Under their remit to monitor emerging risks for consumers and financial institutions, the Joint Committee of the European Supervisory Authorities (the ESAs) is seeking comments by 17 March on its Discussion Paper on the use of “Big Data” by financial institutions.
The ESAs define Big Data as the collection, processing and use of high volumes of different types of data from various sources, using IT tools, in order to generate ideas and solutions or to predict certain events or behaviours. They observe the increase in the use of Big Data – albeit to varying extents across the sectors and across the EU – and seek views on potential benefits and risks.
The ESAs recognise that the use of Big Data is likely to transform the way products and services are provided, which could provide benefits for consumers: products and services better tailored to consumers’ needs, or better quality or more cost-efficient services, and for financial institutions: more efficient processes and decision-making, better management of risks or fraud. But it also raises questions about the impact on consumers’ ability to access the financial markets, data processing and pricing practices, potential limitations or errors in data or analytical tools, or security, privacy or ethical concerns.
The ESAs believe the phenomenon has the potential to grow and that a firm’s capacity to use Big Data may be a key determinant of its future competitive advantage. It may change the way financial services are provided and bring new entrants to the market. They note the increasing number of appointments of Chief Data Officers.
A distinction is drawn between types of data analysis. Descriptive analytics use data aggregation and mining to provide insights into what has happened in the past. Predictive analytics use a variety of statistical models, data mining, machine learning or forecasting techniques to understand what could happen in the future. Prescriptive analytics recommend one or more courses of action and the likely outcome of each decision.
The potential benefits to consumers of more personalised products and services is contrasted with the risk of reduced comparability between products, limited or unclear information and comprehension about the extent to which the offer is tailored or represents a personal recommendation, and more aggressive marketing or cross-selling practices. Also considered are the potential risks and benefits of the use of Big Data to the quality of processes and services, to revenues and costs, and to the impact on consumer’s lifestyles and broader ethical considerations.
At this stage, the ESAs seek views on the possible evolution of the market and of the risks and benefits they have initially identified. They do not suggest new or revised rules. They underline that firms are already subject to various sectoral and cross-sectoral requirements, which, while not explicit about the use of Big Data, provide a broad regulatory framework for the protection of consumers and their personal information. Prospectus publication is required when securities are offered to the public or admitted to trading. There was evidence that SMEs were deterred because of the paperwork and costs involved in issuing a prospectus under the current rules.