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Open banking will require new approach to regulation and consumer protection, says report

A new report has flagged the opportunities 'open banking' will deliver to consumers, in terms of opening up access to new products and services, but confirmed the need to protect and educate consumers against the risks associated with the new offerings, an expert has said.

Specialist in financial services and technology Yvonne Dunn of Pinsent Masons, the law firm behind Out-Law.com, said it is important for policy makers, regulators and industry to understand the consumer issues identified in the report, which was commissioned by Barclays and authored by former government advisor Faith Reynolds.

"The report confirms that there are fantastic opportunities for industry associated with open banking, but it is good consumer outcomes which will ultimately determine whether the initiative is a success," Dunn said. "There is a need to help consumers understand the opportunities of open banking, to build their trust, and offer reassurance over issues such as privacy and rights of recourse if things go wrong, if the benefits identified are to be realised."

In her report (32-page / 7.99MB PDF), Reynolds set out a number of recommendations intended to address the potential risks of open banking and ensure the possible benefits are not missed.

Reynolds said open banking can bring potential benefits to consumers, including helping them to aggregate their financial products in one place, providing them with insight on spending patterns and making recommendations to them on how to save money. It can also spur more personalised services and widen consumers' access to financial products, including credit, debt advice or financial advice, she said.

However, Reynolds' report also warned that open banking might "create more conflicts of interest, exploit asymmetries of power or exacerbate digital and financial exclusion". It said that the "convenience, speed and simplicity" that open banking will provide for "may come at the expense of losing more control of our money and data, a reduction in privacy or security and a more complex marketplace".

Reynolds, who is involved with a number of industry bodies, including the UK's Payments Strategy Forum and the Financial Innovation Standing Committee Consultative Working Group at the European Securities and Markets Authority, warned that open banking could bring with it "conduct risks". She called on the Financial Conduct Authority (FCA) to "publicly discuss its understanding" of those potential conduct risks and "how such risks could be mitigated to inspire confidence, working with other regulators where appropriate".

Reynolds also called on the FCA to work with other UK members of the UK Regulators Network to "assess regulatory requirements for third party providers in the new open banking environment".

In addition, the FCA should carry out a holistic review of "the interplay between the business models used by established players versus new entrants, level the playing field and get rid of conflicts of interest which harm consumers", the report said. The regulator should monitor how lenders make use of "transactional data" to make sure those firms are using the information "responsibly", and check that consumers who withdraw their access to their data "are not penalised", it said.

Reynolds, whose report was informed by her engagement with consumer and industry experts, said success for open banking should be defined by the Competition and Markets Authority (CMA) in partnership with the FCA and Treasury. "Special attention" should be paid to "more vulnerable groups like those on low incomes or young people", she said.

Her report further called on UK regulators to collectively "outline liabilities clearly and ensure that there are no gaps ‘between’ markets" so that consumers can "access redress freely, simply and without difficulty regardless to whom they complain".

It also identified a need for a new "clear cross-cutting strategy" from UK regulators on how they will collectively "regulate in a new data driven economy". The strategy should address "data sharing, new value chains and consumer manipulation", as well as issues of data ethics, it said.

There are a number of different initiatives underway that promote open banking, which broadly refers to the use of application programming interfaces (APIs) to link systems and services in the financial ecosystem together to harness, with customers' consent, customer data that is otherwise siloed.

Open banking initiatives include the move by the UK's Competition and Market Authority (CMA) to help businesses and consumers share their own current account data with other banks and third parties, and to manage multiple providers through a single platform. It also encompasses reforms under the revised EU Payment Services Directive (PSD2), which is designed to help new payment initiation and account information services emerge in the payments market.

"To maximise the potential of open banking and to address the concerns … it requires action: new approaches to regulation, strategies for protecting consumers in the new data-driven economy and transparency from government about how it uses our data," Reynolds said.

"Open banking offers exciting and powerful ways to reshape people’s and businesses’ experience of financial services," she said. "But it’s not the only thing on the horizon. Open banking and the sharing of transactional data gives impetus to other markets, the internet of things and artificial intelligence. The world about us is changing and it requires action from everyone."

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