Corporate report

Update on Open Banking

Published 5 November 2021

Summary

Open Banking is a key step towards unlocking competition in retail banking and the evolution of the UK’s fast-growing innovative financial technology (fintech) sector – changing the face of retail banking for the benefit of millions of customers and small businesses. Open Banking was initiated in 2017 by the Competition and Markets Authority (CMA) following its market investigation into retail banking; and the CMA is committed to ensuring its continued success. This update sets out progress in strengthening corporate governance at the Open Banking Implementation Entity (OBIE) following an independent investigation and the status of our consideration on the future governance of Open Banking.

Taking immediate steps to improve current governance is a priority for both the CMA and OBIE, following the issues highlighted in the investigation report by Alison White (the Report) published last month.^{[footnote 1]} This is important to secure and build on the significant achievements in Open Banking that have been made to date and that are possible in the future. Progress is being made with the appointment of a new Implementation Trustee and the first non-executive director (NED) in place, and further changes are planned.

In this update, we also look ahead to the longer-term future of Open Banking. Our powers under the Retail Banking Market Investigation Order 2017 (the Order) will change as the implementation phase comes to an end over the course of next year. The CMA will retain some direct regulatory powers including regarding the ongoing maintenance of Open Banking and monitoring compliance, however there will need to be an effective longer-term framework for the future. In this update we set out a number of key high-level principles which we consider should underpin the future arrangements of Open Banking, and we will be publishing a further, more detailed, update responding to our consultation at the end of the year / early 2022.

Given there are much wider potential benefits in applying Open Banking beyond retail banking, including driving competition in payments and the broader financial sector, moving forward it will also be important for there to be a clear regulatory vision supported by cooperation from wider industry and stakeholders. We are therefore also working with other regulators to publish a statement of our joint regulatory expectations alongside our consultation response.

Introduction

Open Banking was initiated in 2017 as part of a package of remedies by the CMA to increase rivalry in the provision of retail banking services. The CMA ordered the nine largest current account providers in Great Britain and Northern Ireland (referred to as ‘the CMA9’) to create and pay for an implementation entity (OBIE), to implement Open Banking in 2017.^{[footnote 2]} The Payment Services Regulations 2017, which implemented the Second Payment Services Directive in the UK, took Open Banking even further.^{[footnote 3]}

Open Banking enables consumers and small and medium-sized enterprises (SMEs) to share their bank and credit card transaction data securely with trusted third parties who are then able to provide them with applications and services which save time and money. It also enables consumers and SMEs to initiate payments directly from their payment accounts to the bank account of their payee, without the use of cards.

The UK pioneered the adoption of Open Banking globally and this initiative has, in the words of John Glen, Economic Secretary to the Treasury, ‘taken the world by storm’^{[footnote 4]} with around 30 other jurisdictions now following the UK’s lead. It is estimated that half the UK’s small businesses and over four million consumers use services powered by Open Banking technology. There is already a wide range of Open Banking applications - you can buy a car, pay your tax,^{[footnote 5]} and new services have started to be developed to support less well-off consumers.^{[footnote 6]} Open Banking has also started to facilitate the development of innovative payment services which could potentially come to compete with cards as a payment method and act as a substitute for direct debits.^{[footnote 7]} While it is still relatively early days in its development, it has been estimated that by September 2023, 60% of the UK population will be using Open Banking.^{[footnote 8]}

The Open Banking ecosystem in the UK now extends far beyond the CMA9 - currently comprising more than 330 regulated firms made up of over 230 third party providers of services and more than 90 payment account service providers who together account for over 95% of current accounts.^{[footnote 9]} Moving forward, it will be critical that this vibrant ecosystem and the benefits it generates for people, businesses and the wider economy in helping to open up competition and forge the way for new services to be offered, continues to thrive and develop.

Open Banking has therefore been a major success in securing positive outcomes for consumers and small businesses and improving competition in retail banking, and also has significant wider transformative potential as it continues to develop. However, we also recognise there have been significant issues in relation to the operation of the OBIE.

On 1 October 2021, the CMA published the findings of an independent investigation that it had requested following allegations relating to the OBIE, former Trustee, and certain OBIE senior staff (current and former). The Report identified a number of failings relating to management of the OBIE. The Report also found that a weak governance framework and a lack of appropriate corporate governance had contributed directly to what happened at the OBIE.^{[footnote 10]} This update focusses on changes in respect of corporate governance. It does not consider the issues raised by Alison White’s third recommendation,^{[footnote 11]} which are being actively considered by the OBIE with support from the CMA.

