There’s a little-known rule in the works that could be very helpful for investors and their advisors in the short term, and it could be only the beginning for even more good news further down the road. I’ll do my best to explain it in nontechnical terms.
Open Banking Is Coming
The Consumer Financial Protection Bureau, or CFPB, is writing regulations to implement section 1033 of the Dodd-Frank Act. Section 1033 (commonly referred to as “open banking”) is fairly straightforward, but the rules pertaining to it could prove to be quite complex. Section 1033 simply requires certain financial institutions to make consumers’ financial data available to them (and their authorized advisors) in standard electronic formats. (Morningstar ByAllAccounts recently submitted a comment letter to the CFPB.)
This is a pretty big deal because it will make investors’ data readily available—and usable. And to be sure that even small financial institutions will comply, a direct electronic interface, called an API, is not required; data “scraping” will be allowed.
The regulations will prescribe data formats, required data security measures, and processes by which the CFPB can monitor appropriate transmission and use of the data by the financial institutions and aggregators (like Morningstar ByAllAccounts and Yodlee).
For now, the rules only apply to Regulation E deposit accounts and Regulation Z credit card accounts and to those institutions that provide them (that is, banks and credit card companies). In the future, we hope these rules will also apply to investments accounts as well as retirement accounts regulated by Erisa.
Open Banking Will Benefit Advisors and Clients
So, why is this a big deal for advisors?
In the very near term, authorized advisors will be able to have uniform directed access to their clients’ banking and credit card activities. Although it’s not a complete financial picture, it can certainly help when advising clients dealing with budgetary issues.
In the long run, the rules could expand to include all investment and retirement accounts. This would provide advisors with the opportunity to fully monitor and cohesively manage their clients’ full financial situation.
Additionally, aggregators would more easily provide accurate, up-to-date information.
Finally, consumer protections would be implemented to ensure secure access and prevent inappropriate use of investor data.
Open Banking a ‘Basic Right’
The regulations are necessary to the implementation of section 1033. Brian Costello, head of data aggregation strategy at Morningstar, believes that consumer access to their own financial data “should be a basic right, as should the ability for them to share the data with the parties the consumer has selected as best suited to help them manage their financial activities and performance.”
Costello says, “In the current macroeconomic environment, it is vital that industry and government are aligned in enabling and protecting consumers in their savings and investment activities. Investing should be accessible to all consumers, and one way to generate positive investment outcomes is via personalized advice from competent and authorized financial advisors.”
Advisors need to pay attention to further developments on open banking. Making data more accessible and usable is key, as are safeguards. It’s a fine line, but in the end, investors should benefit.
The opinions expressed here are the author’s. Morningstar values diversity of thought and publishes a broad range of viewpoints.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.