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ESAs consider risks and benefits of big data

The increasing use of big data brings risks as well as benefits to consumers and the financial industry, the Joint Committee of the European Supervisory Authorities (ESAs) has said.22 Dec 2016

The ESAs, which include the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority, have launched a public consultation on the use of the technology to identify any regulatory or supervisory actions that are needed.

"Big data is a phenomenon not based on a single technology, but rather a result of a whole string of innovations in several areas. What these innovations all have in common is that they use the volume, variety and velocity of data to derive economic benefit from it," the consultation paper said.

Financial institutions across the banking, insurance and investment sectors have started using big data techniques, it said.

"For example, aggregator services use financial and payment data from bank accounts of consumers for dashboard and accounting products. Banks use financial and payment data for consumer credit worthiness. … In the insurance sector, telematics boxes in cars monitoring driving behaviour are being applied to offer individualised policies and prices according to the customer’s driving behaviour [while] smart connected homes and wearable devices in the health sector may lead to more granular segmentation of risks, pricing more risk-based, and increase the effectiveness of risk-selections," the paper said.

"The possibility to achieve more granular segmentations could [therefore] lead to certain benefits for consumers and financial institutions in terms of more personalised products / services but could also raise questions in terms of its potential to limit the access to certain services, or at certain conditions, or exclude certain categories of consumers," it said.

"Firms’ price adjustments based on consumer features and behaviour-based factors could also go against financial institutions’ overarching obligation to treat customers in a fair and non-discriminatory manner," the paper said.

Relevant regulatory issues include data protection and consumer protection, the consultation paper said, and also clauses within sector-specific EU financial legislation that are relevant to any discussion of big data.

Firms also need to consider reputational, legal and cybersecurity issues relating to big data, it said.

The consultation closes on 17 March 2017.

Financial technology expert Luke Scanlon of Pinsent Masons, the law firm behind Out-Law.com said: "It is good to see that the ESAs have plans to address, among other issues, questions of allocation of liability between financial institutions and the growing number of third parties involved in financial data related ecosystems. A detailed response following the consultation period by the ESAs on this issue specifically would be very helpful for all businesses operating in the sector."

A similar exercise run by the UK's Financial Conduct Authority (FCA) this year found that the outcomes of big data are broadly positive for consumers. It identified two areas, however, where the use of big data had the potential to leave some consumers worse off: risk segmentation could make it harder for some customers to find insurance, and big data could allow firms to charge certain customers more, the FCA said.

A survey earlier this year found that major UK insurers had plans to prioritise the use of big data.