The Financial Sector Conduct Authority publishes its South African draft position paper on open finance
The Financial Sector Conduct Authority (FSCA) has published its draft position paper on Open Finance.
The paper communicates the Authority’s proposed policy position on Open Finance and provides recommendations in respect of how to optimize available opportunities, whilst also managing and mitigating risks faced by consumers. Open Finance and Data Probability can be valuable financial innovations, supporting financial inclusion and the financial resilience of customers, as well as promoting competition by enabling new market entrants to compete fairly with incumbents.
The concept of Open Finance is built on the principle of customers owning the data that they create on the platforms of financial institutions and having the right to share that data with suitable authorised third parties. Data sharing within Open Finance refers to financial data shared, which may be the customer’s personal registration or identification information at the financial institution, or customer information produced by financial institutions in relation to that customer’s financial products. A commonly known example in South Africa is that of account aggregation solutions that can integrate with different financial institutions by linking customers bank accounts; credit and store cards; investments and loans, to allow customers to view their money in one place. Another example is instant Electronic Funds Transfers (EFTs), a payment method offered by a third party which automates the initiation of payments by consumers to e-commerce stores and provides immediate confirmation of payment to the e-commerce store to enable them to dispatch the goods or services purchased.
While customers share their data by giving their online login credentials to third party providers (TPPs) to access innovative financial services, most TPPs are currently not licensed as financial institutions, and therefore lie outside the FSCA’s regulatory framework. Moreover, for financial institutions already participating in the Open Finance and data sharing ecosystem, there is no tailored regulatory framework, meaning that the risks deriving from data-sharing and data-use are not yet specifically addressed. This brings considerable risks to customers, as providers are not compelled to operate within agreed governance and operational norms or pursue a customer-centric approach. Consumers have no right of recourse when things go wrong. The FSCA’s proposed regulatory framework seeks to address these challenges.
On the other hand, the risks to consumers that may arise from Open Finance relate to (1) privacy and protection of personal data, (2) operations and cybersecurity, (3) misconduct and (4) fraud. Notably the ability of consumers to make good use of Open Finance platforms and technologies relies heavily on their [the consumers’] financial and digital literacy, internet connectivity, and access to reliable devices. This means that shortcomings in any of these aspects raises barriers to consumers being able to access Open Finance opportunities, which may disproportionately affect marginalized communities. Moreover, Open Finance may open the door to anti-competitive effects if certain providers are excluded from the data sharing regime.
The Authority favors an incremental approach to the implementation of Open Finance, where prioritization may focus on particular sectors and be shaped by aspects like the relative market size, stakeholder appetite and anticipated positive impact.
The FSCA is part of the inter-agency Open Finance Integration Working Group (OPI WG), working closely with the National Treasury and other financial sector regulators to understand the Open Finance ecosystem in South Africa. Effective implementation of an Open Finance regime will require collaboration and coordination across the financial sector and other regulators, to ensure effective oversight while limiting the regulatory burden on regulated persons.
