Relief As UK Regulators Unveil Next Open Banking Chapter

April 18, 2023
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The Joint Regulatory Oversight Committee has set out its recommendations for the next phase of open banking in the UK.

The Joint Regulatory Oversight Committee (JROC) has set out its recommendations for the next phase of open banking in the UK.

Open banking “can be a success story”, said HM Treasury (HMT), the Financial Conduct Authority (FCA), the Payment Systems Regulator (PSR) and the Competition and Markets Authority (CMA) in their roadmap of priorities.

To make this happen, the JROC has set out its vision for the open banking future entity, including the next steps that need to be taken in designing it.

There will be a transition from the Open Banking Implementation Entity (OBIE) to the future entity, which will build on the progress of more than 7m consumers and businesses using these methods to date.

The future entity is set to go live in Q4 this year.

Paul Rodgers, chief executive at the trade association Vendorcom, told VIXIO that he was "delighted".

"These recommendations establish a clear route-map that recognises the importance of all entities – including the regulatory authorities – to collaborate."

“Today’s publication of the JROC’s recommendations is a significant milestone and opportunity for all open banking stakeholders in the UK,” said Todd Clyde, chief executive at Token.io.

For Clyde, it is positive that the regulator has identified a clear and continued role for a strong central entity to both maintain and expand the UK’s open banking ecosystem.

“The OBIE has been a key driver of the UK’s success in open banking to date, and in particular, in enabling seamless open banking-enabled user experiences,” he said.

Meanwhile, Jack Wilson, public policy chief at TrueLayer, suggested that there is a sense of relief among open banking providers that recommendations are out.

“The industry can now move forward,” he said. “While the report points to plenty of work still to do, it also sets ambitious timelines to make progress at pace.”

The report also outlines the principles that will underpin a long-term regulatory framework, which the government is intending to legislate for.

At the Innovate Finance Global Summit, HMT minister Andrew Griffith stated in his keynote that “this will be the year of delivery for the next generation of open banking”, which is something the report appears to want to make good on.

Yet, there are still areas for improvement, Rodgers noted. "I am particularly focused on inbound payments to merchants, whether initiated by consumers or business customers, and therefore have some concerns that the generic term retail payments is used throughout this report."

For Rodgers, this implies that the distinctiveness of payments made across the wide range of merchant sectors and payment channels may still not be recognised by the banking or regulatory community.

"The pace of both the deployment of open banking protocols to provide bank-based merchant payment systems by merchants and the adoption by consumers will be determined by the distinctive domains, ecosystems, characteristics, and scenarios being understood if bank-based payments are to take their place in everyday commerce to anything like the level that cards offer."

He further noted that the recommendations seem to ignore the need for international, interoperable payments in most merchant payment acceptance scenarios. "If this is not part of the goal, UK open banking will be a nationally-bounded banking protocol with limited value to many merchant sectors. This would be an unfortunate, isolating outcome."

VRP among top priorities

JROC priorities are set around five themes: levelling up availability and performance; mitigating the risks of financial crime; ensuring effective consumer protection if something goes wrong; improving information flows to third-party providers (TPPs) and end users; and promoting additional services.

The latter, in particular, includes a pilot for non-sweeping variable recurring payments (VRPs).

VRPs are a payment instruction whereby customers can safely connect authorised payments providers to their bank account to make payments on their behalf, within agreed limits.

The CMA has already mandated the nine largest UK banks (the CMA9) to implement a VRP open banking application programme interface (API) to enable easier sweeping of funds from a customer’s current account to another of their accounts.

For the remainder of this year, the JROC wants to set the groundwork for the expansion of VRPs.

By the end of Q2 this year, it is expected that the FCA and PSR will publish terms of reference for a working group on expanding VRPs beyond sweeping use cases and publish a discussion paper on principles for commercial frameworks for premium APIs.

In Q3, the working group will draft a delivery plan and framework to enable a phased rollout of non-sweeping VRPs, while, in Q4, the PSR may consult on changes to Faster Payments to enable this rollout.

The PSR will also, alongside the FCA, conduct consumer research to identify critical and future use cases and risks for vulnerable consumers.

“It is particularly pleasing to see regulators recognise the potential of non-sweeping VRPs in their roadmap for open banking,” said Clyde.

“VRPs are key to unlocking richer open banking use cases, such as one-click e-commerce payments and subscription payments.”

With the total transaction value of all open banking payment transactions in the UK projected to surpass $82bn by 2027 (from $13.6bn in 2022), Clyde noted he expects that the availability of non-sweeping VRPs will be an important catalyst for the adoption of open banking-enabled payments.

The JROC report also commits to the FCA and PSR consulting, if needed, on creating requirements to support non-sweeping VRP rollout and/or to adopt a wider multilateral agreement for premium APIs.

The report has pencilled a Q4 2025 implementation date for a multilateral agreement or rulebook for premium APIs.

Elsewhere, the JROC has delegated the OBIE to design a data collection framework for API availability and performance, which it must submit to the FCA and PSR for approval.

The JROC wants this data collection and analysis completed in Q3. It says the PSR and FCA will consult, if needed, on changes requiring reporting additional data for API availability and performance.

Fraud and data sharing

A topic at the top of the payment industry inbox and the JROC is financial crime mitigation.

The report recommends market participants assess their compliance with the FCA’s existing guidance on payments limits.

This chimes in with a recent Dear CEO letter from the financial watchdog that showed dissatisfaction with payments firms compliance with anti-money laundering rules.

A data collection framework for financial crime will also be designed with submissions taking place by Q3 this year.

The JROC has further committed to implement the use of open banking-based data sharing in Faster Payments to reduce fraud in Q4 2023, and to implement effective financial crime prevention tools for TPPs and ASPSPs by Q1 next year.

Also in 2024, the JROC has stated that it wants the open banking future entity to consider how API based data sharing can be broadened out beyond authorised push payment fraud and report findings to FCA and PSR.

It has recommended that the FCA and PSR should consult on mandating data sharing, the use of financial crime prevention tools and/or additional tools or requirements for high value payments.

“The roadmap is necessarily ambitious, but we believe it is achievable if stakeholders collaborate effectively,” the JROC report summarises, suggesting that it needs the support of committee members, TPP, account servicing payment service providers (ASPSPs), consumers, businesses, the OBIE, the subsequent future entity and other stakeholders to deliver the actions set out in the roadmap.

These actions will further strengthen the ecosystem, it adds.

“They will need to ensure it is resilient, economically sustainable, efficient, and scalable to promote new and innovative products and services, provide a greater choice of payment methods and support further data sharing propositions.”

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