In 2016, Finance Canada began an exploration on the development of Open Banking, taking input from local banks and fintechs, as well as keeping an eye on developments in the USA and Europe.
Banking provision in Canada is heavily concentrated in 5 large banks. Whilst levels of competition and innovation is low, the Canadian banks largely avoided the catastrophic banking crisis which had affected other markets such as the USA and the UK in 2008. Their strong risk controls, corporate governance and steady profits had steered them clear of some of the collateralisation and leverage leading to the implosion elsewhere.
As the various inputs were provided to Finance Canada, the banking lobby suggested that Open Banking would not only create consumer risks, but would lead to outflows of capital and destabilise the secure banking system of which they were rightly proud.
On the other side, fintech companies were showcasing innovative propositions that enhanced competition and delivered better outcomes for people.
Whilst the Canadian banks are heavily linked to their US counterparts, sharing some trade associations and technology systems, Canadian policymaking and regulatory oversight was taking a lot of information from their UK equivalents, as the UK established Open Banking framework and delivery capability.
Against the backdrop of financial sector competitive positioning and policy development, Canada has also had various overlapping privacy laws which have been updated from time to time.
The 2018 budget announced a governmental review of the future of Open Banking, and in January 2020 the report from the Advisory Committee on Open Banking was released. It proposed that industry and government combined to develop a framework to introduce Open Banking to Canada. As part of the positioning, Open Banking was renamed to Customer Directed Finance and then to Consumer Driven Banking.
The Digital Charter Implementation Act, 2020, set out how Canada would regulate the collection, use and disclosure of personal information for commercial activity. The aim was to modernise the rules in the face of impending Open Banking, and set regulations about how consumers have a right to control, edit, manage and delete information about themselves.
In April 2022, the Canadian Department of Finance appointed its first Open Banking Lead, who was tasked with developing and implementing the country’s Open Banking regime. Alongside this effort, the Financial Data Exchange (FDX) was developing the potential for use of its API standard for Canada, complementary to the Department of Finance’s ongoing consultation on secure consumer-directed finance in Canada. The CIO Strategy Council had been inviting national stakeholders to provide input on a draft national standard for Open Finance. Many of the fintechs lobbied against the role of FDX (where all of the banks and some of the fintechs were members) on account of both missing features in scope (not supporting live use cases) and were also concerned at any possibility of a market led rather than a regulator enforced approach.
There was widespread frustration that the 2023 budget omitted the anticipated Consumer Driven Banking as progress in Canada fell further behind other markets. In April 2024, the government of Canada included Consumer Driven Banking in the budget that will have both a system of governance and funding, and seek a level of interoperability with the framework being established by the US CFPB, expected later in 2024. There is some concern that the framework proposed in the budget did not clearly include small business accounts which are in scope in European markets under PSD2.
The budget outlines an intention to pursue a hybrid approach, with government and industry collaborating. Three core fundamental elements would encompass common rules to protect consumers, an accreditation framework for third-party providers and technical specifications for data transfer. This way, they hope to give consumers confidence. The most important area to get right, as it has been in all other markets, is establishing clear independence and regulatory oversight of the development of standards, enforcement of standards and the ability to decree minimum scope. There remains the usual challenge of establishing a clear liability framework which has systems of customer redress.
