Will we see the end of further regulation in Open Banking after the UK legally leaves the EU at the end of January 2020, or is version 4.0 coming?
After Boris Johnson’s emphatic win in the UK General Election, it seems that the UK will legally leave the EU at the end of January 2020. Does this mean that UK banks will avoid future EU regulation which we expect to open the banking sector even further (PSD3 anyone!)? Well, like Brexit itself, the answer to the question isn’t so clear…
UK Open Banking
Regardless of the UK’s place in the EU, some argue that the UK Open Banking standard is broader than the EU’s PSD2, and so is a blueprint for other countries around the world.
This supposed leading position can be supported by the extent to which the UK’s banking sector has adopted open banking - approximately half of UK banking assets by value are opened via APIs, according to a recent study by Deloitte.
However, to consolidate the UK’s place as a leader in open banking, some say further OB regulation may be coming down the pipe, especially given a post-Brexit emphasis on global trade rather than just a European focus.
New OB v4.0 standard content
The scope of further UK regulation isn’t defined yet, but would likely extend to most accounts, transactions and data, maybe even credit cards and loans (business accounts, hallelujah!).
In addition, there are several areas that remain unclear under existing standards, and any new regulation would have to consider issues such as:
- Whether instant payments are covered under the scope of open banking.
- The setting of specifications for API standards, directory services and infrastructure by the regulator (FCA) to minimise fragmentation.
- Whether other areas in the open data economy get included too (e.g. retailers, utilities, etc.).
- A flexible approach to developing and managing the regulations themselves given the fast pace of change in today’s world e.g. using agile methods rather than rigid prescription.
“Compliance enforcement for PSD2 and Strong Customer Authentication is delayed in several countries by 18 months or more”
PSD2 Implementation delays
The European Banking Authority granted relief to National authorities to relax compliance of PSD2 in summer 2019 (due mainly to delays in issuing the Regulatory Technical Standard and particularly its impact on strong customer authentication). This led to extensions in some countries of 18 months and more before full enforcement. Even in the UK, some banks had already been granted limited compliance extensions prior to the EBA announcement, to support open banking transitions.
Will we ever see a PSD3?
While PSD2 stimulated the development of the UK Open Banking standard (which became fully operative before PSD2), we need to ask whether a PSD3 will ever come to pass.
There is a strong school of thought in the banking sector that says PSD2 has been the spark to ignite the transformation of the sector but that participants (banks, fintechs and consumers, jointly “the market”) should drive future developments without any need for further regulation.
This is supported by criticism of the PSD2 regulation which was drafted before technical standards had begun to converge – contrasting this experience in Europe, to how things have progressed elsewhere in the world such as Australia, Canada and Hong Kong (where regulation was drafted with specific technical standards in mind).
Indeed, there are several areas around the existing PSD2 regulations that remain unclear and give difficulty to banks, fintechs and regulators alike:
- security procedures for RTS compliance
- eIDAS Certificates from Qualified Trust Service Providers (QTSP)
- TPP Registration
"...further regulation in the area of open banking will not happen any time soon, and so we should drive open banking developments directly from the market."
Given the delays in the sector for full compliance with PSD2, and other internal challenges that the EU will have to address in the next few years (such as budget re-balancing, climate change pressure and even prevention of Brexit contagion within the bloc), extending open banking regulation is not going to be a high priority in Brussels.
Similarly, the UK government will have a focus on securing trade deals globally and any changes to regulation in a key sector such as banking may complicate negotiations.
It seems likely therefore that further regulation in the area of open banking will not happen any time soon, and so we should drive open banking developments directly from the market.
What do you think will happen – more regulation or market-driven development?