It is critical that the governance issues are addressed swiftly and effectively, to ensure that concerns do not arise again, either at the OBIE or in future arrangements that will take forward Open Banking after the implementation phase for retail banking comes to an end. Having good corporate governance systems and processes in place will also help to ensure the OBIE continues to deliver its important work on Open Banking as part of the roadmap and to push this forward at pace.^{[footnote 12]}

Progress in strengthening OBIE governance

Amongst the issues raises by the independent investigation was the need for effective corporate governance.^{[footnote 13]} Within this theme, the investigation found that the Order set out very little detail about the governance arrangements of the OBIE; that too much power was vested in the Trustee personally with insufficient checks and balances; and that there were failings in the system of risk management and internal control. The investigation also found that there was significant uncertainty about responsibility for governance of the OBIE as between the CMA, the Trustee and CMA9.

The CMA is working closely with the OBIE (including the new Implementation Trustee), on a package of governance measures as a matter of priority. The CMA9 is also engaging constructively with the CMA, the new Trustee and the OBIE to support these governance improvements in line with the Order. A number of actions have already been taken. As a first step, a new Implementation Trustee with significant experience in finance and fintech, Charlotte Crosswell OBE has been appointed to lead the OBIE. Ms Crosswell has committed to focus on workplace culture and improving corporate governance as immediate priorities. Significant work is also underway at OBIE to review and strengthen the organisation’s HR and culture policies, in addition to investing in its people agenda.

Given the investigation’s findings regarding the Trustee role, it is crucial for independent NEDs to be appointed to the OBIE Board to provide independent oversight and challenge. One of these roles has been filled through the appointment of Jeremy Newman, who has significant experience as a NED in a number of areas including public policy, audit, risk and corporate governance.^{[footnote 14]} Recruitment of a second NED role to provide additional scrutiny and experience to the Board is currently underway through an open process supported by an external search agency.

The independent NEDs, alongside the Trustee, will play a key role as Board members in ensuring that the OBIE effectively fulfils its functions, is managed in accordance with good corporate governance standards and principles, and providing oversight regarding the running of OBIE, among other aspects.

While these are significant steps forward, we recognise that additional changes are also needed. Further consideration is being given to a number of areas, including:

• providing clarity on the roles and responsibilities of each of the CMA, OBIE, Trustee and CMA9 (as funders) in relation to the governance of the OBIE, including appropriate escalation mechanisms should further concerns arise and greater transparency on financial expenditure

• the composition and role of the current OBIE Board – such as appropriate management of conflicts and whether additional executive roles are needed

• mechanisms for ensuring transparency and reporting of Board matters, as well as reviews of Board and governance effectiveness

Given the need for these governance improvements to be made in a timely manner, we plan to have reflected the necessary changes in the relevant documents, such as the Agreed Arrangements^{[footnote 15]} and OBL’s Articles of Association, by the end of the year.

The CMA also recognises that there are lessons to be learned from the governance issues at the OBIE in relation to how it approaches remedies in its market investigations. The CMA has commissioned a review led by Kirstin Baker CBE, an independent NED on the CMA Board, into its approach to designing, implementing and monitoring these remedies. The terms of reference for this review will be published in due course.

Future governance of Open Banking

Alongside improvements to the existing governance of the OBIE as noted above, it is critical to make preparations for the future arrangements of Open Banking, to secure and build on the significant progress to date. In doing so it is important that the CMA and others take the investigation findings on governance into account.

The CMA also considers that it is important to set clear regulatory expectations for the longer-term. We are therefore working with other regulators (FCA and PSR in particular), alongside relevant government departments, to develop a statement which will set out a clear joint vision for the future of Open Banking and its governance. This vision is intended to help address the period between the end of the implementation phase of Open Banking and any future regulatory framework that addresses areas beyond retail banking. We are planning to publish a further update, including this statement, at the end of the year / early 2022.

