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Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue No. 51 - Evidence - February 20, 2019


OTTAWA, Wednesday, February 20, 2019

The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:15 p.m. to examine and report on the potential benefits and challenges of open banking for Canadian financial services consumers, with specific focus on the federal government’s regulatory role.

Senator Douglas Black (Chair) in the chair.

[English]

The Chair: Good afternoon. Welcome, colleagues and members of the general public who are following today’s proceedings of the Standing Senate Committee on Banking, Trade and Commerce either here in the room or via the web. My name is Doug Black, and I chair this committee.

I want to welcome all of my colleagues back after the break and, of course, to welcome us to this stunning new Senate of Canada building. I would encourage all Canadians, if you have the opportunity to be in Ottawa, to find time to visit it. It is glorious. This room, which is a big upgrade from where we have been for the last number of years, will be our home for our twice-weekly meetings going forward.

Before we call on our panellists, I would like my colleagues to introduce themselves.

Senator Klyne: Marty Klyne, Saskatchewan.

Senator Griffin: Diane Griffin, Prince Edward Island.

Senator Duffy: Mike Duffy, Prince Edward Island.

[Translation]

Senator Dagenais: Jean-Guy Dagenais from Quebec.

[English]

Senator Stewart Olsen: I’m Carolyn Stewart Olsen, New Brunswick.

Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.

Senator Martin: Yonah Martin, British Columbia.

Senator Frum: Linda Frum, Ontario.

The Chair: I would like to take this opportunity to remind the committee that Linda Frum will now be sitting with us as a permanent member. Having had the privilege of serving with Linda now for six years in the Senate, we are big winners. Thank you for agreeing to serve on this committee.

And we have a new senator: Senator Wetston, can you introduce yourself please?

Senator Wetston: Thank you. I just feel so youthful now that you mention it. Howard Wetston, Toronto.

The Chair: Today marks the first meeting of our study of the potential benefits and challenges of open banking for Canadian financial services consumers, with a specific focus on the federal government’s regulatory role. I am pleased to welcome our witnesses in the first panel: as an individual, Christopher C. Nicholls, Professor and W. Geoff Beattie Chair in Corporate Law, Faculty of Law, The University of Western Ontario; and from Equitable Bank, Dan Dickinson, Senior Vice President and Chief Digital Officer.

Professor, I would ask if you would please proceed with your opening comments. We’ll follow that by Mr. Dickinson, and then I will expect senators will have questions for you.

Christopher C. Nicholls, Professor and W. Geoff Beattie Chair in Corporate Law, Faculty of Law, The University of Western Ontario, as an individual: Thank you, Mr. Chairman and honourable senators.

Over the past five years, open banking has attracted significant attention worldwide. Here in Canada, of course, the federal government’s Advisory Committee on Open Banking released its consultation paper last month. The Advisory Committee defined open banking in this way: “As a framework where consumers and businesses can authorize third-party financial service providers to access their financial transaction data using secure online channels.” Those channels, it is understood, would involve the use of standardized open application programming interfaces, or APIs.

Open banking, some people believe, could herald a revolutionary change in the delivery of financial services and the structure of financial services firms. One U.K. banker, for example, has described open banking as “the biggest change to the system since the invention of the chequebook.”

I would like to make three brief points today: First, that the possible benefits of open banking to Canadian consumers and the Canadian economy are real and potentially very significant; second, that the rapid pace of international developments in open banking does create some urgency for Canadian legislators and regulators to develop an appropriate Canadian framework in a timely way to ensure that Canada is well positioned to participate in the benefits and opportunities that open banking can offer; and third, although it is important for Canada to move as promptly and prudently as possible in this area, important legal, regulatory and structural issues have been identified that must be resolved satisfactorily to ensure that any Canadian regime of open banking operates safely to fulfill the promise of providing significant net benefit to the Canadian public.

I will discuss the benefits. A partial list of the possible benefits of open banking might include: enhancing competition in the financial services sector, for example, by enabling consumers to engage in more effective price and service comparison shopping, and by making switching from one service provider to another easier; expanding the range of money management and investment management products and services available to financial services consumers; improving credit application processes; creating new payment initiation options that could replace the use of credit cards, debit cards and other traditional payment methods; more broadly, facilitating the creation of many new businesses; unbundling the services typically provided today by incumbent financial institutions; building on traditional bank platforms to provide a wide range of innovative and useful financial services; improving financial literacy, preventing exploitation of vulnerable borrowers; and most ambitiously, offering the possibility of expanding banking and financial services to many people who currently lack access to such services.

There have been significant recent advances in the development of open banking, internationally, including in the European Union, following the adoption of the second payment services directive, PSD2, in November 2015, and in the United Kingdom. The U.K. developments are especially noteworthy. In 2016, the U.K. Competition and Markets Authority, CMA, established the Open Banking Implementation Entity to manage the process of moving to an open banking environment. The OBIE is funded by the U.K.’s nine largest banks and building societies, all of which are now required to make certain data available through open banking.

As of January 2019, there were 71 regulated third-party providers enrolled in open banking with the U.K. Financial Conduct Authority, as well as 33 account providers. That’s essentially those nine largest U.K. banks and building societies, as well as a number of others that have chosen to participate voluntarily.

There have also been major developments facilitating the move to open banking in Australia, Japan, Hong Kong, Singapore and elsewhere.

Some Canadian commentators worry that if there is an international race to become a world leader in open banking, Canada may be running behind. In its recent open banking opportunity index, for example, EY ranked Canada eighth worldwide in terms of readiness to take advantage of open banking. The U.K. was ranked first. In particular, the EY index gave Canada the lowest ranking in the category of regulatory environment.

Effective implementation of an open banking regime would certainly depend upon ensuring that a number of key legal issues and regulatory concerns were dealt with appropriately. Those issues would include: privacy concerns, issues of data protection and ownership, cybersecurity — and I appreciate this committee has considered the implication of cybersecurity recently. I note the committee’s October 2018 report with the very apt subtitle “It should keep you up at night,” and it does. Other issues include: anti-money laundering; digital identification; various liability issues; securities regulatory issues; challenges relating to developing sufficient regulatory expertise and capacity; and implications for the payments system, market stability and market structure in the financial services sector.

In conclusion, the potential benefits of open banking are significant, and the rate of international open banking developments is rapid. A thoughtful and effective Canadian response to these developments will challenge legislators and regulators to develop and implement a framework that will enable Canadian consumers and businesses to realize the considerable benefits open banking offers and address a series of specifically identified challenges, while trying, to the greatest extent possible, to anticipate future hazards as well.

I wish to thank the members of the committee for giving me the opportunity to speak today, and I look forward to taking your questions.

The Chair: Thank you, Mr. Nicholls. That was extraordinarily helpful.

Mr. Dickinson, please go ahead.

Dan Dickinson, Senior Vice President and Chief Digital Officer, Equitable Bank: Thank you, chair, and good afternoon, everyone. I’m the Senior Vice President and Chief Digital Officer at Equitable Bank. Headquartered in Toronto but operating across the country, Equitable is the ninth-largest independent schedule 1 bank in Canada. As Canada’s challenger bank, we take pride in our position as an intermediate-sized bank that drives innovation while focusing on the needs of customers. We have invested continuously in our technology infrastructure and capabilities in order to remain responsive to changing customer needs today and over the longer term.

