Open Banking was meant to revolutionise the ease of switching between bank accounts, but consumers remain as stubborn and loyal as ever despite the potential of the system. Open Finance has the capacity to have a much bigger effect on Wealth Management. But is the industry ready and engaged?
Open Finance goes much wider and could allow wealth managers to provide better, more accurate advice, quicker and more efficiently.
Open Finance is the initiative spearheaded by the Financial Conduct Authority (FCA) aiming to “…allow consumers and SMEs to access and share their data with third party providers who can then use that data to develop innovative products and services which meet their needs today and in the future”. The FCA consultation of all affected financial services industries recently closed. Reaching out to financial advisors, life insurance, investment managers and pension providers for their input, they wanted the wealth management industry to help shape the regulation.
PIMFA’s (Personal Investment Management and Financial Advice Association) own submission to the FCA, and our conversations with wealth managers, suggest to us that the industry has been lukewarm in its engagement with the opportunity. The focus has been on the potential challenges of the industry supplying data to others rather than the opportunities as recipients of the information.
This is maybe unsurprising given consumers limited take up of Open Banking. In a recent study, we found that around 1 in 3 of the UK population claim to be aware of Open Banking, with 1 in 10 claiming to be using a service supported/utilising it. But the term, and its benefits, are poorly understood. The Open Banking Implementation Entity (OBIE), the body set up by the Competition and Markets Authority to deliver open banking in the UK, announced in late September 2020 that over two million customers are now using open banking-enabled products; a significant upswing in its use due to the disruptive effects of the COVID-19 pandemic, but still miniscule for a supposedly ground-breaking innovation.
Open Finance goes much wider and could allow wealth managers to provide better, more accurate advice, quicker and more efficiently. With client permission, advisers would be able to see, timely and accurate information about their client’s financial situation – from home insurance to saving, mortgages to spending patterns without the extensive and time-consuming fact-finding process.
The challenge some in the industry believe they face is persuading clients to allow them access to all this data and the benefits it would have for the advice and investment recommendations they’d receive. In our experience, wealth managers are some of the most trusted people and organisations a high net worth (HNW) individual deals with, sometimes becoming close personal friends.
However, the industry is suffering from a lack of digital confidence and only recently have digital investments started to pay off. Our MillionaireVue data from earlier this year shows that only 66% of UK HNWs are satisfied with the digital services provided by their wealth manager.
The other major challenge is getting smaller product providers to upgrade their systems to allow Open Finance to even gather the data in the first place – persuading them that there is a need will be key for the industry to exploit the opportunity.
But there is a call to action. Not only has the effect of the pandemic been to spur digital engagement with our finances but our work shows that those currently using Open Banking are more likely to be HENRY’s (High Earners, Not Rich Yet); typically younger, higher earning, and London-based. They’re users of challenger banks, digital mortgage providers, investments generally and Nutmeg in particular. That is to say, they are some of the likely wealth management clients of the future. Their need for Open Banking, with their more complex finances and natural inclination towards online services will eventually shake up the wealth management industry.
How quickly and positively wealth managers engage with initiatives like Open Finance will determine the industry’s winners and losers for the next 10 years.
For more information about costs please get in touch with one of our wealth experts here.