Open banking has seen a surge in interest, investment and innovation, as monthly active user rates doubled during 2020 and the UK’s authorised third-parties nearly doubled over the same period. However, the UK’s Open Banking framework is in a state of flux as the old body in charge of its implementation is being phased out; one possible successor is Open Finance.
This is the view of Nick Caley, Vice President of UK and Ireland at ForgeRock. Caley advises global clients in industry and government on security strategy and digital transformation focused on hybrid data architectures and data-driven business models.
As ForgeRock’s VP of UK and Ireland, Caley has worked with regulators like the OBIE and businesses such as Yapily and HSBC on Open Banking matters, so he is well-placed to discuss what regulators need to do to ensure Open Banking’s adoption, the potential aims of the Future Entity including an expanded remit to Open Finance and the issues and pitfalls raised during the consultation period:
In 2021, UK Open Banking will undergo its biggest shakeup since its inception – and perhaps not a moment too soon.
Building on years of similar criticism, Starling CEO Anne Boden in October castigated Open Banking as a failure – “it has not been a success” – in an appearance before the Treasury Committee.
However, there is an opportunity for real change on the horizon. As part of its responsibilities under the Retail Banking Market Investigation Order (the Order) in 2017, the Competition and Markets Authority (CMA) is currently reconsidering the whole framework for the delivery and implementation of Open Banking in the UK.
Among the mooted changes is a possible replacement of the Open Banking Implementation Entity (OBIE), the body directly responsible for Open Banking’s rollout, with a new regulator or merging its responsibilities with an existing one, like the FCA.
Among the fintech and banking community, nothing is liable to polarise opinion as much as Open Banking. For its proponents, Open Banking (and the OBIE) has created a flourishing and world-leading ecosystem with 700 market participants. But its critics point to its slow growth rate and the considerable upkeep costs.
For the CMA’s part, it believes that “the core elements of open banking are now in place” but it also tellingly warns that “it is not inevitable that it will continue on the same trajectory.”
The shape of the new regulatory framework for Open Banking will play a large part in either continuing the upwards trajectory or arresting its growth. In the end, consumers will be affected, for better or worse.
So what comes next after the OBIE?
The outsized role of regulators on UK Open Banking
Regulators have always had an outsized role in the development of the UK’s Open Banking ecosystem. The whole system resulted from a significant market intervention by regulators after all, kicked off by the Order. The “regulatory foresight” of the Order has now been proven.
Due to this arrangement, regulatory oversight is a cornerstone of the framework in which the OBIE and UK Open Banking ecosystem operates. Currently, the Implementation Trustee has a dedicated monitoring function, tasked with ensuring that the CMA9 are complying with the Order and that the broader system is operating as desired.
To date, this arrangement (though not perfect) has ensured that the CMA9 has largely acted in the interests of the broader ecosystem. Given their £26million contribution this year to the upkeep and promotion of the ecosystem, they may feel that they are entitled to benefit more than they currently are, however. The omnipresent danger is that the CMA9 begins to put their commercial interests ahead of the ecosystems.
The CMA is aware of this as a systemic risk that needs to be mitigated: “Further [Open Banking] innovation may be stalled where there are conflicts with banks’ commercial objectives.”
Perhaps understandably, this is somewhat of a red flag for UK fintechs. It was one of the key concerns raised through Innovate Finance, which represents the community, in its response to the CMA.
Right now, regulatory oversight of the OBIE and CMA9 is tied to the monitoring and enforcement of the Order itself, raising the possibility that the oversight currently in place will be decoupled from the future entity under UK Finance’s proposed transitional plan.
The needs of the ecosystem are evolving beyond the scope of the Order but this is one aspect of the current arrangement that should be carried over in some way if only to allay the concerns of other parties involved in the ecosystem.
If the scope of the future entity expands to Open Finance other regulators like the FCA could also have a monitoring and oversight role. Either way, there must be a clear and strong regulatory framework for Open Banking moving forward.
Is Open Finance the future of Open Banking?
Consumers are demanding more control and clarity over their overall financial health – beyond just banking. In the words of UK Finance, “consumers do not see the relevance of the PSD2 boundary to their financial lives”.
This raises the question: should we leapfrog Open Banking altogether and focus on kickstarting Open Finance instead?
The FCA already signalled its interest in pursuing Open Finance initiatives, applying the lessons and resources of Open Banking to get it off the ground. But under UK Finance’s proposals, the future implementation entity will still largely focus on Open Banking.
As it stands, discussions around Open Finance will be separated and subordinated to a secondary ‘Open Futures board’ outside of the current governance structure, purportedly to avoid conflicts of interest.
UK fintechs, ever eager for new innovation, have taken umbrage with this as it signals that Open Finance is a secondary concern for the future entity and that this would make its focus “too narrow.” They believe Open Finance initiatives should instead be the “overarching aim” of the future entity.
If the aim of Open APIs is to “transform financial services” and “enable [consumers] to take more control of their finances,” extending the regime into finance more broadly is a logical and natural next step.
When adopted across the financial services ecosystem, it would create a variety of secure, trustworthy, and user-friendly tools that empower users to engage more meaningfully with their finances – and their data.
Once again, the UK has another opportunity to deliver another open data financial revolution, this time on an even grander scale. To play on the words of the CMA, we must make the system work harder for consumers.
This starts with empowering the future entity as an enabler of Open Finance through a robust regulatory framework to protect the interest of consumers and the broader ecosystem.