One such change that we believe holds a great deal of promise for Canadians is open banking. I wish to thank the committee for the opportunity to share our thoughts on the potential benefits and challenges of open banking.

Before I proceed, I should point out that while I also sit on the board of directors for Payments Canada, I appear here today only to present my own view and the views of my bank.

Part of my role at Equitable is to think of new ways to help our customers use advances in technology. Another is to monitor regulatory developments in other markets in search of ideas that could benefit our customers, should they come into effect here.

Open banking fits both these bills. We firmly believe in the potential benefits of open banking, by which we mean giving Canadians access to their financial data when and where they want it. We are unequivocal in our belief that customers own their banking data.

From the time we read the commitment in the 2018 budget to study open banking, through the appointment of Minister Morneau’s advisory panel on the topic, we at Equitable Bank enthusiastically and publicly advocated for open banking in Canada. We were further encouraged by the excellent consultation paper released last month by the Department of Finance, which clearly articulated the potential benefits to Canadians. To quote that paper:

. . . open banking could increase the efficiency of the financial sector by promoting a vibrant and more diverse ecosystem of financial services providers and thereby increase the utility of the sector by delivering innovative and useful offerings for consumers and small business at low cost.

We couldn’t agree more.

At Equitable, our intention is not to be all things to all people. We focus on offering differentiated products, better rates and superior experiences where we feel Canadians are not well served today. We are a leader in alternative and CMHC mortgages, for example. We are one of two banks to provide reverse mortgages, and our digital arm, EQ Bank, was rated one of the top 10 digital banks in the world by Financial IT magazine.

However, there are more products and services we do not offer, because Canadians are already well served by other institutions. Our view of the future is that Canadians will work with a handful of providers to create the financial picture that best suits them, and that the tools will exist to help everyday Canadians find that ideal setup. This is the possibility offered by open banking: Canadians can easily see and manage their family’s finances; small businesses can more easily find and procure the banking services they need at rates and prices that help them grow; the Canadian fintech community grows and thrives, creating jobs and filling needs; and increased competition leads better value for everyone’s hard-earned dollar.

The consultation paper released by the Department of Finance also contemplates the potential risks of open banking. While we’re certainly aware of these risks — indeed, as a bank, consideration and management of risk is built into our DNA — we do not believe that the risks outweigh the potential benefits. Furthermore, these risks can be mitigated if government plays a strong role in enforcing standards and principles, especially regarding privacy, consent and consumer protection. For example, standards for data-sharing consent that emphasizes clarity and simplicity for customers versus complex legalese will be vital in helping to protect customer privacy. Similarly, a clear scheme for establishing liability when third parties become involved, and guidelines as to how those third parties are vetted would help to protect all parties.

The final risk I’ll address is cybersecurity. While cybersecurity is a constant consideration in how we build and operate our banking services — and I can assure you, it does keep me up at night — our view is that open banking does not increase the nature of cybersecurity risk for banks. Indeed, we believe may reduce the cybersecurity risk inherent in screen-scraping, wherein unregulated third parties store the banking credentials of Canadian bank customers. The Canadian desire for this screen-scraping technology is understandable. Canadians wish to actually see their complete financial picture in one place and better understand their own finances. We believe that this need can be better and more securely achieved through a well-managed open banking regime.

We believe government can play a central role not only in helping to mitigate risk but in driving the adoption of open banking. Clear principles regarding interoperability, minimum standards for how and how much data ought to be published by banks and published timelines for adoption of open banking services will all be key in successfully delivering open banking to Canadians.

In closing, on behalf of Equitable Bank’s employees, I would like to once again thank you for the opportunity to share our views. We applaud the government’s initiative regarding open banking and look forward to the next phases of the initiative. As an advocate for innovation and customer-centred banking, Equitable Bank is an ardent supporter of open banking in Canada and the benefits it will bring to both customers and to society as a whole. I thank you for your time and welcome any questions you may have.

The Chair: Thank you very much, and you have been very helpful to the committee.

Before proceeding to questions, I would like to introduce Senator Verner, who is also a member of this committee. We may now move to questions.

Senator Stewart Olsen: Thank you for being here and for your presentations. I’m going to bring us back, if you don’t mind, to a very simple thing because we have people watching who are going to say, “What is open banking?” I wonder if you can give me a short answer to that because it’s a confusing term.

Mr. Nicholls: I will give you a brief explanation and let Mr. Dickinson fill in any holes.

The idea behind open banking is that a bank’s data or information — on your or my account — would be made available in a secure form directly to third parties. For example, a third-party fintech company. That third party could then take that information, with the customer’s consent, perhaps aggregate it or combine it with other information and provide to the customer a service they can’t otherwise get. Here’s the paradigm case, the one that got people excited in the U.K. where open banking was, in part, a response to the European second payment services directive and lack of competition in England’s banking sector. The Competition and Markets Authority conducted a study, or its predecessor did, of the banking industry in the U.K. and found there was not much robust competition in the market for personal current accounts. Essentially, a small group of banks — four banks — controlled about 70 per cent of that market and their data showed that customers were not switching banks, even when there was evidence that there were better products, services and prices available to them. There was stickiness, as the economists call it.

One of the reasons that people don’t switch is information. It’s very hard to comparison shop between banks. Another reason is that even if you know there is a better banking product, it’s difficult to switch. It involves going to your bank and there are a lot of reasons — psychological, behavioural, time and otherwise — as to why people don’t switch banks.

With an open banking regime, a single service provider could give you, with your consent, a product that would allow you to see all of your banking accounts, at every institution, at the same time. It would also make it easy for you, at the push of a button, to switch all of your accounts from one bank to another without talking to your current bank. If that regime existed, you can see how we would expect robust competition in the market for personal current accounts, which is what really motivated originally the U.K. initiative. But that’s the simplest example of open banking.

I’m sure Mr. Dickinson can give you a host other possibilities that become available once it is possible for third party innovative technology-based companies to get access directly to your banking transaction data, with your consent, and add value to it.

I’ll let Mr. Dickinson expand.

Mr. Dickinson: I grew up on a farm in rural Nova Scotia. There is one bank branch within a 20-minute drive, and that bank branch has been the only source of banking products for my family for years. My father is a farmer and has more complex needs than perhaps the average day-to-day banking account, so he has gone to that bank for his needs. In theory, in an open banking world, you could actually have a tool created by an unbiased third party which is there to serve farmers and says, “Tell me more about your farm, tell me about cash flow the different things about you.” And that is, again, with their consent.

They could input that information a simple way and look across the spectrum of financial service options across the country — it does not have to be local — and provide an option that said this would be the best fit for you.

Before getting to the switching and whatnot, just having the access to information is a key part of open banking. Today, my father, who is a very busy man, would have to look at the websites or call each of these banks individually to find out which is best for him even for that simple purpose. I feel there is a great deal of value there, especially in communities like the one I grew up in.

Senator Stewart Olsen: In your consideration, who would benefit the most by this and do you think Canada is ready?

