The FCA has published a Call for Input (PDF 608 KB) in relation to the development of Open Finance, which closes on 17 March. 'Open Finance' is the term used to describe the extension of Open Banking data-sharing principles to enable third party providers to access customers' data across a broader range of financial sectors and products, including savings and investments. This broad scope of Open Finance, including focus on individuals' total financial lives, makes it particularly relevant for the financial advice and wealth management industry.
Although this FCA initiative is in the early stages of development, we believe Open Finance is a fundamentally strategic topic that has profound implications for the future of both UK financial services and UK regulation. It therefore merits engagement and broader input from all industry participants and stakeholders. The financial advice and wealth management industry could potentially be net beneficiaries of Open Finance, but there are a number of risks and unintended consequences that need to be avoided in its evolution.
Open Finance: what is it and why is it relevant?
The FCA suggests that Open Finance has the potential to transform the way consumers and businesses use financial services. It could make it easier to compare price and product features and to switch product or provider. It could help widen access to advice and support in decision-making. It has the potential to spur innovation, the development of new services, increased demand and improved efficiencies for businesses.
Open Finance could broaden the Open Banking concept to savings, mortgages, pensions, investments and insurance policies. Potential consumer benefits articulated in the FCA paper include:
- Automated switching and renewals, reducing the current friction and improving the ability to shop around (e.g. motor renewals)
- Developing personal financial management dashboard to allow consumers to have an entire view of their arrangements, allowing them to understand and optimise their financial position (of particular benefit for unadvised /disengaged clients)
- Accurate creditworthiness assessment and increased access to credit to allow third parties to see overall cash flow and identify suitable credit (e.g. prioritisation of debt repayments sequencing)
- Advice and financial support services by helping customers make financial decisions and making it easier for clients to share information with advisers/wealth managers (e.g. pre-population of KYC/fact-finding)
On what aspects is the FCA seeking a view?
The FCA, by its own admission, has highlighted that this is very much an early stages paper and its does not have any pre-conceived ideas about how this could or should operate. It is seeking opinions and observations from across a large number of sectors including the Wealth Management Sector. In relation to Open Finance, it is specifically the paper is seeking views on:
- Could Open Finance pose any risks to the FCA's operational objectives? And would its current regulatory framework be sufficient to mitigate them?
- Under what conditions would Open Finance develop in a way that delivers the best outcomes? (both for firms and end clients)
- Given the above, what role should the FCA play? Does it need to intervene, and if so, in what way?
What are the key considerations for the financial advice and wealth management industry?
The Given the infancy of the Open Finance concept and nature of the call for input, it is premature to speculate on the winners and losers associated with Open Finance. There are many strategic aspects and key risks for the FCA and industry to consider in the evolution of Open Finance. These include:
Transformation of business and operating models for responding to the opportunities and challenges associated with the direction, scale and timing of development of Open Finance. At one level, there could be benefits for advisers and wealth managers who principally deliver value for their clients by helping individuals achieve their financial and life goals.
The digital enablement and ease of aggregating the individual or household balance sheet could reduce costs and increase focus on more value-added aspects of advising, engaging with clients and delivering products and services to meet life goals.
On the other hand, existing business models could face strain due to increased competition, margin compression and increased costs associated with creating and maintaining capabilities to remain relevant and competitive in an Open Finance market.
Key risks to be addressed
Whether the proposed further development of technology may result in more consumers being excluded from the sector (i.e. less tech-savvy individuals may be less likely to engage with Open Finance)?
The risk associated with the mis-use of data, whether intentional or otherwise, and the associated data rights for consumers to ensure that Open Finance protects consumers and builds trust. What incentives would the FCA need to put in place to encourage firms to share data in the first place?
The risk of the initiative generating poor consumer outcomes (e.g. whether firms could use greater access to consumer data to subvert the intentions of Open Finance and develop business model or practices that take advantage of the information asymmetry and/or in the case of investments, increase switching behaviour and attempts to time the market when clients are investing for longer term goals).
The degree to which Open Finance will increase competition in the sector and genuinely drive innovations resulting in better customer outcomes and/or increased efficiencies?
Whether Open Finance can be built with sufficient inter-operability and cohesion to be viable (i.e. what common standards are needed to support its development between wealth managers)?
The associated operational issues of designing and deploying a new way of sharing data and the feasibility and costs of investing in a new system to facilitate the exchange of data between providers and advisers/wealth managers.
The FCA is keen to obtain input to help shape the debate. Firms do not need to answer every questions or draft an elaborate response — a response to a solitary question or a series of higher level bullet points or a short paragraph will be equally welcomed. It would be especially helpful if there is broad response from a range of industry participants from the financial advice and wealth management industry to inform the FCA's thinking on this topic.
The deadline for responses is 17 March 2020. After a period of analysis and reflection, the FCA plans to publish a Feedback Statement to summarise an aggregated view of the responses the FCA has received and to detail next steps.
We believe that alongside regulatory impetus, Open Finance will continue to evolve in the light of innovation and market competition. We look forward to engaging with the industry and sharing perspectives on this important topic.