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One month after the Financial Conduct Authority’s (FCA) discussion paper on bigtech firms’ entry into UK financial services, experts weigh in on risks and warn that it is high time to name a regulator that takes ownership of bigtech oversight.
Speaking at an FCA webinar on Monday (November 28), experts agreed that digital markets may bring many benefits for consumers and the economy but they also present risks if left unchecked.
The webinar followed an FCA discussion paper in late October which looked at the potential competition impacts of bigtech entry and expansion in retail financial services.
In the paper, the FCA argues that bigtech innovations may improve quality and bring down prices of financial products in the short term, but in the longer term these competition benefits may erode if a small number of firms gain control over a market.
Bigtech firms have “a great history to start well, giving something out that looks free, but then pretty soon because of the network externalities they can enjoy, they are monopolising markets”, Tommaso Valletti, Payments Systems Regulator non-executive director and former FCA non-executive director, said at the webinar.
“They bundle everything, you are sucked into their own ecosystems, it becomes very difficult to disintermediate, it’s terrible for competition and it’s not very good for consumer choice.”
“Then it is very difficult to undo things later on,” Valletti stressed.
The model was seen in advertising and social networks and there is a risk that it is going to be leveraged in the financial sector as well, according to Valletti, and could lead to “an exclusionary and exploitative” digital ecosystem.
As a result of the vast amount of personal data that bigtechs have, there would also be a significant asymmetry of information between bigtech financial service providers and traditional market players, Valletti warned.
“They may even know more about yourself [than you do]” and be “able to do price discrimination in unprecedented ways”, he explained.
“Maybe it’s an abstraction but it is a new thing that we haven’t experienced so far.”
It’s time to name a bigtech regulator
Although bigtechs have been part of users’ everyday lives for more than a decade, it has only come up in recent years that specific regulations should be tailored to digital markets.
Earlier this year, EU legislators reached an agreement on the bloc’s Digital Markets Act (DMA), which regulates bigtech “gatekeepers”. The legislation is expected to come into force next year.
Meanwhile, the UK government, as part of its autumn statement, has also promised to bring forward the Digital Markets, Competition and Consumer Bill in the third parliamentary session.
The bill would give the Competition and Markets Authority (CMA) new powers to promote and tackle anti-competitive practices in digital markets.
The CMA, more specifically the Digital Markets Unit (DMU) under the CMA, however, would focus on algorithmic discrimination, self-preferencing and advertising, but it does not have specific competence in financial markets, Valletti noted.
This gives the DMU and the FCA the opportunity to come together and collaborate. However, the lack of a main regulator with clear authority to lead on bigtech regulation creates a risk.
If regulation is “split across too many institutions, in my experience, it is not going to work too well”, Valletti said.
In addition to the CMA and the FCA, the Office of Communications (Ofcom) and the Information Commissioner's Office (ICO) are also looking at various aspects of digital markets.
Meanwhile, the increasing reliance on bigtech cloud computing to support critical banking services may also have implications for the Prudential Regulation Authority and the Bank of England, requiring them to step in.
The danger, according to Valletti, is, in the absence of a leading regulator, bigtech oversight might become a tick-box exercise, running the risk that bigtech firms in the UK could play the different regulators off against one another.
“We need some clear ownership [and decide] who’s gonna take the lead,” he emphasised.
The webinar was organised by the FCA and was intended to start a discussion about bigtech firms’ entry into retail financial services.
Going forward, on December 6 and 7, the FCA will hold sector-specific roundtable discussions with payments, insurance, consumer credit and deposit-taking industry players.
Comments on the discussion papers can be submitted to the regulator until January 15.
