The fast-moving nature of developments in the tech space has continued to draw the attention of regulators globally, including in the UK. Recognising the opportunities, but also the risks, arising from these developments, two topics which have been a focus for the UK’s Financial Conduct Authority (FCA) are the increasing role of artificial intelligence (AI) in the sector as well the continuing expansion of certain global technology companies, colloquially described by the FCA as 'Big Tech', into retail financial services.
The regulator’s previous thinking in this space was supplemented on 12 July 2023 by a speech on AI and Big Tech by its Chief Executive and the publication of a feedback statement focused on competition impacts of Big Tech’s increasing role in the financial services sector. On Big Tech, in particular, the FCA is continuing to gather information to better understand the risks and drivers in this area. The regulator sees its role partially as supporting investment into the UK with ‘pro-innovation regulation’ and, as such, is only intending to intervene where this is seen as necessary. But AI and Big Tech will continue to be under increasing scrutiny while the regulator assesses any potential positive and negative impacts which their ever-greater role in financial services could have on the sector and on consumers.
AI: The FCA’s key considerations
The FCA’s Chief Executive, Nikhil Rathi, highlighted in a speech delivered on 12 July 2023 that the FCA is ‘determined that, with the correct guardrails in place, AI can offer opportunity’. The regulator’s work is aimed at allowing the opportunities arising from the use of AI in the sector to be embraced safely – recognising that, when considering the impact of new technologies on financial services, an explosion of opportunity is often accompanied by risks that can amplify in the face of extremely fast-paced developments.
Concerns on how recent developments in the tech sector are impacting financial services focus, for example, on the potential for misinformation, bias and data quality and cyber risks. The FCA’s aim is to harvest the opportunities of these developments while ensuring that the safety and soundness of firms and the financial markets are protected. The FCA has in place an ever-increasing work programme to enable it to deepen its understanding of the impact of evolving technology on the sector and regulate, where appropriate, its use within (and therefore the effect on) financial services.
Big Tech’s entry and expansion into retail financial services
The FCA’s focus on Big Tech’s presence in financial services is intertwined with its work not only on AI, but also on other topics such as data and outsourcing to critical service providers. Regulatory initiatives in these areas should therefore be considered alongside each other. The FCA notes that Big Tech firms may provide or facilitate AI systems, driving AI adoption, and recognises that Big Tech firms may concentrate the provision of certain services to financial services firms. A consultation on a centralised framework for collecting certain information on firms’ outsourcing and third-party arrangements, which could address some of the competition concerns arising from this, is expected to be published in due course.
In October 2022, the FCA published its discussion paper on ‘The potential competition impacts of Big Tech entry and expansion in retail financial services’ (DP 22/5) – see our blog post ‘The FCA and the “demi-gods of data” – Regulatory focus on Big Tech in financial services’ – and on 12 July, the FCA published its Feedback Statement (FS 23/4) to this.
In its discussion paper, the FCA set out five key themes, including (i) that Big Tech firms may be able to enhance the value of their ecosystems through innovative propositions in the financial services space, (ii) that their entry into the sector could benefit many consumers in the short and possibly the longer term, and (iii) that competition benefits may be eroded in the longer term if Big Tech firms can create and exploit entrenched market power. Further detail on this is set out in our previous blog post.
The FCA has identified a further five key themes in its feedback statement regarding the considerations which emerge from feedback to the discussion paper and from engagement events:
- Differing Big Tech business models and strategies: Respondents felt that Big Tech firms should not be considered as one given their differing business models and strategies;
- Refining the regulator’s analytical framework: Some respondents suggested that further sectors where Big Tech firms may have incentives to enter, such as investment management and micro-credit, could be considered alongside those covered by the discussion paper;
- Data access and data sharing: Various respondents felt that data access and sharing should be considered in greater detail given Big Tech firms’ competitive data advantages, including through their access to unique datasets;
- Big Tech activity at or beyond the regulatory perimeter: Respondents considered that potential challenges arising from Big Tech firms operating at the boundary of or outside the regulatory perimeter may need to be considered by the FCA to ensure consumer protection, among other things; and
- Overlaps with regulators and other regimes: Respondents raised that the FCA should continue working with domestic as well as international regulators to coordinate on common challenges and to address the global nature of Big Tech firms.
The FCA considers that several of its existing market design initiatives, including on open finance, outsourcing and AI, are relevant to the competition impacts identified in its work on Big Tech. Following its analysis of the feedback received, the FCA has added three new actions to its list:
- Call for input: The FCA plans to issue a ‘Call for Input’ on Big Tech firms as ‘gatekeepers’ and key drivers, including the role of data asymmetry between Big Tech firms and financial services firms. The purpose of this is to enable the FCA to gather evidence to help it to assess whether Big Tech firms have the potential for future market power in financial services. The FCA notes in the feedback statement that Big Tech firms have access to a wide range of data, such as purchase behaviour, browsing and search history, social media activity, geolocation and biometrics, giving these firms access to significantly more information as compared to the transactional data that financial services firms are able to access. Big Tech firms are able to access the data that financial institutions hold via Open Banking, but there are no reciprocal arrangements allowing financial services firms to access Big Tech data. The FCA’s concern is that financial services firms may be placed at a disadvantage as a result. However, Big Tech firms’ ability to access a wider range of data may not create a competitive advantage as those data may not be used for financial services related purposes. As such, the FCA hopes that through the Call for Input it will be able to better understand the nature and materiality of this risk.
- Review of the FCA’s approach to supervision of Big Tech firms: The FCA intends to consider its supervisory approach to Big Tech firms to ensure that they are monitored in the most effective and holistic way. The FCA plans to consider their business models, characteristics and cross-sectoral presence, potentially taking a broader approach to assessing Big Tech’s activities in the financial services sector. A firm’s regulated as well as unregulated activities may be considered in order to build a picture of the firm’s involvement in the market and the impact that it has on financial services.
- Continue working with the Government and the DMU: The FCA will continue to work with the Government and the Digital Markets Unit on the new pro-competition regime for digital markets.
The FCA has not proposed any regulatory or policy changes as part of its most recent thinking on the tech space and its interaction with the financial services sector. The regulator’s focus instead continues, at this stage, to be on improving its understanding and monitoring of AI and Big Tech in financial services. This is no easy task – factors such as the rapid pace of technological innovation, the heterogenous nature of Big Tech firms’ business models and strategies and the interaction of these topics with other areas, such as data and outsourcing, add complexity to this work. We expect a wealth of further materials to be published by the regulator on its journey to ensure holistic, effective supervision in this space.