At the end of April, the Financial Conduct Authority issued its feedback statement FS24/1, outlining its approach to the management of risks arising from the emergence of 'big tech' in retail financial services.
Its publication was announced in a speech by its chief executive Nikhil Rathi, made on the same day.
Big tech firms hold data that financial services firms do not, and that data is valuable. If regulated appropriately, the growing presence of big tech in retail financial services offers benefits to consumers.
Consumer data collected from big tech firms’ core digital activities can be given to financial services firms, enabling them to provide more tailored and better priced financial products to consumers.
Big tech firms may also take advantage of mandated financial services data-sharing initiatives, such as open banking, adding to the data pool they have access to.
But data asymmetry between big tech firms and financial services firms also presents competition risks. The FCA’s feedback statement identified some examples.
First, big tech firms may use data from their core digital activities to gain additional insight into consumer behaviour, which is unavailable to other financial services firms.
This may allow big tech firms to gain market power by increasing barriers to entry and expansion, or by adopting harmful price discrimination in financial markets by favouring certain financial services partner firms when providing their data.
Second, should a big tech firm achieve wide-scale adoption of its digital wallet and payment authentication/verification services, it could become a gatekeeper to retail financial services.
Third, the concentration of third-party services (such as cloud services), held between a few big tech firms, may limit the financial industry’s bargaining power.
The International Monetary Fund, in a June 2021 speech by Tobias Adrian, financial counsellor and director of the monetary and capital markets department at the IMF, has drawn parallels between big tech’s expansion into retail financial services and the regulation of ‘shadow’ banking, noting that “both have grown outside the regulatory perimeters to have potential systemic implications”.
Neither the FCA, nor the 31 respondents to its call for input, identified significant current effects arising from data asymmetry. The principal next step outlined by the FCA is to continue monitoring big tech firms’ activities in retail financial services.
Looking ahead, one might ask whether the FCA has a meaningful role to play in regulating the competition impact of big tech’s emergence in retail financial services, or are other regulators better placed to act?
The FCA’s consultation assumed that existing regulations are unlikely to be sufficient to mitigate the risks of data asymmetry in retail financial services. However, since it launched two years ago, the FCA has not identified a tangible current use case for big tech in retail financial services.
Meanwhile, the regulation of big tech firms in other sectors is gathering pace, particularly in anticipation of the promulgation of the digital markets, competition and consumers bill.