In March 2021, the CMA consulted on arrangements for the future oversight of Open Banking. In this consultation we referred to a proposal by UK Finance (a trade association for the banking and finance industry), which had engaged with stakeholders to develop a blueprint for a new organisation (a ‘Future Entity’) to replace the OBIE in its current form which would serve the needs of the significantly larger number of financial institutions by enabling an Open Data and payments market.

We asked stakeholders for their views on future arrangements, taking into account UK Finance’s proposal as a starting point but inviting stakeholders to submit different approaches. We received more than 60 written responses from a wide range of stakeholders including banks, fintechs, representatives of user groups, among others. These responses expressed diverse views about the future governance, risks and solutions to take forward Open Banking.

We were in the process of considering these responses when the investigation reached its conclusions. One of the Report recommendations was that a proportionate form of corporate governance should be implemented for any successor organisation to the OBIE, and the Report included detail as to what that form of corporate governance should entail. The Report also included findings regarding the OBIE’s governance framework that are relevant to designing the Future Entity. Given the significance of these conclusions, we consider that it is necessary both to take a number of immediate steps (as set out above) but also to take stock of the implications on the appropriate approach to future oversight and governance. We are committed to ensuring that the recommendations and findings from the Report are taken on board in considering the appropriate future governance of Open Banking.

We recognise the desire of some in the industry to begin work on transition and progress plans for the future. We anticipate being able to set out a detailed position on the Future Entity at the end of the year / early 2022. We set out below a number of high-level principles to provide an initial steer on some of the key areas we are considering, which we hope will be a helpful signal for the industry and the OBIE. The CMA, working alongside the FCA, PSR, government and the wide range of industry stakeholders and user groups, will be prioritising further work on key aspects of the future arrangements over the coming weeks.

High-level principles for the future governance of Open Banking

Our consultation document set out 4 key criteria that are fundamental to the framework underpinning the future governance of Open Banking (independently-led and accountable, adequately resourced to perform the functions required, dedicated to serving the interests of consumers and SMEs, and sustainable and adaptable to future needs of the ecosystem). We have developed these further in setting out below key guiding principles for the future governance of Open Banking.

The implementation phase of Open Banking in retail banking is governed by the Order and is anticipated to come to an end during the course of 2022. Completing the implementation (ie defining/agreeing standards and these being adopted by CMA9) will be a significant milestone; though, it does not mean that all the obligations under the Order will at that point fall away. After implementation, the CMA will retain some direct regulatory powers including regarding the ongoing maintenance of Open Banking and monitoring and compliance. However, it is important that there is an effective longer-term framework for the ongoing operation and development of Open Banking, including beyond retail banking.

Purpose - competition and innovation

It is important that Open Banking delivers on its full potential as a key driver of competition in retail banking as envisaged by the remedy. There is also potential for its wider application to increase competition in the payments and broader financial services sectors. Further innovation is also needed to ensure continued growth in the usage of Open Banking, including for account-to-account payments.

Regulatory collaboration and oversight

There should be sufficient regulatory oversight of the Future Entity, including close collaboration between regulators and the ability for regulators to set expectations and prioritise appropriate interventions when necessary. This will require coordinated efforts to design and put in place appropriate future governance arrangements, which will also need to allow sufficient flexibility for future developments. We anticipate that future oversight could be shared with the FCA (given its current regulatory remit, which includes payments and data-sharing in relation to Open Banking and as the anticipated lead regulator for Open Finance) and PSR (as the lead regulator for payment systems), both playing a key role alongside the CMA. There will also be a need for wider industry and stakeholders to work cooperatively with regulators to help ensure its continued success.

Stakeholder interests

The Future Entity must sufficiently and fairly represent and take account of all relevant industry participants and end-users, including consumer and smaller business interests. In doing so, this will require adequate resources to capture and represent these views effectively at all levels.

Leadership

The Board of the Future Entity must articulate a clear purpose and vision for the Future Entity that takes account of regulatory expectations.

The Board of the Future Entity must be independent and accountable and this should be reflected in the roles and composition of the Board (including for example an independent Chair). Consideration must also be given in determining Board composition to the potentially wider scope of the Future Entity to ensure that governance remains effective as the Future Entity develops.

Governance

The Future Entity must adhere to high standards of corporate governance and transparency – including clarity on roles and responsibilities, a clear purpose, financial transparency, appropriate checks and balances and appropriate corporate governance policies, reflecting the recommendations set out in the Report.

