The FCA’s long-awaited feedback statement on open finance has been published. Findings from December 2019’s call for input suggest that, although there is a place for a regulatory framework to set outcomes, the best way forward is via industry-led phased implementation based on credible use cases. Taking account, among other things, of the on-going impact of the COVID-19 pandemic on firms’ resources, a ‘big bang’ approach to open finance is neither ‘feasible [n]or desirable’. This ties in with the Kalifa Review of UK FinTech, which recommends progressing open finance as a mandatory regime with phased implementation as one of the strands of a wider project to develop and implement a data strategy. Firms should be ready for more engagement with the FCA on its feedback statement in the coming weeks.
Long-awaited and much-delayed, the FCA has finally published its Feedback Statement in response to its December 2019 Call for Input (CFI) on Open Finance. But was it worth the wait?
What is the key message?
In short, Open Finance offers huge potential but massive challenges. The FCA is keen to support and promote it but seems to prefer the industry to take the lead, whilst recognising that only a legislative framework, compulsion and common standards will truly unlock the potential.
What are the FCA’s key findings on open finance?
Some of the key findings that the FCA draws out in its feedback statement are:
- Legislative compulsion as a catalyst for industry action A legislative framework would be needed for open finance to develop fully, both to provide any statutory right to data access and to support a regulatory framework. Respondents pointed out that the full benefits of open finance would require full participation, and that this would ultimately require legislation or regulation as a catalyst for industry-led arrangements.
- Building blocks for a sustainable open finance ecosystem In addition to the regulatory framework, the following building blocks would be needed for a sustainable open finance ecosystem to develop – either in support of voluntary adoption or to support future legislation:
- consumer protections informed by an ethical framework;
- a liability model;
- common standards (for APIs and user experience);
- an implementation entity that is funded and governed equitably; and
- a digital I.D.
- Commercial incentives are crucial to success Even if mandated by legislation, the right commercial incentives for firms to invest and participate on a sustainable, and probably reciprocal, basis are central to ensuring the success of open finance.
- The importance of customer buy-in Consumer sentiment and awareness was identified by respondents as the biggest single barrier to customer uptake of Open Banking. The FCA recognises that open finance would create or increase risks and raise new questions of data ethics – including in relation to vulnerable and digitally excluded consumers – which need to be considered from the start as part of any system design.
- Implementation driven by compelling use cases The FCA recognises that a ‘big bang’ approach to open finance is neither feasible or desirable. Many respondents highlighted the need for a phased delivery with a transparent approach to understanding industry costs and clear governance, and broad industry consultation to support the development of any open finance roadmap and its accompanying ecosystem, including API standards and specifications. With the above in mind, and in recognition of the fact that ‘open finance, though transformative, could be a significant undertaking for firms’ in terms of technology, business and regulatory costs, the FCA has found that implementation of open finance should be:
- phased; and
- ideally driven by consideration of credible consumer propositions and use cases (ie balancing the cost and complexity of implementation with the potential consumer benefit).
Draft principles for open finance
- Respondents generally agreed that the FCA’s draft principles for open finance in the CFI were a good starting point to underpin an open finance ecosystem.
- The draft principles include users’ right to share their data and TPP right of access. Many respondents also suggested an additional ‘reciprocity of data provision’ principle, under which any firm that wants to access data under an open finance framework should have to share equivalent designated data that they hold.
- However, respondents highlighted that further work would be required to translate the principles into actionable change and associated regulation, and firms would want clarity on the interplay between these and the existing FCA Principles for Businesses, any new consumer duty of care and any potential overlap with the ICO’s responsibilities.
- The FCA explained in its CFI that a final set of principles could be developed in partnership with the government, following consultation with a broad cross-section of industry and, if appropriate, recognised by the FCA.
The wider context: Smart Data and open finance
- The FCA points out that progress has been made on several open finance and open data-related government and industry initiatives since it published its December 2019 CFI asking for views to inform its regulatory strategy on open finance.
- Of particular importance to the development of open finance is the Department for Business, Energy and Industrial Strategy’s (BEIS) 2020 announcement that – when Parliamentary time allows – it will introduce primary legislation to make it possible to require industry involvement in Smart Data initiatives, including open finance.
- The mandating of specific Smart Data initiatives, and aspects of their design, will be done through secondary legislation which, for open finance, would be led by HM Treasury (HMT).
- Progressing open finance as a mandatory regime in alignment with other Smart Data initiatives is one of the recommendations in the Policy and Regulation chapter of the recently published Kalifa Review of UK FinTech. Rachel Kent of Hogan Lovells is the vice-chair of this chapter alongside the Chair, Dr Kay Swinburne. Take a look at the recording of our recent webinar on the Kalifa Review and open finance for more on the Review’s recommendations.
The feedback statement sets out a number of proposed next steps for the FCA, including:
- Co-ordination: Working closely with BEIS and HM Treasury to consider feasibility, timing and design of any secondary legislation. Linking with the Pensions Dashboards Programme and continuing to engage with the Digital Identity Unit to support the development of a secure and reliable digital identity ecosystem.
- Common standards: Encouraging firms and TPPs to work together to identify a minimal set of data that could be shared on a ‘read’ API basis. These data sets should be informed by credible consumer propositions and use cases.
- Future of OBIE: Working closely with the CMA and the Treasury on the results of the CMA’s March 2021 consultation on the future operating model for the OBIE to ensure that the future entity is flexible enough to respond to any future legislative requirements, open in terms of participation and funded equitably and sustainably.
- Regulatory Sandbox: Encouraging applications by open finance and digital identity propositions for sandbox and direct support.