Open banking to evolve under new UK governance arrangements

The open banking regime allows third parties to link into the systems of banks to access payments data and provide their own services to businesses and consumers using that information. Third party access is only enabled if strict conditions are met, including where customers have given their consent to the data sharing and if standards on cybersecurity are adhered to. There are estimated to be more than five million users of open banking services in the UK currently.

The open banking reforms were mandated by the UK's Competition and Markets Authority (CMA) at the end of a review it conducted into retail banking which identified competition concerns in the market. Nine major banks have been obliged to facilitate open banking in response to the CMA’s Retail Banking Market Investigation Order 2017, which includes remedies to help third parties offer new and rival services to those offered by the banks themselves using account data. An Open Banking Implementation Entity (OBIE) was set up by the banks to implement the reforms, with oversight provided by the CMA. The OBIE has since led on the development of technical standards to facilitate open banking in practice.

Many of the CMA’s remedies have now been implemented by the banks and attention has turned to how the open banking regime should evolve in future. An independent review found issues with the way the OBIE operated and a government-commissioned review of UK fintech last year called for the evolution of the existing 'open banking' regime into a broader, mandatory 'open finance' system.

The CMA consulted last year on future oversight of open banking in the UK. It has now published its recommendations, which include that a new entity should be established to replace the OBIE. Among other things, the CMA stressed the need for independence on the board of the new entity, for the entity to have a clear purpose, have a broader and more sustainable funding model, and take account of the interests of consumers and SMEs in its governance model.

In the long-term, a new regulatory framework will be developed for open banking in the UK. The Treasury is currently working with the Financial Conduct Authority (FCA) and the Payment Systems Regulator (PSR) on the development of that permanent framework, over which the two regulators will share responsibility for regulatory oversight. The new entity will develop open banking within the new regulatory framework, but until that is developed a joint regulatory oversight committee, led by the FCA and PSR and comprising representatives from the Treasury and CMA too, will oversee the transition to the new entity and the implementation of the open banking regime more generally.

In a joint statement, the FCA, PSR, Treasury and CMA said the committee will make recommendations for the design of the future entity and consider any necessary interim governance and funding arrangements. The work on the design of the future entity is expected to be completed in the final quarter of this year.

The committee will also oversee the transition from the OBIE to the new entity, and subsequently the transition to the future regulatory framework too, but in the process it will also consider how to support the evolution of open banking beyond the scope of the CMA’s 2017 Order.

Yvonne Dunn, a specialist in financial services and technology law at Pinsent Masons, said: “It is good to see that plans are being put in place to ensure the development of open banking in the UK. It is important that the UK pushes forward with open finance generally, as well as open banking, so as to not lose its competitive edge to other jurisdictions.”

Luke Scanlon, also of Pinsent Masons, who specialises in fintech, said: “Close attention need to continue to be given to the future of open banking regulation and the views of all stakeholders must be taken into account as part of these developments.”