Marissa Daniels, Senior Associate at Torys, discusses the budding progress of Open Banking in Canada, its regulatory pathway, partnerships, and rules, as the country eagerly awaits an Open Banking framework.
Could you please share some details about your professional background and your involvement in Open Banking in Canada?
I am a lawyer at Torys LLP in Toronto, Canada, working in our Financial Institutions Regulatory practice. I advise regulated financial institutions, PSPs, fintechs, and other types of clients on various matters relating to banking, payments, and cards, including consumer protection laws and anti-money laundering laws. Many of these clients will be impacted by the Open Banking framework in Canada once it's adopted, and many will be active participants.
Can you provide an overview of the current state of Open Banking in Canada?
In Canada, there is not yet an Open Banking framework in place. Canadians are eagerly awaiting the launch of an Open Banking framework, but there is not yet a firm date for adoption. There is talk of a framework being introduced by the end of 2023.
To give a bit of history, back in 2018, the federal government appointed an Advisory Committee to guide a review of Open Banking. The first and second phases of the review each ended in 2020, resulting in the release of a final report that recommended a hybrid approach to Open Banking that would involve collaboration between the government and industry. The intention has been for the government to be primarily focused on the development of policy objectives and the framework and for the industry members to be responsible for the implementation and administration of the system.
The Advisory Committee recommended implementing the following core foundational elements for the hybrid model:
- Common rules for the industry participants, which will ensure that consumers are protected and allocate liability appropriately.
- An accreditation framework, which will allow third-party service providers to participate in an Open Banking system.
- Technical specifications that will allow for safe and efficient transfer of customer data that remains aligned with the policy objectives.
A key consideration for Open Banking in Canada is the principle that an individual has a right to control their personal information and how that information is communicated to third parties. This right stems from Canada's Digital Charter and the Consumer Privacy Protection Act.
In March 2022, the government appointed Abraham Tachjian to lead the implementation of an Open Banking framework. The initial targeted launch date for the first phase of the framework was January 2023. Although that first deadline was missed, the government confirmed that they remain committed to presenting a read-only model of Open Banking this year. A read-only model would enable third-party providers to view consumers' financial information, but not to perform any actions such as initiating payments on their behalf.
Although there is no formal Open Banking framework in place, a study found that over four million Canadians already sharing their data with third-party financial services providers through screen scraping. This demonstrates some consumer readiness for an Open Banking framework.
How do you foresee the Open Banking landscape evolving in Canada in the coming months? Are there any expected milestones or significant developments?
Four working groups were established in July 2022 to work on the implementation of the Open Banking framework. and have been meeting over the past year. The focus of each of these groups is to develop the foundational pieces of the Open Banking System with respect to Accreditation, Liability, Privacy, and Security, respectively. The term of the working groups is set to end by 29 September 2023. Hopefully what will come after that is the first phase of the framework.
As we start to get a sense of what a "made-in-Canada" open banking system may look like, it is evident that it will engage several different areas of law. There are still many moving parts that once implemented will define the regulatory ecosystem for Open Banking. Critical is the launch of Canada's Real-Time Rail payment system which will give businesses and consumers more transparency and access to their payments at any time and any day.
Data, privacy and security also play a significant role in Open Banking. Ensuring that robust laws exist to protect consumers, financial services providers and the integrity of the system is paramount to the success of Open Banking. In June 2022, the federal government introduced two pieces of legislation to strengthen regulation of privacy, cybersecurity and data governance in the private sector. The first, Bill C-26, would enact the Critical Cyber Systems Protection Act (CCSPA), which aims to protect critical cyber systems, including in the financial sector, and grants substantial new order-making and information-gathering powers to federal regulators overseeing them. The second, Bill C-27, would enact the Consumer Privacy Protection Act (CPPA) to reform federal privacy law, and the Artificial Intelligence and Data Act (AIDA), which would govern the use of AI and automated decision systems.
There also may be interplay between the Open Banking framework and the Retail Payment Activities Act which, once in force, will create a supervisory framework for payment service providers.
Given that, according to a recent survey conducted by the Financial Consumer Agency of Canada (FCAC), the federal regulator responsible for protecting financial consumers and enforcing consumer protection legislation, consumer awareness regarding Open Banking remains low, I expect that, once we approach the framework's launch date, a broader scale consumer education programme will be put in place.
What is the role of Canadian financial institutions in Open Banking? How are they adapting to the changing landscape?
