Christopher Woolard CBE
Partner at EY, EMEIA lead financial services regulation, Chair EY Global Regulatory Network. Trustee at Which?

A small number of large technology companies – known as the “big techs” – touch almost every aspect of our online lives. They create innovative, high-quality products which bring substantial benefits for consumers and the economy, funneling investment into new technologies and providing platforms which reduce costs for small businesses to start-up and grow.

Big tech firms are already offering regulated financial services, most commonly payment services. This entry into financial services looks set to accelerate in the coming years through a combination of acquisitions, partnerships, and direct market entry. Incumbent financial services firms will need to consider how to respond, whether by competing head on or partnering to combine their financial services expertise with the reach and brand recognition of the big techs.

The UK government has already acted upon concerns about the financial stability risk posed by the reliance by financial services firms on a small number of technology providers (including big tech cloud providers). The Financial Services and Markets Bill contains provisions which bring ‘critical technology providers’ within scope of UK supervisory authorities.

The FCA has now released a Discussion Paper to inform its own response to the rapidly growing position of big techs in retail financial services, which currently spans payments, e-money, consumer credit and insurance. The FCA wants to hear about areas where big tech activity could bring the biggest benefits for competition, and the biggest risks. Questions cover the likely entry, strategies of big techs into financial services, relevant learnings from the expansion of big tech in other countries, the potential impact on new entrants, and the competitive advantages and disadvantages of big techs over incumbent financial services providers and fintechs.

No regulatory changes are proposed at this stage, but the Discussion Paper will be used by the FCA to inform its approach to the government’s proposed pro-competition regime for digital markets. If enacted, the Bill would give new powers to the Competition and Markets Authority (CMA) to oversee a mandatory code of conduct for big tech firms which are designated with “strategic market status”. The proposals also include powers for the CMA to introduce so-called “pro-competitive interventions” to address the root cause of market power and stricter merger rules for deals involving big techs.

The FCA will be working closely with the CMA (including through the Digital Regulation Cooperation Forum) to prepare for the new regime. However, since the legislative timetable for the Bill remains unclear, the CMA has been intensifying its scrutiny of big tech activity using its existing market investigation and merger control powers. Depending on the outcome of the discussion paper, the FCA may choose to step up its own activity. This could include keeping a close eye on big tech acquisitions in financial services markets with a view to passing relevant information to the CMA, launching market studies, or referring markets to the CMA for detailed investigation. Where there are opportunities for greater competition, but complex regulation is holding firms back from entering the market, the FCA could provide support through its Innovation Pathways.

Financial services providers, including established firms, fintechs and new entrants, should consider responding before the Discussion Paper closes on 15 January 2023. In the meantime, EY will continue to monitor the debate and provide our thoughts on the developing regulatory framework.

The views expressed here are the author’s own and not necessarily those of EY. I'm grateful to my colleague Fran Clausen for her help in preparing this article.