Caroline Stevenson, Head of Financial Services Regulatory Team, Burness Paull
The FCA has recently published a feedback statement (FS 21-7) summarising the feedback they received from their Call for Input looking into the opportunities and risks posed by open finance. In the industry, we sometimes see the phrases “open banking” and “open finance” used interchangeably so you may ask yourself, what is the difference?
Well, there is actually a fundamental difference between the two – one already has a legal and regulatory framework supporting its roll out and the other does not.
Open banking was developed to increase competition and innovation in the banking industry. This was underpinned by the CMA Order and the pioneering second Payment Services Directive (more humbly referred to as PSD2). It was then delivered in the UK via the Payment Services Regulations 2017.
Through the plumbing that financial institutions were required to implement under the Regulations, customers are now able to consent to third party use of their payment account information and can also let some of those parties undertake payments on their behalf.
The growth of Scotland’s FinTech community has been partly fuelled by the opportunities created by open banking and we’ve seen an insurgence of new companies being established to provide services like aggregation, credit ratings solutions and charitable donation companies to name but a few. Open banking has clearly been a huge asset for Scotland’s financial services innovators.
So, how is this different to open finance? Well, the UK Government and Regulators are working on this as we speak but in essence, open finance looks to build upon the concept of open banking to permit access and sharing of customers’ data in relation to other types of financial products and services.
The problem with open finance is, unlike with open banking, through the requirements under PSD2, there is no safe legal or regulatory framework for this to take place so different segments of the financial services sector are working on different initiatives to make this work.
Whilst this looseness ensures there is plenty space for creative thinking and gives different players the ability to come up with standards and best practice to meet their needs, any creativity will ultimately be hindered without a relevant framework being put in place to support this.
As such, the FinTech community and consumer groups should be encouraged to put pressure on the Government and Regulators to legislate in this space. For customers, the benefits of having the ability to use aggregation services to look at, not only their payment accounts, but also their savings, insurers, investments, credit companies, mortgages and business lenders would be invaluable. And, for FinTechs the opportunity to innovate to create products that can facilitate this is really exciting.
The FCA has intimated that their next step is to work with BEIS and the Treasury to form a view of what work is needed to inform judgments on the feasibility, timing and design of any secondary legislation relating to open finance. This work may include working with industry to create a bespoke open finance roadmap to take into account the relevant considerations required to make open finance a success. To find out what the key considerations are, keep your eye out for our next post in this series.
Other webinar panelists include Oli Henderson, Associate Partner, Financial Services – Transactions and Strategy, EY, Daniel Broby, Director, Centre for Financial Regulation and Innovation, Strathclyde University, Nicola Anderson, CEO, FinTech Scotland and Nicki Bisgaard, CEO, EedenBull & Chairman PayTech Group.