Mr. Nicholls: Again I will defer to Mr. Dickinson on the business point. However, I believe it is already happening in Canada. In other words, the companies that are doing this are already operating without an open banking regime, and Mr. Dickinson referred to this in his remarks. The way some companies do this now is through screen scraping — I don’t know where the term comes from, but it refers to the idea that you, the bank customer, turn over to a third party your authentication details so they can log into your account. It is not done in a casual way but in a way intended to protect that data. But that is not the most secure way of providing this information.

But people are doing this now in Canada and elsewhere. In fact, again, one of the drivers for open banking reform in many jurisdictions is a recognition that screen scraping is currently going on and that there must be a better and more secure way of providing the services that people want without an insecure method, or less secure method, of transferring information, such as screen scraping. In terms of who would benefit, we don’t know because in a sense, the sky is the limit.

The obvious examples that have been mentioned, people in remote areas might have access to a wider range of services. There is some suggestion that small- and medium-sized businesses might benefit from improved credit application processes not available to them under our current scheme. But the range of people who would benefit the most is contestable, and I think the people who are in the best position to speak to you about that would be people in the industry, and consumer groups.

Senator Stewart Olsen: Thank you.

Mr. Dickinson: My view is that more competition can only help in this case. I believe there are needs out there that are being met, as Mr. Nicholls said, in ways that are less than ideal. This is not to disparage the companies that are doing these screen scraping methods, but these are unregulated entities. So I think giving customers a way to see their finances in one place to have a better understanding of their credit card payments or the timing of the credit card payments, in a way that leaves them within the trust network of the banks that have served this country for a long time and that customers trust already, is the overall benefit for the everyday Canadian consumer.

Certainly fintechs would be a beneficiary of this because they could provide services, even niche services that wouldn’t be cost effective for other banks to do. And then the employment opportunities that come with that small business growth are obvious.

Senator Wetston: Thank you, chair. Mr. Nicholls, I’ve read a couple of your books — I think a couple at least. Is it two or three that you have?

Mr. Nicholls: Six.

Senator Wetston: I talked to a couple of people about this, in looking at open banking, pros and cons. I have some issue with the ownership of data. I don’t think the case law is settled in Canada on that issue. I don’t think there is any law you can point at to say that the customer owns the data. But you used that expression Mr. Dickinson, so that now that you have a law professor on your right, I will give you an opportunity to answer that question. Who owns the data?

Mr. Nicholls: I’m going to take the prerogative that many law professors do and not answer the question. Moving right along.

I think it may be a contentious issue. In addition to that, the question of who owns data, or indeed any intellectual property issue involving modern technology, that is a very specialized area of law and it is not my area. I’m not suggesting that there is not anyone who can speak to it, but I can’t speak to it.

Even if you are right, and I suspect you may be, that there is uncertainty about who owns the data, which seems to call for a legislative solution as part of implementing open banking. I think that’s generally recognized as well, that there has to be a certainty in ownership of data.

There are some additional complications surrounding enriched data. In other words, a customer certainly owns data with respect to themselves but what happens when that data gets mixed with other value-added services that their bank provides. Is that data still the customer’s own, or is it somehow mixed? Again, these are complex issues of property law. I’m not the one to speak to them. You are right, they have to be resolved.

Senator Wetston: Chair, can we hold that thought and see whether we can explore it in the context of this?

The Chair: Absolutely. We might want to get a witness on that very point.

Senator Wetston: There is a lot of discussion about privacy, and we’ll address that issue. You have raised important issues about it, but it seems to surface all the time. But there are other issues associated with, of course, an open-banking framework. The U.K. has moved ahead very well, and the standards need to be developed. I know you’ve looked at the reports, maybe reports from the Competition Bureau as well as Finance dealing with data and those related issues in open banking. My question is: We have a fragmented system of regulation in Canada, so pick your regulator. Mr. Nicholls, you would have some sense of this issue, obviously, given your work. Mr. Dickinson, you are probably regulated by OSFI. You probably have some involvement with the securities regulators as well. You might.

Mr. Dickinson: Not to date.

Senator Wetston: You are lucky. The time might come if you go into open banking. Can you help frame the regulatory environment as you see it? Obviously, that would have to be considered in the context of finance if they move ahead with some framework for open banking. Do you have any thoughts about that?

Mr. Nicholls:

Yes. There are three elements to this. First, the prudential regulation that OSFI currently carries out would have to include some consideration of the impact of fintechs, depending on what they were doing. There is no way to avoid that. It is difficult in the abstract to talk about what that would look like because it depends on what the specific fintech is doing, whether they are carrying on work that may touch upon prudential concerns. There is no way to avoid securities regulatory issues. There just isn’t. I mentioned them in my remarks, but depending on the nature of the product being provided, if there is a financial management product that a fintech is providing, it is very difficult to avoid securities regulatory issues. In our system, as you are very well aware, senator, it is fragmented and we can’t really do anything about it. That’s our system at the moment.

There are also systemic implications, and we may have a new systemic regulator who will have something to say about that as well. Again, we don’t have that regulator yet. It is hard to envision exactly how that would layer on top of a new model for open banking when we don’t even have that regulator operating in our existing system.

And, of course, the payments system. There are significant payment implications with respect to open banking, depending again on specific services provided by specific fintech companies.

It is not a single answer. It is an answer that depends on looking at what each of these new businesses or enterprises are doing, identifying how we regulate that function now, and regulating that function in the same way, regardless of the particular institutions carrying it out.

Mr. Dickinson: If I could add a few thoughts. You are absolutely right in that there needs to be alignment. Open banking should it come to pass, will highlight the gaps in areas where regulations leave it exposed — the fact that credit unions regulate it provincially. However, if a customer is trying to get a complete financial picture, they are now touching on possibly both of those.

Alignment to existing things like the FINTRAC regulations and any money laundering to identify your customer will have to come into line with open banking or open banking’s effectiveness and utility would be affected.

Ultimately, digital identity is a foundation on which open banking would operate more effectively. I don’t think I am going out on a limb to say it is not sorted in Canada yet. Certainly, the collection, in our response to finance, we viewed these as of a piece, digital identity, payment modernization and open banking.

To answer Senator Stewart Olsen’s question: Is Canada ready? There are multiple pieces that are getting us on our way. I don’t think they are harmoniously aligned yet. But I am hopeful they are moving in the right direction.

The Chair: That’s very useful.

Senator Marshall: My primary issue is on the privacy issue, but if we are having someone come in to talk about that, I will move to another question.

Open banking. Who bears the cost? Is it the various financial institutions? Who bears the cost, and how do they recoup the costs? Is it through selling products to customers? Just tell us about that. Because it is not being done for the sake of being done; it is done to make money.

Mr. Dickinson: I would view this as almost another means of distribution, if you think of it that way. There is a customer benefit, certainly, but opening up information about a bank’s products to a wider audience for a bank like mine, for example, certainly has benefits. So the banks would bear the costs of being a sort of publishers of this data, I would say, but they do that today. It is just done through controlled portals.

So this does change the profile of those costs, but banks spend an enormous amount on not just distribution but security around that distribution today. We view it as another means of that distribution of making customers aware of the products.

Senator Marshall: If it is happening now in bits and pieces, will this impact the issue of privacy and security?

