Open Finance in the EU and UK

December 2023

Open finance — a framework to allow consumers and businesses to share their financial data with trusted third parties in a secure and safe manner — has the potential to offer more tailored, informed and innovative services to help consumers and businesses manage their finances. Legislative and regulatory proposals to establish the framework in the EU and UK are moving forward but are not without their challenges.

Open finance builds upon the successful roll out of open banking — where the Payment Services Directive (PSD2) (and the UK Competition and Markets Authority) mandated the right of access to payment account data and payment initiation to increase innovation and competition in the payments sector. Open finance essentially expands the scope of open banking — it would allow the sharing of data on products such as loans, savings, investments, pensions and insurance.

Open finance has been under consideration in the UK since 2019 when the FCA set up an advisory group and published a Call for Input on the opportunities presented by open finance. 

There was no further commentary until the FCA's Feedback Statement of March 2021 outlined that a legislative framework would need to be in place for open finance to develop. That framework is now going through Parliament in the form of the Data Protection and Digital Information Bill. The Bill provides the statutory underpinning for the government and regulators to introduce and implement smart data schemes in different sectors, including energy, telecoms and, critically, financial services. It will also allow regulators to introduce requirements around consumer protection and consent, security, data acquisition and usage, privacy, onward sharing, operational resilience for data providers (i.e. financial institutions) and data users (i.e. fintechs/third-party providers). Despite the delays in setting central standards or legislation, there are some firms and organisations (e.g. the Centre for Finance, Innovation & Technology) who are pushing forward with the ‘low hanging fruit’ of open finance, and developing solutions on a proprietary basis that are not dependent on the industry-wide standard.

As the legislation is being agreed, issues are being debated by industry and the regulators around open finance including:

• Ensuring the right commercial incentives exist for firms to invest and participate on a sustainable, and probably reciprocal basis.
• How open finance can be designed and operated by firms to enable them to evidence compliance with Consumer Duty — including the delivering against good customer outcomes principle.
• Need for a robust dispute resolution mechanism with redress and liability arrangements.
• Consideration of allowing existing third-party providers who are registered as Account Information Service Providers under open banking to rely on their existing registration to expand into open finance.
• Consideration of whether third-parties should be allowed to initiate actions in open finance i.e. making transfers, initiating sales or redemptions or managing investments given the varying rules and operational infrastructure across the different types of investments.
• Consideration of the phasing the product types and sectors that are available for open finance — for example — building upon the standard and guidelines established in open banking to expand to savings accounts, ISAs and lending products first.
• The need for clearer regulatory definition around the advice/guidance boundary e.g. do machine generated personal recommendations constitute 'regulated advice'. This could be informed by the joint policy paper that the FCA and HM Treasury will be publishing shortly.

There has also been discussion on whether the government will commit to provide access to government-held data sets — e.g. those held by HMRC, DWP and Companies House. 

Open banking has evolved with the support for various entities, including common standards and guidelines developed by Open Banking Limited and the Joint Regulatory Oversight Committee. Learning from the evolution of open banking, a similar structure may be needed for open finance and consideration will also need to be given on how it would be funded.

In June 2023, the European Commission proposed a legislative framework for financial data access (FIDA). This was alongside revisions to PSD2 — PSD3 — that includes measures to improve the functioning of open banking. The FIDA framework allows, but does not oblige, customers to share their data with data users (e.g. financial institutions or fintech firms). The framework covers customer data typically collected stored and processed by financial institutions as part of their normal customer interaction in loans, savings, investments, occupational and personal pensions, and non-life insurance. It also covers the data collected when carrying out assessments of suitability and appropriateness. However, life, sickness and health insurance data will be excluded from the scope of the proposal as well as creditworthiness data of individuals

FIDA will allow full control by individuals and businesses of who accesses their data and for what purpose. It will provide additional safeguards for consumers in line with data protection and operational resilience rules.

There will also be standardised technical infrastructure to facilitate the sharing of the data. The proposal also imposes a requirement on data holders to provide customers with dedicated permission dashboards as part of their customer interfaces. 

Issues raised in relation to the FIDA proposal include:

•  The new category of data users ('Financial Information Service Providers') should be adequately regulated and supervised to the same high standards as financial institutions to help maintain operational resilience and cybersecurity standards.  
• There needs to be measures to ensure there is a level playing field and reciprocal data sharing between financial institutions and BigTech companies.

Alongside the above developments, the UK government has also been developing the framework for pensions dashboards. The dashboards will allow individuals to view their pensions information, including the State Pension, together in one online secure place with the goal of helping people clearly understand and be better engaged with their retirement savings. There is a legal and regulatory deadline of 31 October 2026 for occupational pension schemes and FCA regulated pensions providers to have completed connection to the dashboards ecosystem. In 2024, HM Treasury will introduce a new regulated activity to bring Pensions Dashboard Service operators within the FCA perimeter, and subject to FCA rules

In the EU in 2021, EIOPA provided technical advice to the European Commission on the development of: 

• Pensions dashboards to allow public authorities to identify emerging gaps in pension provision in their populations.
• Pension tracking systems to provide consumers with an overview of expected income in retirement and to help them make more informed decisions.  

However, no legislative proposals have yet to emerge from the Commission. 

Although it will be a while before the open finance frameworks are finalised in the EU and the UK, it is worth firms beginning to consider how open finance could facilitate offering innovative services to their customers and how the proposals might impact their business models. However, firms will need to keep in mind that certain cohorts of customers will still want or need to access more traditional services. 

Lessons can be learned from the implementation of open banking as well as other jurisdictions implementations of similar frameworks. For example, Australia's Consumer Data Right — allows data sharing initially in banking, then in energy followed by non-bank lending or Brazil's Open Insurance Initiative.

Firms could also consider what they can do now to experiment and innovate. Open finance represents a tipping point for firms to move beyond the compliance model of Open Banking, to shift gears towards commercialising and monetising open finance capabilities. While the legislative framework for open finance is established, the FCA is also keen for firms to use its regulatory sandbox to test out innovation both in open finance and digital identities. 

KPMG in the UK has experience of working with firms to develop their open banking and open finance strategies, and can help firms become technologically, operationally and commercially ready for the introduction of open finance.