What is open finance?
13 March 2020
24 March 2020
Open finance could be the potential for financial services to provide better access and services to consumers and businesses.
A Call for Input was recently announced by the Financial Conduct Authority (FCA) into open finance. Using open banking as its model, this is an emerging market that came into place in September 2019. It enables customers to consent to third-party providers (TPP) accessing their payment account information and or making payments on their behalf.
Open finance will work similarly, encouraging better competition, developments and innovation in financial services, According to the FCA:
“[Open Finance is 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.”
The FCA’s vision for open finance is:
1. Consumers and businesses:
- can grant access to their data to trusted third-party providers (TPPs) and in return gain access to a wider range of financial services/products
- have greater control over their data
- engage with their finances, and are empowered to make better financial decisions
2. Increased use of open finance services spurs greater innovation, benefiting consumers by providing a broader range products and services that better suits their needs.
3. Widespread use of new services improves the financial health of consumers and businesses in the UK.
The Call for Input is relevant for the following:
- banks, building societies and credit unions
- consumer credit firms
- electronic money and payment institutions
- financial advisers
- fintech and innovative businesses
- general insurers and insurance intermediaries
- investment managers
- life insurers and pension providers
- mortgage lenders and intermediaries
Some of the benefits open finance aims to have include consumers being able to engage better with financial products and how to make more informed decisions. This will be made possible by being able to compare products and services in a more convenient way, such as PFM dashboards. By making it easier to share financial information with advisers, customers should feel more empowered aby the decisions they make about what products they choose and why. This could also open up automated switching and renewals so that there’ll be less friction if customers want to compare products. Accurate creditworthy assessments and increased access to credit will mean that third parties can see overall cash flow and identify suitable credit. Similarly, this could also be of benefit to Small and Medium Enterprises (SMEs) who could see improvements to lending platforms for internal management, leading to greater cash flow control.
Some of the current developments include:
- GDPR – getting the data portability right
- Smart data – encouraging consumers to share their data across markets
- Pensions dashboard – providing consumer access to their pension data
- Industry APIs – Developing application programming interfaces for banks and trading bodies
- Open banking – Opening up banking data
As part of the Call for Input, the FCA want to learn how financial service providers and consumers would use open finance and what their concerns are. Maintaining good compliance with GDPR is one such concern. With news of cyber attacks and data breaches occurring daily, the responsibility to store and process data properly will broaden due to the amount of potential data shared. Data could also be misused if it is not shared properly or kept up to date, therefore providing incorrect advice or information.
There is also the question of how accessible terms and conditions are, specifically for vulnerable customers who may not have appropriate products and services clearly available or signposted. As with price comparison websites, the focus is sometimes solely on the cheapest cover and not if it is the most relevant product. The input of firms is also important as their lack of participation could mean that certain products and services are not included, therefore leading to poor consumer outcomes.
At present, initial stakeholder engagement has identified four concerns:
- Incentives – Will open finance develop without intervention? Crucially, do the incentives exist for firms to share their data?
- Feasibility and cost – Can all firms develop and offer the access needed to support open finance? What are the costs and barriers involved with investing in a new system?
- Interoperability and cohesion – What common standards are required for open finance to develop?
- Underpinned by clear data rights – Is an adequate framework of data rights in place? If not, what would it be, and how would it be provided so that consumers are protected?
The FCA’s role in driving forward open finance will be to explore the following:
- develop draft principles and drive their adoption
- support and recognise industry codes of conduct
- provide industry forum to identify opportunities and risk
- identify regulatory and commercial barriers
- support development of common API standards
- consider if existing regulatory framework supports open finance
- create new rules
The deadline to reply to the Call for Input is 1 October 2020.
Alternatively you can respond by email or in writing to:
Strategy & Competition
Financial Conduct Authority
12 Endeavour Square
This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.