On 12 July 2023, the UK Financial Conduct Authority (FCA) published Feedback Statement 23/4: The potential competition impacts of Big Tech entry and expansion in retail financial services (FS23/4). This summarised the feedback received in relation to its October 2022 discussion paper (DP22/5) and sets out the key actions it intends to take in response.

DP22/5 coincided with the publication of the speech “Our emerging regulatory approach to Big Tech and Artificial Intelligence” by FCA CEO Nikhil Rathi, the AI aspects of which we noted in our Fintech Flash “Generative AI and Financial Services: A Recent View From the UK Regulator”. It contributes to the further focus by FCA and the UK Government on the activities of technology providers, which, although unregulated, are likely to have an impact on regulated financial institutions.

In this respect, DP22/5 can be read alongside the recently enacted provisions in the Financial Services and Markets Act 2023 governing critical third-party providers and the linked FCA and prudential proposals noted in our Alert “Too Important to Fail - Part 2: The Coming Regulation of Providers of Critical Technology Services to UK Financial Institutions” and expected to come into force in Q4 2023. It is also part of a broader focus on third-party providers of services deemed to be critical, including those under the EU Digital Operational Resilience Act, or DORA. Our insight hub on Financial Regulations for Critical Third-Party Technology Providers in the EU and UK deals with this.

Recap of DP22/5

In October 2022, the FCA published DP22/5, hoping to encourage discourse and seek opinions on the potential competition benefits and harms that will result from Big Tech firms’ accelerating expansion into retail financial services.

The paper weighted up the potential short-term benefit of increasing competition and stimulating innovation against the longer-term risk of the growing market share of Big Tech companies across the digital economy, which may suppress competition and give Big Tech companies access to a greater amount of user data.

The paper focussed on four key retail financial services sectors: payments, deposit-taking accounts, consumer credit, and insurance. In these sectors, the FCA identified the following five common themes:

• The potential for Big Tech firms to enhance the overall value of their ecosystems with further entry and expansion in retail financial services sectors through innovative propositions.
• In the short term, a partnership-based model is likely to continue to be the dominant entry strategy for Big Tech firms. In the longer term, they may seek to rely less on partnerships and compete more directly with existing firms.
• Big Tech firms’ entry may not be sequential or predictable. While initial forms of entry may be hard to predict, once momentum builds, significant market changes may occur quickly.
• In the short term and possibly enduring longer, Big Tech firms’ entry into financial services could benefit many consumers.
• In the longer term, there is a risk that the competition benefits from Big Tech entry into financial services could be eroded if these firms can create and exploit entrenched market power to harm healthy competition and worsen consumer outcomes.

Summary of Responses

The Feedback Statement identified five additional key themes arising from the feedback. These were:

• Differing Big Tech business models and strategies: Big Tech firms have differing business models, strategies, and incentives for entering into or expanding in financial services and so cannot be treated as a homogeneous group. 
• Refining the FCA’s analytical framework: Responses suggested broadening the scope of DP 22/5 to consider further financial services such as investment management, wealth management, micro-credit, and crowdfunding services. 
• Data access and data sharing: Big Tech’s access to unique datasets not available to other financial services providers (for example, browsing data, social media data, and biometrics) raised concerns of these companies acquiring a competitive advantage. As a result of this, respondents suggested that the FCA consider data access and data sharing solutions. Although it is not referred to specifically in the feedback statement, data sharing and access are key features of the EU Digital Markets Act, which has a similar goal of addressing competition issues within Big Tech companies in the EU. 
• Big Tech activity at or beyond our regulatory perimeter: Feedback raised questions over how the FCA would address challenges of Big Tech firms operating at the boundary or outside of the regulatory perimeter. 
• Overlaps with regulators and other regimes: Respondents urged coordination with domestic and international regulators given the global nature of these firms and the common challenges Big Tech companies raise throughout digital markets.

Actions and Next Steps

The FCA suggests that a number of market design policy initiatives that are already underway, whilst not specific to Big Tech firms, will be applicable to the risks identified in DP22/5. This includes:

In addition to these existing initiatives, the feedback statement proposes three additional next steps on the basis of the feedback received:

• Before end of 2023: 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. This will aim to assess whether Big Tech firms have the potential for future market power in financial services and to understand the nature and materiality of the risk presented by data asymmetry between Big Tech firms and financial services firms. The Call for Input will examine:
  • the extent to which data accessible by technology firms is relevant to developing financial services products
  • the potential impacts of this Big Tech data usage on competition 
  • potential ways to ensure that competition continues to work well, should these data advantages of Big Tech firms exist
  • other significant factors that could lead Big Tech firms to become “gatekeepers” in financial services
• Review of the FCA’s approach to supervision of Big Tech firms to improve how they monitor Big Tech activities, both within and outside the regulatory perimeter.
• Working with the Government and the Digital Markets Unit (DMU) on the new pro-competition regime for digital markets. The Digital Markets, Competition and Consumers Bill, introduced to Parliament in April 2023, proposed to empower the DMU to impose conduct requirements and make pro-competition interventions in respect of firms that have “Strategic Market Status”. The Bill encourages regulatory cooperation with regulators including the FCA and gives the FCA the power to make a recommendation to the Competition and Markets Authority in certain circumstances. A memorandum of understanding will set out how these regulatory coordination provisions will be implemented.

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