In June 2019, the Standing Senate Committee on Banking, Trade and Commerce (the “Committee”) released its report on open banking, entitled “Open Banking: What it Means for You” (the “Report”). Open banking has gained popularity in several countries in recent years, including the United Kingdom and Australia. Yet, Canada has lagged behind.
The purpose of the Report was to analyze the benefits and issues surrounding open banking for Canada and how the federal government should regulate open banking. The Report calls for, among other things, swift action on the part of the federal government to advance a secure open banking framework.
What is Open Banking?
Open banking is a framework that gives individuals control over, and access to their financial data. The Report notes that in most countries, open banking consists of two elements: (1) financial data portability (the ability of consumers to direct that their personal financial information be shared with another organization); and (2) payments initiation (the enabling of payments directly from a bank account using a smartphone app, as an alternative to credit and debit card payments).
Open banking allows individuals to securely and easily transfer and share data held by their financial institutions with third parties, such as other financial institutions and fintech companies. These third parties can then use this information in the provision of its services to that individual. This ability to easily transfer financial information between entities means that consumers can easily move from one financial institution to another. In addition to this, open banking removes some of the friction surrounding mortgage applications or loans, allowing an individual to instantaneously grant a lender temporary access to specific financial information about her/him that is relevant to the mortgage/loan application.
A formal review of open banking was announced by the Canadian federal government , and an advisory committee was established by the Minister of Finance in September, 2018. A consultation paper was released in early 2019 based on some submissions to the advisory committee, and a more formal report is anticipated this year.
The Report and Recommendations
In the Report, the Senate found that individuals presently face significant difficulty in accessing and sharing their financial data and have little control over this data. The Report also found that the rapid adoption by Canadian consumers of new banking technologies (e.g. roboadvisors) has created an impetus for fintechs to be able to access consumer data “easily and seamlessly”.
The Report commented on current practices used by an individual to grant financial services providers with access to his/her financial information and the privacy risks associated with this. One such practice for facilitating data sharing is "screen scraping". This requires users to provide third party financial service providers with login credentials for the user’s online banking platform. This allows these third party service providers with access to extract user transactional and financial information. Yet, this approach is fraught with risks for the consumer, including the inability to limit further access to user’s financial information, identity fraud and cybersecurity risks. Open banking would be able to overcome this as the individual can limit the amount and types of financial information to only what is needed to provide the relevant services.
To address the above concerns and to address the need for a strong open banking framework, the Committee makes ten recommendations. These recommendations include:
- Fund Consumer Research. The Committee recognized that, while benefits to consumers were discussed, scant research on consumer attitudes towards open banking has been conducted. A key recommendation is to fund consumer advocacy groups for this purpose.
- Name an Interim Oversight Body. The report recommends that the Financial Consumer Agency of Canada (FCAC) be named an interim oversight body to monitor screen scraping and open banking in Canada.
- Develop a Framework for Regulation. Led by industry and based on principles, a framework to regulate open banking should be developed to govern the implementation of open banking.
- Develop an Accreditation System. Registration for third-party providers and tools for innovation for those providers to develop technology.
- Reform Privacy Laws. The report recommends reforming the Personal Information Protection and Document Act to become more closely-aligned with global standards of privacy.
- Payments Modernization. As the open banking framework is being developed, the government should work with industry experts in payment modernization.
Conclusion
The Report is a call for clear, decisive action towards open banking in Canada. While some of the recommendations are long-term in nature, the need to protect people’s privacy is pressing and the problem is clearly-defined.
With the upcoming federal election in October 2019, open banking is unlikely to be implemented rapidly. But with attention on the issue from both Houses of Parliament, there is reason to be optimistic that change is around the corner.
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