Mr. Dickinson: It could. I think it will make it a more difficult challenge to get to alignment on these. I don’t know that they are insurmountable. To the point Mr. Nicholls made before, I think they have to be sorted through. It will be easier if we get through those privacy questions before anybody starts building anything, certainly, and that’s why we highlighted the need for a strong central role at the government level.

Our opinion is that a market-driven approach would be more haphazard than a strong central set of principles that says this is how we protect consumer privacy, and this is how we ensure a baseline level of security. That, we believe, has to come from the centre.

Senator Marshall: Conceptually, how do you see this progressing? Once there is open banking, do you see every customer with a financial institution picking up everybody? Or can a customer say, “I’m not interested in sharing my data; I know what my financial situation is; I don’t want to be part of it”? Can it be done that way?

Mr. Dickinson: Conceptually, absolutely, and an opt in only. The customer would have to give express consent on a granular level, almost to say, “This information for this institution, not this institution. I want to share this. I don’t want to share this.” Every model we’ve seen around the world has been a selective opt-in model, and it has to be very clear what you are asking that institution to share with this third party and what you are not. Exactly how that is defined will be part of the heavy lifting here, but as a baseline I would say it has to be an absolute fundamental block.

Mr. Nicholls: And a clear right to revoke, which is the other element.

Senator Marshall: Are there any examples of privacy issues? For example, in the health care field, we hear in many provinces that somebody is in looking at somebody’s health records. Is that an issue for what has been done so far? What has been the experience so far with regard to privacy and security, with regard to those two issues? Or is it too early?

Mr. Nicholls: I’m not aware of a breach linked specifically to open banking. But the cybersecurity breaches, those are the same risks we are talking about. So the fact there is no specific example where we can say that it was because of open banking should not lead us into a false sense of security that this is something special.

Mr. Dickinson: The points I made in my remarks, we don’t think that is without cybersecurity risk. We don’t think it changes the nature. We think that cybersecurity risk already exists. This is another surface in that.

Senator Marshall: It would have the same exposure.

Mr. Dickinson: We would have to keep the same diligence of care around customer data and access, identifying access, all the same requirements that we have today.

Mr. Nicholls: As Mr. Dickinson mentioned earlier, this seems to be an approach stressed in many jurisdictions to the extent that cybersecurity will always be a risk. But screen-scraping, the technique currently used, is probably less secure than the API technology being advocated.

Senator Marshall: Thank you very much.

Senator Klyne: I will have a bit of a follow-up question to a few other questions. In responding to Senator Stewart Olsen’s question, you gave us your interpretation or a definition of what open banking is. Taking that a little step further. Can you explain what a fintech company is and maybe offer some examples?

Mr. Nicholls: Go ahead.

Mr. Dickinson: Those third parties could be fintechs. They could be another bank requesting access to a second bank’s data on behalf of that consumer. This is the person asking in the middle of that. It could be a fintech. It could be a technology company. So the example I use, where there could be a firm who decides to help farmers find the best banking services for them and maybe charges a small fee for that service, that could be a technology provider. It could be something that comes out of a university incubator. That’s an example of a fintech company.

It is somebody trying to help solve a financial need using technology at a most basic level. It stretches all over the place. You could touch on payments, identity, insurance. It is a very broad category unfortunately and gets applied to a lot of things. But I would say it is a non-bank, technically speaking, and it is a company trying to help customers solve financial challenges.

Senator Klyne: Does the farmer look for the fintech or vice versa?

Mr. Dickinson: Hopefully they find each other, happily. It could be either.

Senator Klyne: If the farmer undertakes to do this, I don’t understand why open banking is needed given the internet and the way those in the four pillars of financing put their website out there with all their services and products. The follow-up on that would be I don’t understand why a financial institution would want to share their customers’ data with another one, unless you are selling it and making money.

Mr. Dickinson: If the customer asks to get that data. Today, if you sign into your bank’s website, you can see all your data. So the customer is requesting to get that data from the bank. It used to be through statements. It could be through the website or mobile app and they can do that today. This open banking as a concept means I could use a third party to get the data out for my own reasons. It could mean that the app is helping me analyze my transactions and manage my spending.

Senator Klyne: The customer is doing the work here. I kind of got a different idea earlier.

Mr. Dickinson: I used an example of a farmer doing this, so instead of the farmer having to go to the different websites, understand the banking products and do the crunching numbers on which transactional account is best for him, there could be a tool that says, “I’ve looked at your transactional data and this bank would give you a better deal.”

Senator Klyne: Some fintechs may have an algorithm: Here are three options for you and I recommend option A.

Mr. Dickinson: Exactly.

Senator Klyne: So the government appears to be open to open banking which they define as a framework where consumers and businesses can authorize third-party financial service providers to access their financial transaction data using secure online channels. To authorize that, they have to opt in, correct? But they can opt out. So how does the financial literacy-challenged individual opt in or authorize that? How is that explained to them? When they go to open a chequing account and a customer service representative is on the other side of the counter, do they just sign in and opt in on that, or is it fully explained to them what they are doing, which is authorizing third-party financial providers access to their transaction data? Is that what we are doing here?

Mr. Dickinson: Well, that’s the challenge here, to clearly explain to the consumer who wants to sign up for this what they are signing up for. This is the granularity we mentioned before in giving them the right to revoke that access. In a perfect world, they would say that this is the data you are giving access to and for how long and the granularity of the data. That is the idea, that it would be very clear. Now, trying to do that is a challenge. It is hard to do that comprehensively but simply.

Senator Klyne: There are various levels of financial literacy. The big five, if you will, they will train their customer representatives to fully explain to customers at various levels of financial literacy that this is what you are getting yourself into and this is what you are authorizing. In the early days, that might be simple if you are just opening a chequing account. Later on they decide to open up an RRSP and then later a mortgage and even later, they pick up a credit card, all with the same bank. You can see how this psycho-graphic is starting to build, especially once they get ahold of the credit card information and see where the transactions are, the countries and so forth.

Senator Marshall spoke about the theme of privacy. I am a little concerned about that. Maybe in the early days, someone can opt in, but I like the reassurance that they can opt out or unsubscribe from the barrage of marketers or get on the do-not-call list. This is very interesting, and again, it goes back to I don’t know why banks would share their clients’ transaction data unless they are selling it to make money.

Mr. Nicholls: In the case of the European and the nine largest U.K. banks, they are doing it because the government is forcing them to.

Senator Klyne: Is the Canadian government forcing you to do this?

Mr. Dickinson: No, not today. I believe that if we feel that open banking is in the best interests of Canadians there should be guidelines and even objective dates for when banks would provide this data.

Senator Klyne: It is goodwill to do it in the interests of the customer?

Mr. Dickinson: For us, we are a small bank. For us, it makes it possible for more people to know more about our products. This is another means of distribution. If I believe I have a competing product that’s worthwhile to Canadians, I believe this is a fantastic way to actually make it available to more.

[Translation]

Senator Dagenais: I have questions for Mr. Nicholls and Mr. Dickinson. Mr. Nicholls, why is it that Canada is taking longer to adopt open banking than other modern countries? As we know, Mexico, China and India have adoption rates of about 46 per cent, but Canada’s is just 18 per cent. Is that due to the regulatory environment? The institutions, themselves? Customer resistance? Why are we so behind in Canada?

