In a speech earlier this year, Nikhil Rathi, the CEO of the Financial Conduct Authority (FCA) predicted that “from masters of the universe to demi-gods of data, financial and Big Tech firms will wield huge power over the direction of our lives”. With more traditional financial services firms having been subject to regulatory scrutiny and rule-making for years, the FCA is turning its focus to Big Tech players who are venturing into the world of financial services, releasing a discussion paper this autumn on “The potential competition impacts of Big Tech entry and expansion in retail financial services” (DP22/5).
Far from being relevant only to the big players, Big Tech’s increased role in financial services and the regulators’ response to this are of interest to a broad range of stakeholders – whether in their capacity as customers, current or future competitors, potential partners or parties interested in the developments as part of a broader regulatory focus on data-driven and digital markets players, which of course may have implications for not-so-Big Tech too.
What are the key findings in the FCA’s discussion paper?
The subject of the FCA’s recent discussion paper are Big Tech firms’ potential impacts on competition in retail financial services markets. Big Tech firms are defined in this context as “large technology companies with established technology platforms and extensive established customer networks”. Several of these entities have already started to enter financial services in the UK or elsewhere, either by offering services directly or by partnering with incumbents.
The FCA’s analysis is at this stage limited to four retail financial services sectors: payments, deposit taking, consumer credit and insurance. Big Tech’s entry into financial services has not been limited to these retail sectors but their importance to consumers’ financial lives and the potential competition impacts of Big Tech’s entry or expansion, combined with the fact that these sectors have been the focus of Big Tech firms’ ambition in financial services so far, have made them the FCA’s initial focus.
In its analysis of Big Tech’s entry and expansion in these sectors, the FCA has identified five themes:
- There is potential for Big Tech firms to enhance the value of their ecosystems with further entry and expansion in retail financial services sectors through innovative propositions.
- Big Tech firms could seek to leverage their expertise so as to offer financial services products themselves or rely on partnerships with incumbents. In the short term, the FCA expects that a partnership-based model is likely to continue to be the dominant entry strategy, but in the longer term, firms may seek to compete more directly with existing firms.
- The payments sector has tended to be used as a starting point for Big Tech firms’ entry into financial services, with expansion into other sectors following later. However, such firms’ entry may not be sequential or predictable. Initial forms of entry may be hard to predict, but once momentum builds, the FCA judges that significant market changes may occur quickly.
- In the short-term and possibly for longer, Big Tech firms’ entry in financial services could benefit many consumers. Positive competitive pressures could include:
- where Big Tech firms partner with incumbents, increased operational and technological efficiencies resulting in lower prices and better provision of services as well as potentially increased access for unserved or underserved consumers; and
- where Big Tech firms compete with incumbents, additional incentives for firms to embrace digital technologies, reducing the cost of provision.
- In the longer term, the FCA foresees a risk that competition benefits are eroded if Big Tech firms create and exploit entrenched market power, for example through (i) exploiting their ecosystems by attracting and then locking in consumers or (ii) seeking to reduce competition and create a competitive advantage for themselves by leveraging the unparalleled data available to them and restricting access to it for others.
What action is the FCA intending to take?
The FCA has made clear that at this stage, it is not proposing regulatory or policy changes and is only looking to stimulate a discussion on this topic. To this end, in addition to launching its discussion paper, the FCA also held a webinar last month (a recording of which is available here) and is conducting sector-specific roundtables to enable further discussion with stakeholders.
That is not to say that regulation may not follow at a later stage. It is clear from the discussion at the FCA’s webinar that there is at least some appetite for future regulation. However, the FCA currently seems to be at the earlier stage of seeking to understand Big Tech’s increased role in financial services and the risks this poses.
What are the broader takeaways?
One important point to note is that the FCA’s Big Tech discussion paper is only one part of its increased focus on data-driven businesses and digital markets. This topic has been a regulatory consideration for a while, but the shaping of digital markets is now a focus in the FCA’s Strategy 2022 to 2025 and is keeping the regulator busy on various fronts. The FCA is engaging in extensive cross-regulator work on data and digital markets beyond (but relevant to) its analysis on Big Tech firms, including:
- supporting the Competition and Markets Authority’s (CMA) Digital Markets Unit, which seeks to create a new pro-competitive regime for digital markets;
- in the context of the Digital Regulation Cooperation Forum with other authorities such as the CMA and Ofcom;
- with the Bank of England and the Prudential Regulation Authority (PRA) on artificial intelligence and machine learning. The regulators published a discussion paper earlier this year on this subject, designed to facilitate a public debate on the safe and responsible adoption of AI in UK financial services; and
- with the Bank of England and the PRA on operational resilience and the role of critical third parties. The regulators’ discussion paper on this includes analysis on critical services provided to financial services firms by Big Tech firms.
Regulatory focus in this area will only increase going forward, considering in particular the announcement by the UK Government in its Autumn Statement 2022 that the Digital Markets, Competition and Consumer Bill, which will provide the CMA with new powers to promote and tackle anti-competitive practice in digital markets, will be brought forward. The Edinburgh Reforms further reiterate the Government’s focus on the tech sector, with the Financial Services and Markets Bill already containing provisions to create a regulatory sandbox for market infrastructure and new plans announced to, among other things, create a new category of trading venue which would allow trading of financial instruments on an intermittent basis. See more on the Edinburgh Reforms in our blog post “The Edinburgh Reforms: A Love Rekindled”.
A second broader point is that firms can expect increased cross-regulator and cross-border cooperation in this area. The FCA’s Big Tech discussion paper acknowledges that there are clear overlaps between the remit of the FCA and other regulators and authorities, so that future engagement will be vital to minimise competition risks identified in this area. The FCA’s operational objectives include a competition objective, but broader competition expertise sits within the CMA, and the clearest overlaps and complementarities exist between these regulators. Other regulators which will have an interest in this subject include the Bank of England and the PRA, including from a financial stability perspective. One of the challenges for the regulators in ensuring effective regulation of Big Tech firms, which was also raised at the FCA’s webinar, will be to ensure appropriately extensive cross-regulator cooperation while establishing clear regulatory ownership.
Just as cross-regulator engagement within the UK will be vital, cross-border cooperation on any future regulation of Big Tech will need to be ensured. The discussion at the FCA’s webinar emphasised that Big Tech firms are operators of a different kind given not only their scale and the extensive data which they can leverage, but also their global reach. Regulators around the world are considering new challenges emerging from digital markets and data; for example, the EU’s Digital Markets Act aims to limit anticompetitive behaviour by gatekeeper platforms, and across the pond, US legislators are considering antitrust bills which would have an impact on Big Tech firms. UK regulators will need to leverage such ongoing work and their ties to other regulators and authorities to ensure close international cooperation if they wish to effectively regulate the global players that are Big Tech firms.
Next steps
The period for response to the FCA’s Big Tech discussion paper will run until 15 January 2023, and a feedback statement is expected to be published in the first half of 2023.
With the FCA’s work on Big Tech at a relatively early stage, it is difficult to predict what action the regulators will take next in this area. Further regulatory materials and consultations will likely follow. The discussion at the FCA’s webinar emphasised that the innovation and competition effects brought by Big Tech firms are not principally a bad thing, and the regulator is therefore unlikely to seek to crack down on Big Tech’s entry and expansion in financial services altogether, but increased regulatory scrutiny and intervention in this area are to be expected.
Therefore, as ever, watch this space – new regulation may be appearing on the horizon.
