JC 2016 86

Joint Committee Discussion Paper

on the Use of Big Data by Financial Institutions

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Table of contents

Table of contents 2

Practical information 4

Executive summary 5

Definition and scope 7

Description of the phenomenon 8

Purposes / business models 9

Type of firms using Big Data 9 Purposes of the use of Big Data 10

Type and sources of data 10

Scale of the market and market concentration 11

Regulatory framework applicable to Big Data 14

Data protection requirements 14 Consumer protection requirements 17 Sectoral financial requirements 18

Potential benefits and risks for consumers and financial institutions 21

Potential benefits and risks linked to more granular segmentations 21

Potential benefits for consumers in terms of more personalised products and services 21 Risks related to access to financial services because of granular segmentations 22 Risks related to reduced comparability of financial services 23 Risks linked to limited/unclear information and comprehension about the extent to which the offer/service is tailored to consumers and/or represents a personal recommendation 23 Risks for consumers derived from more aggressive marketing or cross-selling practices 24

Potential benefits and risks linked to the quality of processes and services using Big Data tools 24

Potential benefits for consumers and financial institutions linked to better/innovative processes, products and services 24 Potential benefits for consumers derived from better insight into and control over their financial situation 26 Potential benefits for consumers and financial institutions linked to improved detection of fraud and other illegal activities 26 Potential benefits for financial institutions relating to improved regulatory compliance (regtech) 27 Risks related to consumers having limited ability to correct information errors, challenge the use of data/ decision-making processes or seek clarifications 27

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Risks for consumers and financial institutions related to flaws in the functioning of Big Data tools 28

Potential impact on revenues/costs 29

Potential benefits relating to increased revenues/lower costs derived from cost-effective processes, products or services 29 Budget and human capital challenges 30 Potential lower costs related to enhanced risk and credit-worthiness assessments 31 Potential increased revenues from access to a wider/more stable client base 31 Potential increase of revenues linked to exploitation of data 31 Potential impact on claims settlement/complaints handling practices 31

Reputational, legal and cybersecurity issues related to the use of Big Data technologies 32

Potential reputational or legal risks linked to the use of Big Data technologies 32 Amplified cybersecurity risks 32 Risks related to liability allocation 33

Benefits and risks linked to the impact on consumers lifestyles and broader ethical considerations linked to the use of Big Data 33

Possible evolution of the market 35

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Practical information

EBA, EIOPA, and ESMA (the ESAs) welcome comments on this Discussion Paper on the Use of Big

Data by Financial Institutions and in particular on the specific questions set out herein.

Comments can be sent by clicking on the respond button on the ESMA website. Please note that

the deadline for the submission of comments is 17 March 2017. Comments submitted after this

deadline, or submitted via other means may not be processed.

Comments are most helpful if they:

respond to the question stated;

indicate the specific question or point to which a comment relates;

are supported by a clear rationale;

provide evidence to support the views expressed/ rationale proposed; and

reflect a cross-sectoral (banking, insurance, and investment) approach, to the

extent possible.

It is important to note that although you may not be able to respond to each and every question,

the ESAs would encourage partial responses from stakeholders on those questions that they believe

are most relevant to them.

All contributions received will be published following the close of the consultation, unless you

request otherwise by ticking the relevant box in the consultation form. Please note that a request

to access a confidential response may be submitted in accordance with the ESA's rules on public

access to documents. We may consult you if we receive such a request. Any decision we make not

to disclose the response is reviewable by the ESA's Board of Appeal and the European Ombudsman.

https://www.esma.europa.eu/press-news/consultations/joint-committee-discussion-paper-use-big-data-financial-institutions

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Executive summary

Rationale and scope

One of the tasks of the European Banking Authority (EBA), the European Securities and Markets

Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA),

collectively known as the three European Supervisory Authorities (ESAs), is to monitor any

emerging risks for consumers and financial institutions as well as new and existing financial

activities and to adopt measures, where needed, with a view to promoting consumer protection

and the safety and soundness of markets and convergence in regulatory practices. The coordination

of the ESAs actions in these areas is taking place within the Joint Committee.

In monitoring consumer protection developments and financial innovations, the ESAs have noted

the continued increase in the use of Big Data across the banking, insurance and securities sectors,

i.e. the collection, processing and use of high volumes of different types of data from various

sources, using IT tools, in order to generate ideas, solutions or predict certain events or behaviours

(for example to draw actionable insights from these diversified volumes of data in order to profile

customers, identify patterns of consumption and make targeted offers). The increase in the use of

Big Data has been observed, albeit to varying extents, across the banking, insurance and securities

sectors and across different EU Member States.

The ESAs have assessed potential benefits and risks linked to the use of Big Data by financial

institutions, with a view to determining at a later stage which, if any, regulatory and/or supervisory

actions may be needed to mitigate the risks while at the same time harnessing the potential

benefits. The ESAs are issuing this Discussion Paper in order to receive feedback from stakeholders

on this preliminary high-level assessment.

Definition and description of the phenomenon

This Discussion Paper starts by defining the scope of this consultation and by describing the Big

Data phenomenon as observed by the ESAs. Internet and connected devices have become core

elements of our lifestyle. Data is generated, collected, stored, processed and used at

unprecedented rates and entire business sectors are being reshaped by building on data analytics.

All kinds of activities/products could be impacted, such as profiling consumers, assessing

creditworthiness, marketing campaigns, carrying out market segmentation decisions, developing

products, pricing products/services, underwriting risk, preventing fraud, undertaking

AML/customer identification, increasing internal efficiency within firms, etc.

Potential benefits and risks

The Discussion Paper then presents a preliminary assessment of the potential benefits and risks for

consumers and financial institutions. The use of Big Data is likely to transform the way products and

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services are provided with benefits for consumers (in terms of products/services better tailored to

consumers needs, better quality or cost-effective services/products) and financial institutions (for

instance in terms of more efficient processes and decision-making or better management of risks

or fraud situations). At the same time, the use of Big Data could potentially also have an impact on

consumers access to products/services, raise issues around the processing of data and financial

institutions pricing practices (e.g. based on analytical data showing a customers likely willingness

to pay more, or demonstrating his/her inertia to switch products) or decision-making using Big Data

technologies, the potential limitations or errors in the data and analytic tools, or security and

privacy/ethical concerns, eventually leading to legal and reputational risks for financial institutions.

Potential entry barriers in accessing Big Data technologies could also have negative implications on

innovation and competition in the financial markets at the detriment of consumers welfare.

Possible evolution of the market

The Discussion Paper concludes by presenting an overview of the possible evolution of the market.

The ESAs are of the view that the phenomenon has the potential to continue to grow and the

capacity to use Big Data may be a key determinant of competitive advantage in the future. The

adoption of Big Data technologies may change the way financial services are provided. Tech firms

may also expand their activities to provide financial services, by leveraging their own technical

expertise, innovative and integrated platforms or extensive consumer data or loyalty among

millennials. Many financial incumbents understand this reality and are well awar