Reporting

The Board of the Future Entity should provide regular and transparent reporting to regulators, and there should be sufficient control and approval mechanisms in place (for example, key strategy / planning / budgeting documents for review and approval, and approval of the appointment of the Chair of the Future Entity).

Monitoring and compliance

There is a continuing need for rigorous ongoing monitoring of Open Banking standards and compliance with the ongoing obligations under the Order. We are considering different options for achieving this, but we envisage that this is likely to require more detailed and active monitoring and reporting than that typically undertaken by the CMA and other regulators, particularly in some aspects which are critical and have an immediate impact on the ongoing success of Open Banking.

Funding

We support the design and implementation of a more broadly-based and sustainable funding model, particularly in respect of ‘membership’ contributions. We acknowledge that there are different funding models available for example this could entail securing financial contributions from Third Party Providers, enabling commercial revenues and / or reviewing the charges for Directory Services. In future, we also consider there may be value in potentially introducing a sector-wide levy as proposed by some of the consultation responses.

Transition

Robust arrangements must be in place to protect the future of Open Banking before the transition from the current OBIE to the Future Entity can take place and this is an important consideration for the current Board of OBIE. We are currently considering the necessary governance arrangements that need to be put in place to manage and oversee the smooth transition towards a new governance model. This governance will need to reflect and represent a range of ecosystem participants and ensure active oversight from regulators to drive this forward.

Next steps

The CMA, working with the OBIE and other stakeholders, will be continuing to take steps to improve the corporate governance of the OBIE and ensure the issues identified in the Report are addressed. Alongside this we will also be working with other regulators and government to develop plans for its future governance, to secure the future of Open Banking. We will be publishing a further update on this by the end of the year / early 2022.

There have been significant achievements to date to open up competition in retail banking, but there is still much more to do and it is therefore critical that we build on this momentum both in the current work underway at the OBIE and in the future.

1. Other important concerns were raised in the investigation report which are not the focus of this update. Visit the The CMA’s announcement concerning the findings of the report. ↩

2. The OBIE was established by the CMA9 as a limited company, Open Banking Limited (OBL). ↩

3. This provided a legal right for regulated third party providers (TPPs) to access payment accounts which are accessible online, provided they have the customer’s explicit consent. Account providers must allow TPPs to access the payment account data and make payments. ↩

4. Foreword to the Kalifa Review of UK Fintech (PDF, 9.89MB). ↩

5. For example, Cazoo now uses Open Banking payment services, and HMRC has taken over £1billion in tax through Open Banking since enabling the collection of tax payments in this way, Global Government Fintech, 29 September 2021. Applications using Open Banking’s account information data-sharing functionality include: services to establish the affordability and eligibility of a loan in mortgage applications; comparison services which identify the best bank accounts for small businesses; and services which alert customers to potential cost savings, for example, that their mortgage has switched from a fixed to a floating rate. ↩

6. For example those with a thin credit file or adverse credit history (for example, Signal, from Credit Kudos), or to assist carers in identifying unusual spending patterns (for example, Kalgera). ↩

7. Variable recurring payments and sweeping, Token, 2021. Variable recurring payments (VRPs), which enable SMEs to set up and control flexible future payment authorisations will allow ‘sweeping services’ which, if instructed to do so by a consumer or SME, transfer spare cash to savings accounts where they will accrue interest and/or provide short term credit in competition to bank overdrafts. ↩

8. The Future of ecommerce payments, Truelayer. ↩

9. For a comprehensive list of providers and applications using open banking see the OBIE’s app store. ↩

10. Further details of the investigation and its findings can be found in the CMA’s published update and the independent investigation report. ↩

11. Alison White’s third recommendation was that ‘The position of the complainants needs to be further considered’. ↩

12. The deliverables needed to finalise the implementation of Open Banking are set out in the final agreed Roadmap. ↩

13. The investigation considered the issues raised under five themes: corporate governance; the late delivery of accounts; management of conflicts; procurement and value for money and human resource issues – these are also being actively considered by OBIE and the new Trustee. ↩

14. Jeremy Newman is also an independent Panel Member for the CMA and is acting independently of the CMA. ↩

15. The Agreed Arrangements are the arrangements for the composition, governance arrangements, budget and funding for OBIE and are set out in Part A of Schedule 1 to the Explanatory Notes of the Order. ↩