consumer experience and the value they get from banking services by encouraging secure sharing of data with third party providers with consumer consent. To date, we’ve seen over 135 entities which the FCA has approved to provide Open Banking-enabled services to consumers and SMEs. This includes banks providing the API technology, as well as third party providers leveraging the technology to provide innovative financial solutions. While we’re still in the 'early adopters' stage, research in 2018 suggested that 84% of financial services companies are investing open banking products and services. This is obviously encouraging in the longer term, but does mean from an outcomes perspective, we are yet to see the realised benefits of Open Banking for consumers.
However, there is still a key lesson we can draw from its implementation at this stage: Consistency. From a regulatory perspective, consistency is crucial to the development of Open Finance. Now, I’m not going to discuss all aspects of this, but I’d like to spend a little bit of time on 3 key areas: consent management, digital ID verification and cross-sectoral consistency. I discussed earlier, the importance of consent and consent management. This is a prime example of where consistency needs to be applied.
We need to ensure that consent management tools are properly applied across sectors to ensure that consumers’ expectations on how their data are used and handled are met. An inconsistent approach in this regard could undermine the benefits of data-sharing. Consumers should not have to track through multiple dashboards to understand where their data has been shared, while we simultaneously promise them simplified access to their financial data. Similarly, on digital ID verification, the basic building blocks have already been established by Open Banking.
Open Banking’s APIs enable authorised or registered third party providers to access their customers’ account information and make payments on their behalf. Now, it’s not going to be as simple as 'copy and paste' across the rest of financial services, and I don’t claim to be an expert on the underlying technology behind Open Banking. But in its simplest form, Open Banking demonstrated a practical solution for how data could be securely shared with third party providers. In doing so, it has built the rails for a whole host of potential third-party applications in the financial services space. But consistency, again, is key.
Not just for consumers to be reassured that their data is protected to the same degree with every Open Finance application they use. But also for firms, for third party developers, who have a clear framework within which to develop their applications, safe in the knowledge that their product will be universally compatible with a robust set of standards for security and data management.
The development of Open Finance gives us the opportunity to consider both 'public', and 'private' solutions to the challenges of digital ID verification, above and beyond the authentication requirements of PSD2. For instance, Sweden has adopted Bank ID that allows companies, banks and governments agencies to identify and conclude agreements with individuals over the Internet in a simple, secure and consistent fashion. Originally designed by Swedish banks, it has been adopted by the Swedish government. Ultimately these considerations within the UK context are not for the FCA to develop, and are not for comment.
While verification helps us to tackle fraud, we should also think about the consistency in our approach for more general issues and complaints arising with Open Finance technology. There should also be a clear and consistent liability model – where not only the consumer knows who to complain to, but all actors in the ecosystem know who is responsible for the data and at what point, and when their liability ends. I briefly discussed the threat of fraud and scams earlier, but with these models in place, firms and consumers can feel comfortable that their data will be protected against fraudulent activity through measures like the ones required in Strong Customer Authentication (SCA).
SCA is a key part of PSD2 which strengthens payment safety across all sectors. We should make sure we think carefully as a regulator, and as a sector, about the lessons we can apply from it to Open Finance. This is essential in ensuring that fraud and scams do not become the primary blocker. Whether that be in Financial Services or in other sectors. But this takes me onto my final point on consistency: this is not just a challenge for UK financial services. Co-ordination is essential, not just from industry’s perspective, but across regulators, government bodies, and internationally.
Co-ordination is essential, not just from industry’s perspective, but across regulators and government bodies, and internationally.
An idea this big cannot be siloed in its development. While the FCA has highlighted the benefits for consumers and competition The Bank is currently considering how Open Finance can deliver benefits for SME finance. And the Government’s 'Smart Data Review' is the prime example of how we should be thinking about how data portability can improve the consumer experience across all sectors of the economy.
The truth is, we are already seeing fantastic industry initiatives across sectors, but we need to make sure that trend continues. TISA’s own work through the Open Savings and Investments project is a demonstration of how consumers can view their savings, investments and debt in one place, and use this data to access advice and guidance. But financial services, and the financial services regulator, are not the only actors in this space. The World Economic Forum is currently exploring mobile verification instead of a passport. And, imagine closing the Gender and BAME pay gaps across international labour markets with the help of open wage data.