[English]

Mr. Nicholls: It might be a combination of both of those things.

I’ll leave aside China, although you are quite right, China is one the most aggressive open-banking nations in the world. I will leave it aside because it doesn’t share enough other elements in common with Canada to make it an easy comparator.

The European Union, the U.K. and Australia — particularly the European Union and the U.K. — are ahead of us in a couple of different areas, both in terms of a concern about data protection that didn’t have the same attention here. Many argue that the GPDR in Europe is more robust than currently exists in Canada.

They were ahead of us as well on making data access mandatory for banks. The U.K. proceeded on this in a very aggressive way in part in response to the second payment services directive and their own research that indicated a concern in competition for personal current accounts in the U.K.

It may very well have been that if a similar study had been done in Canada that had received similar results, we may have had a similar initiative, but we didn’t. As a result, they have moved very quickly. So we are, to some extent, playing catch-up.

To go back to all of the points that have been made here, they’re thoughtful and important ones. You can only go so fast. We have to have the legislative and regulatory infrastructure in place or we won’t get benefits. We’ll get all the concerns that the people in this room have rightly identified: privacy, informed consent, and revocation that can be effected and that work and that are for appropriate periods of time.

We don’t have those things in place yet. Those are all prerequisites to moving ahead with open banking as quickly as some other nations have. Some other nations — I’m not talking about Europe now — have not, perhaps, paid as close attention to some of these things. That may, in the end, be problematic for them.

[Translation]

Senator Dagenais: How do financial institutions react when you tell them their customers will have access to comparative data and a wide range of options? Since nothing in life is free, I imagine there are hidden costs somewhere. For example, if a customer transfers their RRSP from one bank in Canada to another, they are charged a $100 fee but they aren’t told about it. The bank doesn’t tell you that, but the customer finds out after the fact. Does this involve hidden costs? I can’t imagine it will be free.

[English]

Mr. Nicholls: On the business case, which is really what you’re talking about, I would have to defer to my colleague who operates in that sector.

I completely agree with the concern. If any institution is going to be asked to incur costs, you can be sure that they will make the case that they have to be able to recoup those costs and to be able to do so in a sustainable way. Large institutions are effective at doing that very well.

I have not spoken to any banks about what their views are on this. We only have the experience that we’ve seen in other jurisdictions.

Mr. Dickinson: I would say that the speakers later in the day who have done studies in some other markets where this is happening would have better data than I on this.

We would have to watch those other markets to see if they have done that, how banks have done it. I don’t think open banking contemplates fee recovery, but I think we’ll watch for examples internationally to see how it has been done.

[Translation]

Senator Dagenais: Clearly, Canada has a solid and robust banking system, more so than many other countries. I think consumers are well protected in Canada, and in return, banks do not hesitate to charge fees. How might consumers save under this new system? Shopping around when it comes to banks isn’t exactly straightforward; sooner or later, you have to pay fees.

I imagine Mr. Dickinson will be the one to talk about fees.

[English]

Mr. Dickinson: My bank doesn’t charge any. Canadian banks are solid, and consumers are well protected. The incentive for consumers here would be more awareness of the competing offers that would be out there. This could be finding a better rate or no-fee plans.

Senator Klyne raised a good point. This information is out there, but we also have a financial literacy challenge. Sometimes I think those two things are at odds. If open banking can lead us down a path of providing more clarity around pricing the way some fintechs have tried to do and to say, “This is the difference between an ongoing interest rate and a promo rate. The promo rate goes away,” understanding things like that or providing transparency and clarity around things like that from unbiased third parties can help.

It won’t be a magic bullet. Open banking will not create a perfect competitive environment, but we believe it’s a good step in the right direction.

[Translation]

Senator Dagenais: Thank you very much, gentlemen.

[English]

Senator Griffin: I have two questions. The Government of Canada has two types of tools that it can use to influence behaviour, economics or anything to do with the economy. One type of tool is the regulatory tool, and the other would be economic instruments.

In the case of our discussion here today, what would be useful to open banking in terms of those tools that the Government of Canada has? What can it do to help open banking and to become more competitive on the international level as a result?

Mr. Dickinson: Our strong feeling is having a set of principles and guidelines around privacy protections and expected options. If Canada decides to adopt open banking, what would be expected of banks, credit unions and other providers of this data and when, and the richness of that? Mandating a certain level usefulness of that data would be a significant part. As I said, all of the clarity and the requirements around that clarity of consent, of the ability to revoke, of trying to give the customer as much understanding as possible of what they are doing if they opt into this.

Also, the vetting of the third parties. While this can incent and drive the market, there is an outstanding question which Professor Nicholls talked about, which is understanding who can get access to this data even if the customer okays it.

I won’t speak for the entire industry here, but I don’t think the concept is that everyone would be able to be a player who gets access to this data. I think there would be some sort of vetting process. So whether it comes as regulations, guidelines or operating principles I think that a strong guiding force in the middle is crucial.

Mr. Nicholls: I agree with that and would say that there are two ways in which the interests of customers, consumers and the interests of the industry align. A big part of making an open banking system robust is enhancing the trust that consumers have in providing their information when they may be, with good reason, concerned about doing that.

In order for that trust to be built, the industry itself will do everything it can from the business point of view. But to the extent that you have strong regulation around privacy, cybersecurity, trusted third-party providers — for example in the U.K., in order for fintechs to have access as third-party providers, they must register with the Financial Conduct Authority. It isn’t just anyone. There is a system there of regulation or registration.

All of those elements that build trust, that are earned by genuinely enhancing privacy, by genuinely enhancing cybersecurity protection, and by having a registration system for third-party providers that is strong and to make sure that the parties participating are credible institutions, will protect consumers and make it easier for companies to enter this business and for startups to compete with incumbent players because the big advantage that incumbent players have in every market is trust. There is lots of suspicion and cynicism, but people trust those institutions more than they trust startups that they have never heard of or just got an email about. Those are the main things the government can do.

Senator Griffin: It’s mainly of a regulatory nature. That’s interesting. What if open banking was not adopted in Canada? What challenges would that present to the banks and fintechs?

Mr. Dickinson: I don’t know if it would provide specific challenges to the banks as we think about it today. We all provide access to our customers today. They can all view their transactions and bank with us as needed.

I think the fintech community would be ill-served by not having this. It would be hard to create a comprehensive scope of fintech solutions to Canadians without having a standardized approach to data. We’d be looking at doing one-off partnerships with each institution, or we rely on this concept of screen scraping. It means it replicates a login looking like it is a customer logging in, but it is not. It’s a computer doing it on the customer’s behalf, and that username and password is stored by this unregulated third party.

I would hazard to say it’s not clear to the customer what they are giving up when they hand over that credential to get access to this utility. Without open banking it would be a challenge, and it introduces cybersecurity risk that is undue.

[Translation]

Senator Verner: We are talking about open banking as it relates to federally chartered financial institutions. I’m from Quebec, and as you know, we have an extensive network of credit unions that aren’t federally chartered. How can that network participate in an open banking system?

