The UK is widely regarded as a global leader in Open Banking, and regulators and industry participants believe there is strong potential to build on that success. Regulatory efforts on that front are led by Joint Regulatory Oversight Committee (the JROC), which was created in March 2022 to design and oversee the development of Open Banking in the UK. The JROC comprises the Financial Conduct Authority, the Payment Systems Regulator, HM Treasury, and the Competition and Markets Authority (the CMA).
On April 17, 2023, the JROC published a report (the Report)1 setting out its recommendations on the future of Open Banking, which the Report describes as “a secure way for consumers and businesses to give regulated third-party providers […] access to their payment account data and to initiate payments,”2 in the UK. We set out below an overview of the Report and our observations on the uncertainties and opportunities it poses.
Overview of the Report
The Report outlines the JROC’s vision of moving Open Banking to a new phase of development, under new regulatory oversight, and with new commercial models forming an increasingly important part of the ecosystem.
New Regulatory Oversight
To date, the implementation of Open Banking in the UK has primarily been mandated under the Retail Banking Market Order 2017 (the Order) made by the Competition and Markets Authority (the CMA). The Order, which is part of a package of remedies designed to address competition problems identified by the CMA in its investigation into the retail banking sector from 2014 to 2016, applies to nine major banks in the UK and is overseen by the Open Banking Implementation Entity (the OBIE). The Payment Services Regulations 2017 also provide regulatory infrastructure underpinning Open Banking services in the UK for those banks and other market participants.
The Report proposes an overhaul of the regulatory oversight of the Open Banking framework. This would involve a move from the current state, in which the OBIE is overseen by the CMA for activity covered by the Order, to an interim state, in which the JROC would oversee a future entity responsible for non-Order activity and the CMA would oversee activity covered by the Order. The interim state would fall away at a future date once the UK Government has developed a long-term regulatory framework for Open Banking.
New Products and Services
The Report sets out three priorities in meeting the JROC’s vision. The first is to establish a sustainable and competitive footing for the UK Open Banking ecosystem. This will involve improving data sharing and collection between participants (e.g., data holders, such as payment account providers, and data users, such as account information service providers) in relation to the availability and performance of APIs and data that can be used to identify and mitigate the risk of financial crime being committed through Open Banking services.
The second priority is to unlock the potential for future growth in Open Banking payments. JROC argues that such growth should be supported by providing better choice and services to customers (e.g., improving customer journeys and lowering costs), and by enabling Open Banking transactions in retail to be a widespread alternative to card-based payments. The report highlights the need to develop additional services such as premium, paid-for APIs—account providers are currently not paid for API access. The Report also suggests that the Open Banking industry continue to develop new use cases, such as the ability for a service user to give permission for third parties to take variable recurring payments from the service user’s payment account (so-called “non-sweeping VRPs”), as an alternative to Bacs direct debit and card-on-file payments.
The third priority is to adopt a scalable model for future data sharing models within Open Banking. This will involve enhanced data sharing for the purposes of managing financial crime risks and testing use cases with service users, particularly those with vulnerable characteristics.
Uncertainties and Opportunities
The Report represents a significant step towards the next stage of Open Banking. However, it is clear from the long list of actions in the Report—29 in total, due to take place by the end of 2024—that much remains to be done. This includes several regulatory and industry-led consultations and working groups, with a first update on progress published by JROC anticipated in Q4 2023.
The range of actions to be undertaken and the fact that many of the proposals will not be backed by regulatory requirements leaves inherent uncertainty in the next phase. For example, new commercial uses cases are (naturally) left to industry to develop. There is, however, no regulatory requirement for market participants to develop and/or use premium APIs, and the potential direction of that development is unclear at present.
It also remains to be seen how consumer protection standards will be set in the next phase of Open Banking, and how the related allocation of liability among market participants would work.
Those points notwithstanding, the Report is a clear statement of intent from regulators and the government as to the direction of travel for Open Banking in the UK. We expect market participants to be interested in developing the mooted new commercial models.
If you have any questions about these developments, please do not hesitate to contact Josh Kaplan, Chris Hurn, or another member of Wilson Sonsini’s fintech and financial services or paymentspractices for more information.