In just over six months’ time we will see nothing less than a revolution in the way consumers can access and share their banking information. On 14 January 2018, under the Open Banking API initiative created to comply with EU Payment Services Directive Two, financial organisations providing payment services will have a legal duty to share information with regulated third parties nominated by customers. This may not immediately seem relevant to financial advisers. However, it provides major opportunities to reduce costs, improve efficiency and offer clients extra services.
To receive this information, firms will need to hold the new registered account information service provider permission from the FCA. A further payment initiation service provider permission for firms that operate payment accounts on behalf of their customers is also available.
The FCA identifies payment accounts as current accounts, e-money accounts, flexible savings accounts, credit card accounts and offset mortgages. Fixed-term deposit accounts, child trust fund deposit accounts and cash Isas are not seen as payment accounts.
The regulations apply where the payment provider offers an online facility to access information on the account. Any platforms or providers with capabilities for clients to make direct payments to third parties using their accounts must be careful to check whether they need the PISP permission. For the most part, though, ASIP status will be most relevant to the life, pensions, platform and advice communities.
The FCA consultation on implementing the regulations closed on 8 June. Assuming it proceeds as outlined, there are key facts advisers should know.
Firstly, any PISP receiving a request from the consumer to provide information to an authorised ASIP has a duty to do so and cannot insist on any contractual agreement to facilitate its release.
Secondly, the anticipated operating process is that consumers will go into the third-party online service they wish to use, such as an adviser’s personal financial management tool. They will then identify their bank and credit card suppliers or other PISP and authorise each company to provide data to their adviser. This permission can be revoked by the customer at any time.
From a practical perspective, this will remove one of the main objections that has been put forward against using personal financial management tools: the need for customers to supply their online banking credentials to a third party.
Under the new arrangements, they are entering their own bank or credit card provider’s system and granting the authorisation there. There is no longer a need for third parties to hold online security information.
These changes will have huge ramifications for many areas of the advice market. Combined with the information that will become available via the pension dashboards project, they will enable advisers to give customers a holistic view of their entire financial life.
Using data made available by open banking can greatly enhance fact-finding, needs analysis and other services. It provides the opportunity to model clients’ future income needs far more accurately, based on expenditure rather than estimates.
Mortgage software suppliers will be able to extract data to enhance affordability calculations and automate the generation of income and expenditure analysis.
Employee benefits and workplace advisers are increasingly offering financial wellness services to help reduce the cost of financial stress in the workplace. With greater access to current account and credit card information, these services can be far more sophisticated.
The financial dashboards that consumers use in the next couple of years will be the clearest indication of who they see as their primary adviser. Open banking will provide an important component to this.
Advice firms should be talking to their technology suppliers today. It is vital they are able to deliver personal finance dashboards to clients before the banks try to capture that role.
Ian McKenna is director of the Finance & Technology Research Centre