Canada must take action on open banking: Senate committee

Following hearings held earlier this year, the Standing Senate Committee on Banking, Trade and Commerce (the Committee) has tabled its report titled “Open Banking: What it Means for You” (report).

What you need to know

• Open banking generally refers to a framework that gives customers access to, and control over, their financial data. In most countries, open banking has two elements: financial data portability and payments initiation.
• The report finds that “control over personal financial data should lie with the consumer,” and that approximately 4 million Canadians have already taken “control by using screen scraping¹ apps offered by fintech companies in order to meet their needs for a more personalized, convenient digital banking experience.”
• The report calls on the federal government to act decisively on implementing a secure and effective open banking framework that benefits both consumers and providers of financial services. The report also urges the federal government to implement the proposals set out in the Digital Charter² at the earliest opportunity.
• Recognizing the need for urgent action, the report identifies three measures for immediate implementation and an additional seven long-term recommendations.
• The federal government’s report on its open banking consultation is expected to be released this summer.

Need to close the open banking gap in Canada

The report finds that an open banking framework is required to:

• safeguard consumer’s personal financial information as Canadians are turning to risky practices such as “screen scraping” to access personalized digitized financial services which increases identity theft, fraud and cyber-related attacks;
• improve consumers’ choice in financial products and services; and
• promote a strong, innovative and internationally competitive Canadian financial sector.

The report observes that Canada is already a laggard in open banking regulation³ and that it risks falling further behind, potentially becoming “an importer of financial technology rather than an exporter,” if it fails to create a regulatory environment conducive to open banking.

Short-term recommendations

Given the urgency to protect Canadians, the report recommends that the federal government immediately takes action on a number of things.

1. Designate an interim oversight body. The report recommends that the Minster of Finance designate the Financial Consumer Agency of Canada (FCAC)⁴ as the interim oversight body, to address the practice of screen scraping and other open banking activities, until a final federal regulator has been identified. As the interim oversight body, the FCAC would:
   • conduct ongoing research on the benefits and risks for consumers of screen scraping and open banking activities;
   • educate consumers about screen scraping;
   • respond to complaints and questions from the public relating to screen scraping and open banking activities; and
   • coordinate oversight responsibilities with provincial and territorial consumer protection regulators.
2. Promote consumer advocacy. In light of the conflicting testimony the Committee received on the impact of open banking, the report recommends that consumer protection advocacy groups be funded to assist them in conducting and publishing research on the benefits and risks of screen scraping and open banking activities.
3. Begin developing a regulatory framework. The report recommends that the federal government facilitate the development of a principles-based, industry-led open banking framework that would be integrated with existing financial sector and privacy legislation. Such a framework would identify:
   • the scope of data to be accessible;
   • how to include the payments sector within the framework;
   • implementation timelines; and
   • the participating financial services providers.

The report further suggests that the federal government assist with the development of industry-led codes of practice and prioritize the development of technology-agnostic open banking application programming standards.

Long-term recommendations

Recognizing the need for a robust and open banking framework, the report outlines seven recommendations that should be implanted over the longer-term. Outlined below are the key recommendations.

1. Reform the Personal Information Protection and Electronic Documents Act. The reform would align it with global privacy standards, including recognizing a consumer data portability right. The inclusion of such a right would further align Canada with the EU’s General Data Protection Regulations and the recently released Digital Charter’s principle of “Transparency, Portability and Interoperability.”
2. Create an accreditation system. The creation of a registry of accredited third-party providers would build consumer trust and legitimize fintechs’ open banking offerings. The report also recommends that accredited third-party providers should also have access to an innovation sandbox to safely test and develop open banking technology.
3. Introduce relevant financial sector-specific amendments. An open banking legislative framework should prohibit the use of consumer banking data for insurance underwriting purposes, ensure the continued stability of the financial sector and provide any necessary bank-specific consumer protection measures.
4. Coordinate with payments modernization. Recognizing that payment initiation is an important aspect of open banking, the federal government should coordinate the development of the open banking framework with the payments industry modernization efforts.
5. Designate a regulatory authority. The Privacy Commissioner focusing on privacy and the Commissioner of Competition focusing on market behaviour should initially be designated as complementary regulators. The government should regularly review these shared responsibilities and consider transitioning to a single regulator if it is deemed necessary.

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¹ The report defines screen scraping as “the process by which certain smartphone apps access banking data. Some fintech companies will use a customer’s online banking login credentials to access the customer’s bank account in order to collect and store the customer’s account information and transaction history.”

² Ten Principles released by Innovation, Science and Economic Development Canada to guide the federal government in developing policies for the data and the digital economy.

³ Canada was recently ranked last out of ten countries in an Ernst and Young international comparison of how conducive its regulatory environment is for open banking and the potential for consumers to adopt open banking: EY Open Banking Opportunity Index (October 2018).

⁴ The FCAC supervises federally regulated financial institutions to ensure compliance with federal financial consumer protection provisions and to promote financial literacy.