[English]

Mr. Dickinson: That’s one of the outstanding questions we raised earlier. It’s unclear how an open banking system that may or may not be managed at the federal level applies to Desjardins, for example, or other credit unions. That is one of the outstanding things that would have to be figured out — how to align the various regulations that exist today. I don’t have an answer for you, unfortunately.

Mr. Nicholls: I think that’s right. To the extent that the Quebec regulators believed that a system brought in at the federal level was one that ought to apply to institutions regulated in Quebec because it was advantageous to the people of Quebec. I suppose they could try to harmonize it, but Mr. Dickinson is right; that is for sure an open issue.

Senator Duffy: Listening to this discussion today reminds of the argument over deregulation of airlines and telephones. Both those developments resulted in lower costs to consumers. Right now I can go on your website from my telephone, and I can go to Ratehub, and they will compare all of the mortgage rates in this area on a chart for free. If I want to comparison shop, the tools already exist.

What does the consumer get out of this? I can understand that the banks, and especially the newer financial institutions, want to get into the game. But it seems to me to be a terribly dangerous thing to give away, to companies you don’t know, the opportunity to go in and root around in your bank account.

Mr. Dickinson: I would highlight that the intention would not be to work with companies you didn’t know. You would go to this company who might be able to provide the service because they are providing a specific need for you.

So Ratehub is a great example; we know Ratehub very well. They cut through the clarity of what a special rate is or isn’t. They manually get that, and there is a delay.

If you know what you are looking for, Ratehub is a great example of something that can help you. If you have more complex needs, if you are a small business owner and you don’t know which products you need, even going beyond anything other than an aggregator of rates, which can be done relatively simply, gets very taxing for a customer. Ratehub is a great example of the starting point of where we could go in terms of overall services that could be available beyond banking.

If you think about Canadians’ entire financial picture, insurance is in there as is planning for retirement. This crosses the lines of investment and banking insurance. Having something that can create a complete financial picture for you and then make it simpler, to consolidate that as you need, is the potential benefit.

Mr. Nicholls: A system that doesn’t emphasize that you only make your data available to firms that you choose to make it available to, that is a principle that underpins open banking wherever it has been introduced. You’re right. If it was an open season, that would be deeply concerning.

The other point that some people have made — and I’m not in a position to assess it — is that in an open banking system it would be possible to provide, on an anonymous basis, your transaction data to mortgage providers who don’t know who you are, but can commit to you based on the data provided to give you the best mortgage rate. That’s not something you could do on your own. In other words, that is only possible if someone has access to your transaction data with your consent, not on their own.

Senator Duffy: I want to get to Google and Facebook, but are you suggesting that these third parties will be able to go in and see not just what your bank balance is but how you spend your money in terms of them making the decision about whether or not they will grant you a mortgage? Are we adding new information to that sheet that they take when you apply for a mortgage?

Mr. Nicholls: That would be the idea, with your consent.

Senator Duffy: They would know everything you buy, everything you spend any money on, as well as what your gross income per year is, based on what’s in your bank account.

Mr. Nicholls: Yes, with your consent. The suggestion is that with that much more detailed picture, they could quote you a rate that would be better than you can get than when they have to build in an additional cushion because they don’t know as much about you.

That is the argument. I don’t make these products. I’m told that technology could be or has been developed, and one consequence would be that, arguably, you could get better rates because the person providing to you has a much better idea of your financial health than if you just give them your information.

Senator Frum: That was a really good line of questioning. I’m not sure I can do better.

I’m also struggling with this idea, you used the term unbiased third parties. I don’t know in a commercial context how any corporation can be free of bias. They have incentives and motivations to be in the marketplace. Can you explain what this term means?

Mr. Dickinson: To clarify, they wouldn’t be biased toward any banks’ products. They might be charging a fee for this, they could be an independent firm who could say that for a small fee they will help figure out the best financial plan. In that example it almost replicates what a mortgage broker does: I will charge you a fee and help you find the best mortgage. They should be independent of whichever bank they’re looking at. I only meant unbiased in terms of not favouring one bank’s products over another.

Senator Frum: This idea that third parties would have to be vetted so they could become trusted, but that’s a whole other level of monitoring now from the regulators or the federal government. That would also require having access to primary information from the customer for the regulator to know who should be a trusted third provider. I’m saying it’s another level of exposure for the customer, correct? The process of vetting?

Mr. Dickinson: For the customer?

Senator Frum: The original consumer. For the regulator to figure out which is going to become the trusted third party through the vetting process.

Mr. Dickinson: There would be a regulator vetting but they wouldn’t be able to participate in the system if they weren’t vetted is the basic understanding. They couldn’t just show up and get access to bank data. If there was a vetting process, the bank could simply turn them away and say you’re not authorized.

Senator Frum: For the regulator to vet the providers, the regulators would also have to see the information.

Mr. Dickinson: The customer information?

Senator Frum: Yes.

Mr. Dickinson: I don’t think that is how this scheme would operate — I don’t believe that’s what it would entail.

Mr. Nicholls: As a general comment, I alluded to this in my remarks and other people know this as well, one of the challenges of the system is whether we have the regulatory resources and expertise. Whether it’s that particular point you raise or a more general point about if we can in fact regulate these new kinds of service providers in a way that’s effective. You’re right. We’d have to be satisfied that we get that right.

Senator Wetston: I want to give you an example of how it might be used and maybe you could comment on it. You’re all familiar with Alibaba and with the fact that it has a huge payment platform unlike Amazon and PayPal. As part of its open banking within China and elsewhere, they offer money market funds and the users are able to invest in a money market fund as an add-on product that Alibaba offers. I believe that’s the case. It sounds okay. Now it is the world’s largest investment product. It wouldn’t surprise you.

The reason I’m asking this question is, do you think that’s the kind of thing open banking might offer in Canada to Canadian investors? If it does — getting back to Mr. Nicholls’s and Senator Frum’s point, the point I raised earlier — what kind of regulatory framework would you ever put in place in Canada to address that issue?

Mr. Nicholls: I’m not sure that the example you have given — and I’m not familiar with it. Is Alibaba accessing individuals’ account data to offer that product or are they simply offering that product?

Senator Wetston: They use an API, they have open banking and, as you know, it would not be dissimilar. They would consider themselves to be part of the open banking structure and framework. I’m not really asking for an answer to that question. I’m trying to present the kinds of things I think open banking can provide and the issue is: Is it something that we think Canada, its culture, its banking system, would be able to accommodate? Maybe officials from finance can answer that?

Mr. Nicholls: Without talking about the Alibaba case, last week on February 14 the Financial Stability Board released a report on basically a look at what’s happening so far in fintech. What they found is that, so far, the rise of fintech firms has not had a significant impact on incumbent financial institutions because, for the most part, fintech firms have not been operating in a business space and on a scale that would represent competition. In fact, in many cases they are operating cooperatively. The most intriguing aspect of that report goes to exactly what you just raised, senator. They said the issue may not be, in the future, fintechs, but rather so-called big techs, companies like Alibaba and Google, that they get into the system. If that were to happen, they said it would be disruptive.

Senator Wetston: Or the FANG companies.

Mr. Nicholls: Sometimes a different term is used, GAFA.

Senator Wetston: I’m not making a judgment, just asking to understand.

