On 25 March 2022 a joint statement on the future of Open Banking was published by HM Treasury, the Competition and Markets Authority (CMA), the Financial Conduct Authority (FCA) and the Payment Systems Regulator (PSR). In conjunction with this statement, the CMA also published their response to the consultation they undertook in March 2021 on the future oversight of the CMA's open banking remedies.
This FinBrief will briefly explore the future of Open Banking by summarising the joint statement against the backdrop of the CMA's detailed response to its consultation.
Open Banking
The CMA's Retail Banking Market Investigation Order 2017 mandated the nine largest current account providers in the UK to set up, and fund, an Open Banking Implementation Entity (OBIE). In layman's terms the Open Banking initiative requires all UK regulated banks, at the request of their customers, to share financial data with authorised third-party payment providers.
The work of the OBIE implementing and maintaining open and common banking standards (the Open Banking remedy) has been coined a "UK success story". The UK's innovative approach to placing Open Banking upon a formal regulatory framework has not only benefitted consumers and businesses by increasing competition and innovation in UK retail banking, but it has also positioned the UK at the forefront of the global advancement of the Open Banking sector.
The OBIE has overseen the initial rollout of Open Banking but as we approach the end of this preliminary stage the time has come for an appropriate successor to replace the OBIE. According to the joint statement, the next chapter for Open Banking contemplates governance by a "Future Entity".
Cross Authority Work
According to the CMA's response to its consultation the "implementation phase" of the Open Banking remedy is due to end in 2022. The OBIE, as overseen by the CMA, has nearly achieved all the core elements set out in the "Roadmap" for initial implementation.
The joint statement summarises the staged transition of Open Banking as follows:
- Current state: OBIE, under the continuing supervision of the CMA, deploys the remaining areas of the implementation stage of the Roadmap. This stage will end when the CMA confirms that the Roadmap is complete and consents to the transition of the OBIE's functions to a suitable successor. The CMA have specified that consent will not be given to the transition until they are satisfied that adequate preparations have been made to ensure that the successor is a financially stable and well governed entity. To ensure the least disruptive transition the CMA have suggested that the Future Entity ought to 'shadow' the OBIE prior to the official transfer of functions.
- Interim state: As successor, the Future Entity assumes responsibility for the Open Banking system upon a broader basis. Succession by the Future Entity is required to allow for the evolution of the OBIE's role beyond those purposes set out in the 2017 Order. The supervisory role is then to be undertaken by a new cross-authority committee (see below).
- Future state: Establishment of a long-term regulatory framework to provide a permanent basis upon which the Future Entity can continue the expansion and development of Open Banking.
According to the CMA there are certain characteristics which they believe are integral to the success of the Future Entity:
- effective regulatory oversight – there must be an external regulatory body with sufficient formal powers and legislative backing to enforce the governance of Open Banking;
- clear purpose – the Future Entity should seek to maintain the current high standards while furthering the development and growth of Open Banking beyond its present scope;
- independent and accountable leadership – the Future Entity must establish a Board, within which the roles of Chair and CEO ought to be separated, and at all times best practice corporate governance principles should be adhered to;
- adequate resourcing – to ensure consistency and transparency the current funding arrangements should remain in place for the Future Entity, until, the Board are in a position to introduce a more broad-based long-term funding model;
- representation of consumers and small and medium sized enterprises (SMEs) – the composition and roles of the Board of the Future Entity must effectively serve and reflect the interests of these stakeholders;
- sustainability and adaptability – the long-term regulatory framework and funding model must allow the Future Entity to evolve to meet the future needs of the Open Banking ecosystem; and
- monitoring – prior to the introduction of the long-term regulations, the effective ongoing monitoring and enforcement of the Order shall be maintained by the Implementation Trustee. A monitoring team must then devise a comprehensive system for ensuring future compliance as Open Banking expands and the Future Entity should also consider undertaking wider monitoring of the ecosystem.
The practical realisation of the transition from OBIE to Future Entity is to be undertaken by cross authority work between all parties to the joint statement. They have highlighted their intention to play a central role in delivering new proposals, be independent and well governed, fairly and effectively take account of industry and stakeholder interests, ensure adequate resourcing and be responsive and adaptable to future Open Banking developments and initiatives.
Joint Regulatory Oversight Committee
While the Future Entity succeeds the OBIE, so too will the CMA be succeeded in its supervisory role by the newly formulated Joint Regulatory Oversight Committee (the Committee). The Committee shall consist of the FCA, the PSR, HM Treasury and the CMA but it is anticipated that the FCA and PSR will act as the joint lead authorities.
According to the joint statement the FCA will authorise, regulate and supervise Open Banking and payment firms, while the PSR will act as the economic regulator for payment systems. Any outstanding Open Banking obligations under the 2017 Order will remain within the remit of the CMA.
The Committee has already pledged to solidify the place of Open Banking in the financial market and collaboration is underway between HM Treasury and the FCA and PSR to formulate the long-term regulatory framework. Ultimately, the future character and vision of Open Banking will be determined by the governance and legislative structures imposed by the Committee and interpreted by the Future Entity.
The main responsibilities which the joint statement outlines as being within the remit of the new Committee are summarised as:
- Making recommendations for the design of the Future Entity and considering any necessary interim governance and funding arrangements with industry and other stakeholders;
- Advising the CMA on the transition from the OBIE to the Future Entity, and overseeing the transition to the future entity where provided for under any interim arrangements.
- Considering the vision and strategic roadmap for further developing Open Banking beyond the scope of the CMA Order, working with industry and other stakeholders;
- Providing appropriate input on the permanent future framework for Open Banking;
- Overseeing and advising the Future Entity once established on an interim basis until the formal regulatory framework is in place; and
- Guiding the transition from the interim arrangements to the permanent future framework.
By the end of 2022 the Committee have undertaken to convene their first meeting; draw up a plan for the design of the Future Entity; and establish priorities with relevant stakeholders.
The introduction of the OBIE saw the UK become a world leader in the development of Open Banking. It is hoped that with the correct and careful introduction of the Future Entity we will see the UK not only maintain its leadership but also expand the application of Open Banking so that it may realise its full potential and thereby benefit consumers, businesses and the wider economy.
DLA Piper Payments Team
The DLA Piper payments team is a market leading cross-jurisdictional group of specialist payments lawyers. The team has a broad range of clients, from dynamic FinTech offerings to established banks and merchant acquirers. The team advises clients on the full range of payments matters including payment scheme participation, sourcing tech solutions, the regulatory framework, commercial contracts, mobile and online payments, digital currencies and disputes.
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