In the evolving landscape of financial services, open banking represents both an opportunity and a legal minefield. Designed to drive competition and innovation by giving consumers greater control over their financial data, open banking has triggered a wave of collaboration between traditional banks and fintech companies. However, this transformation brings complex legal and regulatory challenges that must be carefully navigated.
In this guide, we explore the key legal risks and responsibilities associated with open banking in the UK. Whether you’re a fintech startup building APIs or a well-established bank adapting to new demands, understanding the legal framework is essential for success.
What Is Open Banking?
Open banking is the practice of securely sharing financial information between banks and third-party providers (TPPs) via standardised APIs. It allows consumers and businesses to grant authorised companies access to their bank account data to provide tailored services, such as budgeting tools, payment initiation, and credit comparisons.
The concept was introduced in the UK following the EU’s PSD2 directive and the UK Competition and Markets Authority’s (CMA) requirement for the nine largest UK banks to enable third-party access to data.
Why Legal Compliance Matters
Open banking involves highly sensitive personal and financial data, regulated industries, and strict oversight. Any failure to comply with the law can result in:
- Regulatory penalties
- Consumer claims
- Data breaches and reputational damage
- Loss of FCA authorisation
- Class action lawsuits for privacy violations
Whether you’re a bank sharing data or a fintech accessing it, robust legal frameworks and regulatory compliance are vital to safeguarding your business.
Key Legal Challenges in Open Banking
1. Data Protection and GDPR Compliance
At the heart of open banking lies data, specifically, personal financial data. Under the UK GDPR and the Data Protection Act 2018, this information is classed as “special category” data and requires:
- Explicit consent from the customer for sharing or processing
- Transparent privacy policies explaining how the data will be used
- Robust security measures to protect against unauthorised access or breaches
Fintechs must be particularly careful, as they are often classed as data controllers in their own right and not just processors. This means they carry full legal responsibility for GDPR compliance, even if data originated from a bank.
2. FCA Licensing and Regulatory Authorisation
To operate legally in the UK open banking ecosystem, third-party providers must be authorised by the Financial Conduct Authority (FCA). There are two main types of providers:
- Account Information Service Providers (AISPs) – view transaction data
- Payment Initiation Service Providers (PISPs) – initiate payments on behalf of users
Fintechs must apply for FCA authorisation, which requires:
- Business plans and operational documents
- Details of IT systems and cybersecurity
- Compliance policies and procedures
- Fit and proper assessments for directors
Banks must also ensure they only work with FCA-authorised TPPs or risk legal exposure.
3. API Security and Liability Risks
The use of Application Programming Interfaces (APIs) raises serious concerns about data security and liability. If a breach or fraud occurs, key questions arise:
- Who is liable – the bank, the TPP, or the consumer?
- What legal protections are in place if APIs are exploited?
- How are compensation and dispute resolution handled?
Banks and fintechs must enter into contractual agreements that clearly set out obligations, risk allocation, incident reporting, and liability limitations. In the absence of clear contracts, businesses can face costly litigation and reputational fallout.
4. Consumer Protection and Financial Conduct Rules
Open banking promises better financial services, but consumer trust can easily be lost if protections fail. FCA rules require:
- Clear consumer communication
- No misleading advertising of open banking services
- Easy-to-understand consent processes
- Mechanisms for customer complaint resolution
Failure to meet these standards may result in regulatory enforcement or legal claims from affected users. Both fintechs and banks must ensure they meet the Financial Services and Markets Act (FSMA) and FCA Conduct of Business Rules.
5. Cross-Border Regulatory Challenges
For fintechs operating across borders, particularly in the EU or under passporting equivalents, the legal landscape is even more complex. Brexit has added layers of difficulty, with UK businesses needing to:
- Obtain local authorisation in EU states
- Understand divergent data protection laws
- Comply with differing national banking regulations
International collaboration may require multijurisdictional legal strategies, legal advice, and structured compliance policies tailored to each target market.
6. Competition Law and Anti-Trust Risks
Open banking aims to improve competition, but ironically, it can also lead to competition law breaches. For example:
- Banks limiting access to APIs for certain TPPs could be seen as anti-competitive behaviour
- Collusion between TPPs or unfair pricing models may breach the Competition Act 1998
Companies must ensure that their behaviour does not lead to market distortion, abuse of dominance, or cartel activity – all of which carry significant fines and sanctions.
7. Contractual Risk Between Banks and Fintechs
While open banking is often framed as a regulatory requirement, strong commercial agreements are essential. These should cover:
- API access rights and performance standards
- Service level agreements (SLAs)
- Indemnities and liability caps
- Dispute resolution processes
- Exit and termination clauses
A poorly drafted contract can lead to commercial disputes, loss of revenue, or even regulatory breaches.
Future Legal Trends in Open Banking
Open banking continues to evolve. The UK government’s Smart Data initiative and the planned Open Finance framework will expand data-sharing obligations across:
- Mortgages
- Savings
- Pensions
- Utilities
This means new areas of regulation, increased oversight, and further legal complexities. Fintechs and banks alike must stay ahead of developments to remain compliant and competitive.
How Monarch Solicitors Can Help
At Monarch Solicitors, our specialist financial services lawyers help fintechs, banks, and intermediaries navigate the legal complexities of open banking. Our services include:
- FCA licensing and regulatory applications
- GDPR compliance and data protection audits
- API agreements and liability frameworks
- Consumer protection and contract drafting
- Dispute resolution and regulatory defence
With offices in Manchester and London, and an international reach including Dubai and Hong Kong, we support both startups and multinational institutions in meeting their legal obligations with confidence.
Contact Our Open Banking Lawyers Today
If you need legal advice or representation in relation to open banking, fintech regulation, or data sharing compliance, our experienced team is ready to help.
Call us on 0330 127 8888 or email [email protected]
Serving clients across the UK and internationally.