Senator Klyne: On the note on the regulatory framework and vetting, who is going to pay for that once it’s established? The resources, the services, the expertise behind the regulator framework in vetting?

Mr. Dickinson: I don’t know the answer to that.

Senator Klyne: It has to be established.

Mr. Dickinson: It absolutely would. Based on reviews of what’s happening around the world, there might be ideas that come forward. I don’t have an opinion.

Senator Klyne: Is that a federal regulator?

Mr. Dickinson: I guess that’s part of the discussion.

Senator Klyne: What happens retroactively? You have a lot of existing clients. You go back to them and say, we’d like you to authorize this?

Mr. Dickinson: I don’t think it would be driven, going back and looking through the whole base. If the customer feels a need and go to a provider, whether a bank or third party, once this is in place they would opt in to it. This wouldn’t be something I would ask people to opt into.

Senator Klyne: You wouldn’t promote this to your client base.

Mr. Dickinson: I may do, but it may just come in the form of functionality. I don’t think open banking is going to be something that I would say you need to sign up for.

Senator Klyne: Would you ask a fintech to go to other banks and ask them to?

Mr. Dickinson: In an open banking environment the fintechs would have access to at least talk to that bank and if they had consent from the customer they could get the data. Including from me.

Senator Klyne: You would ask for authorization from new clients as they come about?

Mr. Dickinson: I think the authorization to get access to that data would come more as they have a need. If they ask for something. An example would be this: A customer signed into their bank account who wants to pay off their credit card at another institution. Today they have to sign into that other institution, find the balance, the minimum payment, the due date, write it down or remember it, come back to my mobile app and pay it. We could, in theory, say to that customer if you give us one-time consent to ask your institution for that information, then when you come into our site and want to pay the bill we will remind you that this is the basic information you need, we can pre-fill the form and your minimum payment date is this. So they are less likely to miss a payment if we are their primary site. They could pay it from there without having to do the extra steps.

That would be a case where I would ask for their consent. Can I get that one piece of data? I won’t know anything else about your banking relationship there. I would know those two things about your credit card and only when you ask for it and you can revoke that at any time.

Senator Klyne: So when they sign on is it carte blanche? Is it à la carte, this or that fintech can have it but not everyone?

Mr. Dickinson: It’s definitely not carte blanche. It would be done almost at the point to where a customer is trying to use this tool or access this data. At that point they should be presented with the consent to say they are giving access to this data from this institution for this long.

Senator Duffy: One of our concerns is the protection of the consumer. I can see a situation where people would be offered some kind of an incentive to keep their data with their current financial institution, rather than put themselves out in the market. You agree to be tied to whichever institution you’ve got and you get some kind of incentive for that.

At the same time, I can also see where people will be trolling, trying to convince people to open themselves up and to agree, because they would get some kind of reward. In the old days, people used to get a toaster if they opened a bank account.

Senator Wetston: Now you get an iPad.

Senator Duffy: Now, I’m told, they give you an iPad. I can see that the whole area of consumer protection is going to be an issue for people who are not especially sophisticated, the vulnerable.

Mr. Nicholls: I agree. If I leave you with no other point, it is this: The consumer protection elements — privacy, cybersecurity, data protection and right to consent — have got to be at the top of the list. If those issues cannot be resolved satisfactorily, then we can’t move forward. I completely agree with that.

But I don’t think that the people who advocate open banking say otherwise. I think they recognize if those issues are not satisfied to the satisfaction of Canadian consumers, open banking won’t work anyway because people won’t have trust in the system. I completely agree with you.

The Chair: I want to thank the panellists. We have gone over time, but it is because your input was so extraordinarily helpful to us. As we start this study, it was important to get a good base. I want to thank you both for helping us develop that. Very well done. We may get back to you. We will now prepare for our next panel. Thank you both very much.

Now we are ready for the second part of this meeting of the Standing Senate Committee on Banking, Trade and Commerce. We are continuing our study of the potential benefits and challenges of open banking for Canadian financial services consumers with specific focus on the federal government’s regulatory role.

I am pleased to welcome the panel of witnesses, all of whom have been here before on other matters. Welcome back.

From the Department of Finance Canada, we have Annette Ryan, Associate Assistant Deputy Minister, Financial Sector Policy Branch. She is with Julien Brazeau, Senior Director, Strategy and Coordination, Financial Institutions Division, Financial Sector Policy Branch.

I am always struck by the titles that you have at Finance Canada. But at least you know what you are doing. That’s what we know.

And from the Bank of Canada, we have Grahame Johnson, Managing Director, Financial Stability Department.

Thank you, again, for being with us. You are helpful to the work we are doing. We look forward to your opening statements.

Annette Ryan, Associate Assistant Deputy Minister, Financial Sector Policy Branch, Department of Finance Canada: I am pleased to appear before you today in the context of your study on open banking. My intention today is to provide you with an overview of the principles that guide financial sector policy in Canada and some background about the department’s review that’s ongoing into the merits of open banking.

I will turn things to my colleague Julien Brazeau, who is the senior director of financial systems innovation and is leading the open banking secretariat within the department. He will discuss the review in detail.

[Translation]

The Financial Sector Policy Branch provides policy advice on Canada’s financial sector, including the frameworks for federally chartered financial institutions and financial system areas under federal jurisdiction, federal borrowing and investments, and capital market matters. We work closely with federal financial sector agencies including the Bank of Canada, the Office of the Superintendent of Financial Institutions, the Financial Consumer Agency of Canada and the Canada Deposit Insurance Corporation.

Canada has a globally competitive, stable and resilient financial sector that is supported by a well-functioning legislative framework and regulatory system that is recognized throughout the world for its prudence and balanced approach.

[English]

That framework set out sound principles for the regulation of financial institutions, which are rooted in three core objectives.

The first is stability. The sector is safe, sound and resilient in the face of stress. The second is utility. The sector meets the financial needs of an array of consumers, and the interests of consumers are protected. The third principle is efficiency. That sector provides competitively priced products and services, passes efficiency gains to consumers, accommodates innovation and contributes to economic growth.

The legislative framework governing Canada’s financial sector is also subject to a statutory sunset clause, which guarantees that the framework is regularly reviewed to ensure it remains effective and technically sound.

The department’s most recent review of financial sector legislation began in 2016. Throughout 2016 and 2017, we engaged in comprehensive consultations with stakeholders during which we heard strong support for the current financial sector framework, particularly in relation to the core objective of ensuring the sector’s stability in the face of stress.

That said, we also heard that there was work to be done to ensure that Canada’s financial sector could keep pace with the rapidly evolving global financial sector and meet the changing needs of businesses and consumers. In addition to certain legislative updates, stakeholders also recommended that Canada examine the potential to adopt a system of open banking.

With this feedback in mind, and supported by specific considerations including the cyber risks posed by the current screen scraping environment, which was discussed in the last panel, and a wider global drive toward the adoption of open banking, the government has undertaken its review into the merits of open banking. This review is in keeping with the department’s objective of ensuring that Canada continues to have a globally competitive financial sector, but one that promotes consumer choice while delivering financial stability and economic growth. With that, I will turn it over to my colleague, Julien Brazeau.

