Competition authorities in all jurisdictions, including the UK, face a range of potentially complex competition law issues in relation to fintech offerings. These are likely to include:
- the risks around exchange of competitively sensitive information. This might be through an exchange of information between the collaborators in a fintech joint venture. Alternatively, it might be because of the increased transparency and availability of information resulting from the fintech company’s solution - this may be pro-competitive, but it will be important to ensure that no competitively sensitive information will be exchanged between competitors as a result;
- the extent to which a fintech solution has or over time obtains (through growth, acquisition or joint venture) market power and the consequences of this;
- the risks around the definition of any technical standards involved in any jointly developed fintech solution. To ensure any standard is pro-competitive, participation in it should be unrestricted and the process for its adoption should be transparent. Access to that standard should be on terms which are fair, reasonable and non-discriminatory, to avoid third parties wanting to participate from being excluded;
- the extent to which there can be any exclusivity between the finance and technology providers of a fintech offering;
- the limits of any specified tying or bundling;
- the extent to which incumbent players or established ‘BigTechs’ may seek to exclude efficient competitors by using their market power from other markets; and
- the risk that the use of algorithms by fintech solutions could result in less competition and/or lead to poor consumer outcomes or threaten market integrity.
The extent to which data can constitute a potential source of market power is an important topic currently being considered by various competition authorities throughout Europe and is likely to be relevant in relation to fintech companies.
However, the UK regulators generally consider fintech to represent a pro-competitive force, leading to change in markets and encouraging innovation. The bodies which have jurisdiction for the enforcement of national competition law in relation to fintech in the UK are the CMA, the FCA and the Payment Systems Regulator (PSR). The CMA is the national competition authority and has jurisdiction to enforce competition law with regards to all sectors of the economy. The FCA has concurrent competition law powers in relation to the provision of financial services (both regulated and unregulated) and the PSR has the same powers in relation to participation in payment systems, meaning that they have the power to investigate and enforce competition law in the same way as the CMA, as well as being under a statutory general duty to promote competition. In particular, as part of this mandate, the FCA considers that it is obliged to create a regulatory environment that would allow innovators and new entrants to succeed. In this regard, the FCA has set the ambitious objective of making the UK the centre of innovation for financial markets. In keeping with this, to date, the FCA has been one of the leading regulators at fostering these conditions through schemes such as Project Innovate launched in October 2014, which created the Innovation Hub and more recently the ‘regulatory sandbox’ (discussed in question 18).
In its 2018/19 business plan, the FCA stated that it plans to continue its work to develop a blueprint for a ‘global sandbox’; it also said that it will monitor the extent to which fintech is helping to improve competition, by looking at metrics such as the number of new entrants and the emergence of innovative products responding to consumer need.
In the UK, the greater use of behavioural economics has become a recent feature of the application of competition law. This branch of economics recognises that it cannot always be assumed that consumers will make rational decisions when presented with choices. This has been found to be particularly relevant in relation to financial services and the UK may well see behavioural economics being applied in relation to the regulation of fintech products or services or to assist in the design of remedies to deal with situations where the competition authorities have identified that competition is not working well.
Following the Brexit vote in June 2016, there remains uncertainty over the future relationship between the UK and the EU. It is difficult to speculate what the impact will be for UK-based fintech companies, but by way of example, the European Commission has outlined its strategy for ‘A Digital Single Market for Europe’, the terms of which may be more or less relevant depending upon any exit model adopted. If this proposal succeeds, it could potentially have implications for the current functioning of the UK regulatory sandboxIn its ‘FinTech Action plan: For a more competitive and innovative European financial sector’, the European Commission indicated that it intends to present a blueprint with best practices on ‘regulatory sandboxes’, which will tie into the FCA’s own work in this area.
The CMA’s retail banking market investigation
On 9 August 2016, the CMA published the final report in its retail banking market investigation into the supply of retail banking services to personal current account (PCA) customers and to SMEs in the UK. To address the issues it had identified in the market, the CMA put forward a package of remedies designed to engage, empower and inform personal and business customers. These remedies are aimed at driving innovation and improving products and services, in order to disrupt the status quo in the market.
The remedies package consists of four elements:
- three foundation measures to underpin increased competition:
- timely development and implementation of an API banking standard, which the CMA considers has the greatest potential to transform competition in retail banking (see question 15);
- ensuring bank customers receive much better information on service quality than they do currently. The CMA’s preferred measures of quality are based on a customers’ willingness to recommend their bank to friends, family or colleagues; and
- the receipt by personal and business customers of occasional reminders or prompts to encourage them to consider their current banking arrangements and shop around for alternatives;
- additional measures to make current account switching work better, including building on and improving the existing current account switching service (CASS);
- a set of measures aimed at PCA overdraft users, for example requiring banks automatically to enrol customers in an unarranged overdraft alert, informing customers about the opportunity to benefit from grace periods and generally seeking to increase customer engagement with overdraft features; and
- a set of measures aimed at specific problems in SME banking, seeking to improve information available to SMEs about loan and overdraft charges and eligibility, making it easier for customers to compare different providers and reducing the hold of the incumbent banks.
The CMA used its legal powers to impose some of these measures by order, while others were implemented by the CMA accepting legally binding undertakings from Bacs Payment Schemes Limited (which operates the CASS).
The RBS alternative remedies package
In order to obtain approval of various state aid measures granted to the Royal Bank of Scotland (RBS), the European Commission required certain commitments from the UK government in 2009, which were subsequently amended in 2014. These commitments included the divestment of part of RBS’ branch-based retail and SME business. Complying with these divestment commitments proved challenging and so the UK government proposed a revised package of measures which sought to achieve the same objective of promoting competition. This alternative remedies package was approved by the European Commission on 18 September 2017.
This is of significant interest to certain areas of the fintech sector because part of the remedy package is the creation of the Capability and Innovation Fund, the purpose of which is to encourage eligible bodies (including fintech firms) to: (i) develop and improve their capability to compete with RBS in providing banking services to SMEs; and (ii) develop and improve the financial products and services which are available to SMEs. The Capability and Innovation Fund consists of four pools of funding, each with a distinct purpose:
- Pool A: to facilitate development of more advanced business current account offerings and ancillary product sets by banks with existing and substantive business current account capability;
- Pool B: to facilitate modernisation of existing business current account offerings or (for eligible bodies without existing business current account offerings) the development of new propositions;
- Pool C: to facilitate the development of new and existing SME lending and payments businesses with a particular focus on facilitating the deployment of new technology to the relevant markets; and
- Pool D: to facilitate the commercialisation of fintech that is relevant to SMEs.
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