The Financial Conduct Authority is to conduct an investigation into the use of big data analytics in the insurance sector in order to both protect customers and spur innovation.
The decision was revealed as part of the UK watchdog’s ‘2015/16 Business Plan’ report, which warns of the risks for consumers as technological change quickens across the entire financial sector.
FCA chief executive Martin Wheatley said that the regulator would “continue to monitor” the growing use of digital technology, including a market study to investigate how insurance firms use web analytics, behavioural tools and social media analysis to gain insight into increasingly large volumes of data.
“We will identify potential risks and benefits for consumers, including whether the use of Big Data creates barriers to access products or services,” the report states.
“We will also examine the regulatory regime to ensure that it does not unduly constrain beneficial innovation in this area.”
The investigation findings are due to be published in the first half of 2016.
Speed of innovation
The FCA admitted that the speed on digital innovation threatens to outstrip its ability to create and apply regulations in order to protect consumers, while at the same time supporting the creation of new services and increasing competition.
“Widespread adoption of innovative technologies across a range of firms – from large retail banks and insurers to challenger banks and new startups – may present benefits to consumers, but can also increase the risk of harm to customers and market integrity if the pace and complexity of digital transformation is not effectively managed,” the report stated.
The report pointed out that the advent of new technologies could enable firms to present information “in such a way as to encourage poor choices, possibly resulting in mis-selling”, echoing the guidelines for the use of social media to promote financial services published by the FCA last week
Legacy infrastructure and new competitors
The FCA said that another of the major challenges faced by the financial services industry is the continued reliance on outdated infrastructure among established firms, alongside the use of outsourced services. The FCA is already conducting a report into the legacy infrastructure used in the following a series of high profile outages, launched last year.
The complex systems used by the big banks, for example, continue to create the risk of outages, threatening to undermine customer faith in suppliers and cause a “market integrity issue” if not solved.
The FCA also pointed out that a new crop of startup banks launched on modern infrastructure have an advantage over existing firms, but could still struggle to compete with on an equal footing in terms of IT investment “due to existing firms having better contract terms and more established relationships”.
A number of new banks have launched in recent months – such as Charter Savings and Hampden & Co – while the FCA is said to be in the process of assessing banking licence applications from another 10 – such as Atom Bank and Starling.
Meanwhile the FCA noted that – as lenders shift reliance from branch networks to online and mobile channels - the complexity and age of IT infrastructure could increase the security risk of mobile-front ends.
The report stated: “While digital advancements can make financial services faster and more convenient, foster competition in the market-place and reduce costs, they can also increase security and resilience risks that may arise from cyber-attacks or weaknesses in the underlying IT infrastructure if they are not implemented with due diligence.”