“No going back” on consumer-directed finance: Advisory Committee report on open banking

On January 31, the Minister of Finance released the Advisory Committee on Open Banking’s (Committee) report, “Consumer-directed finance: the future of financial services” (report), which announced that the Government will move forward to enable consumer-directed finance. The Minister announced that the Committee, for the second phase of its ongoing consultation on open banking, will focus on providing advice on potential solutions and standards that enhance consumer privacy and security¹.

What you need to know

• The Committee found during its consultation the term “open banking” is often misunderstood and that “consumer-directed finance” more accurately reflects what is intended, providing better control over and protection of their financial data.
• In a consumer-directed finance framework, the consumer has access to and control over their financial data and can direct their financial institution to share personal information with service providers, irrespective of whether that service provider has a relationship with the consumer's financial institution(s).
• With an estimated 3.5 to 4 million Canadians already using data-driven services to manage their finances, most often sharing their financial data through screen-scraping, the Committee acknowledged that there is “no going back” and recommended that the government move forward to enable consumer-directed finance.  
• The Committee noted that even though privacy and cybersecurity concerns are real and must be addressed, equal weight must be given to ensuring the growth of a vibrant financial ecosystem and technological innovation.
• The Committee urged the government to announce a “bold, clear and concrete timeline for delivering consumer-directed finance”. Based on other jurisdictions’ experiences, the Committee noted that a one to two-year timeline was reasonable.

Highlights from the report

Principled approach to consumer-directed finance: The Committee recommended that Canada’s consumer-directed finance should:

• focus on enabling consumer choice and meaningful control. Consumers, including small businesses, should be able to securely direct and control the use of their data in ways that benefit them;
• be secure; respect and enhance privacy; and; be an improvement over the status quo;
• provide a clear and straightforward accountability mechanism for consumers and a means to ensure that liability rests with the appropriate party; and
• be guided by innovation which is founded on a safe, secure and standardized data-sharing mechanism.

Government’s role in developing a consumer-directed finance framework: The Committee recommended that industry and government work in tandem, with the government acting as an “accelerant”—establishing timelines and objectives that an ultimate framework must meet—and an “enabler”—“setting the guardrails in a way that protects consumers, participants and the sector, but allows innovation to flourish”. Canada’s proposed collaborative approach in developing an open banking framework is unique; other jurisdictions have used a more top-down approach. For instance, open banking in the U.K. was established through competition intervention when the U.K. Competition and Markets Authority issued a ruling that required the nine-biggest U.K. banks to allow licensed startups direct access to their customers’ data².

Current risks not insurmountable: The Committee acknowledged that there are numerous risks associated with consumer-directed finance—namely, consumer protection, financial stability, privacy and cybersecurity—but the Committee was of the view that these risks are not insurmountable. The report noted that there was strong consensus among stakeholders that an accreditation system to admit service providers into the ecosystem could be an appropriate way to manage and address privacy and cybersecurity risks.

On the issue of screen-scraping, the Committee noted that that “eliminating screen-scraping would end the possibility of new-data driven financial tools being offered to a broader group of Canadians and would set Canada behind global developments that are digitalizing the financial sector”. Interestingly, in coming to this conclusion the Committee did not address the Standing Senate Committee on Banking, Trade and Commerce’s July 2019 report on open banking (summarized here) or its interim recommendations, including the need for urgent regulatory oversight to mitigate the ongoing risks associated with the prevalent use of screen-scraping.

Technical standards. The report noted that “technical standards should be market-based and industry-led, but consistent with government objectives”. The Committee recommended that “the technical approach must be nimble and avoid being overly prescriptive” and that the government “should not mandate specific technologies as technology infrastructure, tools and governance systems evolve quickly”. Such a non-prescriptive approach would ensure that the consumer-directed finance framework evolves in step with changes in technology.

Alignment and broader application. The Committee recommended that the consumer-directed finance model should serve as a blueprint for the government to enable enhanced data choice and control for Canadians across all sectors of the economy. The Committee recognized that consumer-directed finance is a first step in a broader digitization of the Canadian economy and part of an ongoing conversation about Canadians’ ability to use, control and protect their own data. This is particularly relevant given the government’s ongoing initiative to modernize Canada’s privacy laws in an effort to align with the EU’s General Data Protection Regulation (summarized here). The Committee also noted that the development of the consumer-directed finance framework be aligned with other work underway to transform the financial services sector, including payments modernization, and be interoperable with international systems.

Next steps

Starting in spring 2020, the Committee will work with stakeholders to examine governance, consumer control of personal data, and privacy and security issues relating to consumer-directed finance. The Committee will deliver the results of its second-phase review to the Minister “later this year”.

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¹ Department of Finance (January 31, 2020), Minister Morneau announces second phase of open banking review with a focus on data security in financial services, press release.

² CMA paves the way for Open Banking revolution (press release).

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