Canadian financial institutions have actively participated in the initial review of Open Banking led by the Advisory Committee as stakeholders and in its current implementation as working group participants. As the Open Banking framework is developed, financial institutions will continue to play a role given the hybrid model, which requires their participation in the implementation and administration of the framework.
According to the Advisory Committee's final report, it was required that all federally regulated banks participate in the first phase of Open Banking. Provincially-regulated financial institutions have the opportunity to join on a voluntary basis and other financial entities will be allowed to participate, if they meet the accreditation criteria. The major financial institutions have already been preparing for the arrival of Open Banking by establishing partnerships with various fintechs, as I note below.
How does the Canadian Open Banking framework compare to other countries, such as the UK or Australia? Are there any lessons that can be learned from their experiences?
In general, global Open Banking frameworks tend to fall into one of two categories: market-driven or regulatory-driven. The development of the Canadian framework has been influenced by both types of models, and primarily by the frameworks in UK and Australia. While Canada characterises its framework as hybrid, it really leans more towards a regulatory-driven model as the federal government is setting the policy objectives as well as the parameters of the framework. However, the Canadian framework also recognises the important role that industry initiative plays in the success of Open Banking.
There has already been consensus in the Accreditation working group that the Australian model is preferable to determine adequacy of insurance. In terms of lessons learned, here have been critiques of the Australian accreditation system as creating a bit of a bottleneck, so hopefully we can learn from this in establishing our accreditation system.
The proposal under the Canadian framework to limit liability of consumers to a small fixed dollar amount except in the case of gross negligence has similarities to PSD2's limitation of a consumer's liability to simple mistakes, and our proposals on liability also emulate the Australian requirement for accredited members to be part of an external complaints body.
Are there any specific industry collaborations or partnerships that have emerged as a result of Open Banking in Canada?
In anticipation of the launch of our Open Banking framework, most of our large financial institutions have partnered with fintechs to build APIs and allow for other methods of integration.
For example, Symcor, a data-exchange company and joint venture of three of Canada's larger banks launched last December a suite of open banking solutions aiming to enable data sharing between Canadian financial institutions and aggregators.
Can you provide any insights into the potential benefits or risks associated with increased data sharing in the context of Open Banking?
Numerous benefits that have been highlighted in respect of increased data sharing through an Open Banking framework, such as
- Enabling consumers to have more control over their own data
- Providing a more secure, convenient and seamless process for data transfer
- Allowing for the development of financial tools that enables consumers to manage their finances more efficiently
- From a financial services provider's perspective, the increased access to consumers' financial data can allow them to develop more suitable and personalized products, which in turn leads to higher consumer retention.
Some risks of increased data sharing are:
- Cybersecurity risks are heightened given the increased number of participants accessing financial information
- Privacy concerns are exacerbated given the potential issues
arising from the misuse of consumer data or the use of consumer
data without proper consent
How will Open Banking contribute to the development of products and services for the underbanked and unbanked population in Canada?
According to the final report from the Advisory Committee, Open Banking will provide financially marginalized Canadians with access to new tools to support their finances. Given the new technologies and products that Open Banking will facilitate, this can potentially lower cost, increase options and automation – which can go a long way for people in rural locations.
The Advisory Committee has also stressed the importance of taking into account the public interest and paying close attention to financially marginalized populations to ensure that the framework improves, and is not detrimental too, their financial situations.
In what ways does Open Banking promote financial inclusion in Canada?
Open Banking has the potential to assist Canadians in determining what the best products are to meet their financial needs. According to the Senate of Canada, between 306,000 and 1.53 million Canadians do not have a bank account. This is in part due to the lack of access to traditional financial service providers. One of the key benefits of Open Banking will be to remedy this situation and strive for greater financial inclusion by allowing for the development of tools that can expand access to financial services.
From an access to credit perspective, Open Banking can enable consumers with limited credit to demonstrate, through their data, their credit worthiness and provide a bigger and better picture to lenders of each consumer's spendings and earnings.
With all of this said, Open Banking is technology driven and therefore may not be as facilitative for those who aren't able or willing to use the technology required to participate.
How important is consumer education in the context of Open Banking implementation? Who is responsible for this? The government? Banks? Fintechs?
Each of these parties has a role to play in educating consumers on Canada's Open Banking framework - in particular, whichever governance entity is established will play a role in consumer education. As noted above, the FCAC's survey clearly demonstrates the need for consumer education.
Originally published by The Paypers.
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