We are already seeing progress in data sharing both inside and outside the UK. Singapore have recently published an API playbook to support data exchange, and Japan have established an authorisation process for third-party platforms, requiring banks to contract with at least one of these platforms by 2020. Australia is finalising their Consumer Data Rights Act, which will allow consumers to share their data with whichever authorised third parties they choose. But we need to ensure that we remain plugged into these international discussions as they set the tone and future for the realisation of cross-sector, and international data sharing. Take the development of Open Banking in the UK compared to China for example: a mandated, standardised process in the UK, contrasted with an organic decentralised development in China. Neither approach will be the panacea, but we need to have the foresight to consider how these national ecosystems will need to interact on an international scale, and how the method by which Open Finance develops in different jurisdictions may affect their compatibility with each other.
Incentives for Open Finance
So, I’ve set out some of the over-arching challenges for us as a regulator, and for regulators in other sectors and in the international sphere. But it’s equally important to think about what the incentives environment for Open Finance looks like. What I mean by this, is what will drive firms to share consumer data, for other firms to provide products using this data, and consumers to adopt these products, and what are the barriers in all these cases. Our role as a regulator then becomes a discussion of whether those incentives and blockers will lead to an organic development of Open Finance which works in the interests of consumers, or whether we need further regulatory steps. This is a complex consideration. From both firm and consumer perspective, we should consider the blockers and friction to sharing data. For example, on the firm side, sharing consumer data might be in tension with their commercial interest.
Firstly, there is the threat of a narrow scope for Open Finance. Narrow scope could stop firms from offering commercially viable product offerings which work in the interests of consumers at the expense of a simple ecosystem. And of course, the cost of investing in the relevant infrastructure to share data could be very high. This leads to interesting considerations about the incentive for data sharing in the first instance, but also reciprocity between firms. There are first-mover advantages to sharing data for firms as part of shaping the emerging Open Finance ecosystem and protecting themselves from the dynamic threat of technology-based challengers. Equally, there are disadvantages if no-one follows suit.
It’s also important for us to think about how monetisation of Open Finance business models might work in practice, and how that monetisation can practically work in a data-sharing environment.
On the consumer side, we need to think carefully about the incentives to share the data. This takes us back to the discussion of privacy, security, and trust in the system. When consumers consent to share their data, they will often consider the potential costs of sharing their data against the perceived benefit. In the short term, this is clearly a challenge. Without realised benefits, this is currently a very one-sided consideration. And finally, there’s the interaction between the consumers and firms.
Here, there needs to be a discussion of whether we think it’s supply that will drive the demand for Open Finance solutions, or whether we need demand for Open Finance products to incentivise the development of those solutions. As with any market, there is no doubt some simultaneity, and there will be variety across use cases. The point is that understanding the incentives environment is crucial to understanding how Open Finance could continue to develop organically, and where, if at all, external bodies need to get involved.
The Role of the Regulator
So, where does this leave us as a regulator? What role does the FCA play? The FCA has the benefit of balancing consumer protection, market integrity, and competition in its objectives. This allows us to think holistically about the sort of environment we want Open Finance to create for Financial Services Participants. Within those overarching aims we have a clear desire to understand how Open Finance will develop in a way that can benefit consumers. In practice, this will lead us to some of the questions I have discussed today:
- How should data be used?
- Who should have access?
- What happens if data is misused?
But beyond the practicalities, there are some high-level questions to be asked about how the FCA ensures Open Finance delivers good outcomes for consumers. Given my role, it’ll be no surprise to you all that I think the Competition angle here is extremely important, and my earlier discussion of the incentives framework is a key component. The FCA needs to carefully take stock and figure out where, if at all, we need to help foster an environment of healthy competition, which has the right balance of consumer protection and encourages organic innovation.
Of course, we can’t do that on our own. As many of you know, we have set up an Advisory Group, comprised of industry experts, consumer and business representatives, academics, and members of the government. The group is currently considering how Open Finance will develop, including the barriers to development, and ethical and practical issues around data sharing I’ve discussed today. Additionally, we will be publishing our call for input at the end of the year and encourage you to be part of the debate on open finance by reading and responding to it.
Your input will be crucial in helping us understand how we can best contribute to the wider project. This process may be highly iterative, but we believe that the benefits to be gleaned from Open Finance are worth the effort for the consumers and markets we serve.