Julien Brazeau, Senior Director, Strategy and Coordination, Financial Institutions Division, Financial Sector Policy Branch, Department of Finance Canada: Thank you for the opportunity to appear before you.

I’m going to provide some detail about the review but before I do, I thought it would be beneficial to provide an explanation of the term “open banking,” and I know that was a subject of the discussion with the previous individuals who appeared. In the course of carrying out daily banking tasks, we generate a stream of information based on our transactions. That information is held and controlled by financial institutions. Open banking is a framework that empowers consumers and businesses to authorize third party financial service providers to access that data through secure online channels.

It is a consent-based and opt-in system that includes clear mechanisms to manage enquiries and address complaints. Among the potential benefits of open banking are: The ability for consumers and small businesses to access new products and services that enable them to better manage their financial affairs; the potential to increase individual control over personal financial information; and the possibility of mitigating existing cyber risks — those risks arising from the current practice of screen scraping that we have been discussing, where service providers essentially store the unencrypted log in credentials of customers, making them vulnerable to a cyber attack.

Additionally, international experience has demonstrated that open banking also holds the promise of greater financial inclusion and access for underbanked and financially vulnerable consumers.

Finally, systems of open banking requires participants to meet rigorous standards with respect to privacy, security and operational stability. Indeed when we look to examples of jurisdictions that have implemented open banking, such as Australia, the United Kingdom and the European Union, we see that these requirements are a foundational component to their respect systems.

Following the statutory review of the financial sector frameworks the government, through the 2018 Budget, signalled its intent to move forward with a review into the merits of open banking. Since that time, the minister has appointed an advisory committee to facilitate this review whose members bring to the table a diverse set of experience in the area of financial services, financial technology, innovation, privacy and cybersecurity.

The committee is supported by a secretariat within the department for which I am the lead. In early January, the department released a consultation paper, which served as a guide for the committee in its engagement with Canadians and posed questions around potential benefits, risks and the role that government should play. The opportunity to provide written feedback closed on February 1, and we received over 100 submissions to date. The committee is currently concluding a series of round tables throughout the country. To-date round tables have been held in Vancouver, Toronto and Montreal. We will also be undertaking a round table in Iqaluit.

Following this consultation and subsequent review, the committee will provide a report evaluating the merits of open banking with a focus on protecting consumer privacy, ensuring the security of financial transactions and maintaining the stability of the financial sector.

[Translation]

Open banking has the potential to offer a secure way for Canadian consumers — including small businesses — to benefit from a broader range of financial products and services. This could better serve consumers and grow businesses and markets, contributing to the growth of the Canadian economy.

At the same time, in order to realize these potential benefits, any potential system of open banking must have appropriate consumer protection and support the continued resilience and stability of the financial sector. It is through this lens that the committee, supported by the secretariat, is undertaking its review.

With that, I will conclude my remarks. I would be pleased to answer any questions the committee might have.

[English]

Grahame Johnson, Managing Director, Financial Stability Department, Bank of Canada: It is a pleasure to be back in front of this committee, so thank you very much for the invitation. I am Grahame Johnson, Managing Director, Financial Stability Department, Bank of Canada. As the managing director of financial stability, I look forward to speaking with you today about the potential benefits and challenges of open banking for Canadian financial services consumers.

I will focus on the potential implications for financial stability and for the financial system as a whole. I will address the implications of innovation in financial services and particularly of data sharing on the financial services sector with an eye to both the challenges and the opportunities it offers.

[Translation]

Understanding the impact of data sharing between consumers and financial service providers is crucial to our oversight role for robust and resilient payments systems and for financial stability.

[English]

The Bank of Canada does not have a regulatory role with regard to consumer protection, so I trust that you understand that I will not be able to address any consumer privacy implications today. The Canadian economy, as we all know, is digitalizing rapidly and innovation in financial services driven by new technology represents a significant opportunity.

Innovation has the potential to boost access to financial services, improve efficiency and to offer businesses and households more choices in the financial services they use daily. Based on research and analysis done at the bank, as well as through global fora such as the Financial Stability Board, there is broad consensus that fintech can have a positive impact on the financial system provided that the risks are adequately managed, and that is an important caveat.

Open banking can play an important role as a catalyst for fintech innovation as many new fintech services rely on access to consumer data. For example, lenders can analyze the history of transactions to help understand whether potential borrowers will have the ability to repay loans. That helps both the lender and the borrower avoid taking excessive risks, help tailor credit to specific circumstances and respond, potentially, more rapidly to changing conditions. Investment managers, as another example, could use the same data to help create savings plans and craft wealth management strategies for consumers, some of whom may not have had access to these sophisticated financial investment planning services or known where to find them.

As has been mentioned a number of times, this is already happening today. In some cases, individuals are providing access to their banking data manually — the screen scraping we have heard about — and there is consumer demand for this. In other cases, banks are establishing their own frameworks or private APIs to help share data. The need for exchange of personal data will continue to grow as fintechs offer more services to consumers and businesses, and as those banking customers seek out alternative services that are more convenient and cost-effective than the services they are currently getting.

That’s one reason we believe this open banking consultation is important. It gives us the opportunity to consider how much of this evolution we should leave to the ongoing bottom-up developments that are already happening, the things being driven by the fintechs and banks, and how much additional top-down structure we need to put on to control the risks and maximize the benefits of open banking. At the Bank of Canada, where financial stability is our key consideration, we pay particular attention to two aspects of this transformation.

First, due to our responsibilities for overseeing critical payment and settlement systems, we are considering how open banking might affect these payment systems. Some of the new fintech initiatives can benefit from access to financial data and enhanced payments processes being developed, working together. We therefore want to make sure that open banking initiatives are aligned with the work Payments Canada is currently undertaking toward modernizing Canada’s payments infrastructure.

Second, we consider how open banking and any accompanying shift in the market structure for financial services might affect financial stability. This includes protecting confidence in the financial system, which requires the safety and security of data and the infrastructure to be maintained. It also includes ensuring that both existing financial institutions and any new service providers adhere to robust risk management standards and have resilient funding models.

[Translation]

The Bank of Canada welcomes the consultation process currently under way, as well as the work of the Advisory Committee on Open Banking. Overall, the impact of open banking on financial stability and our payments and settlement systems remains an open question.

[English]

The bank will continue to examine how open banking and data sharing can contribute to an efficient and resilient financial system, in line with our objective of promoting the economic and financial welfare of Canada.

Thank you for the invitation again to appear, and my colleagues and I are happy to address any questions you may have.

The Chair: Thank you. That is very helpful to us.

Senator Stewart Olsen: Thank you for your presentations. It is always good to see you again.

I do have some hesitation as I look at the document, “A Review Into the Merits of Open Banking,” where I see 19 pages, and, of that only three discuss the risks or potential risks. I am concerned because the potential risks will lead into the development of regulations. That concerns me as well, given the standing of the country at eighth, and one of the reasons is because of our regulatory system. Can you reassure me that you are going to be able to establish these regulatory systems and bring it up to speed with the rest of the world, for instance, who has gone into open banking, and do it before we actually establish anything on open banking?

Ms. Ryan: The first question, senator, speaks to the balance that we’ve forth of explaining what we see as the potential merits of open banking and then the risks. Then the second question comes to, well, how will we regulate all of this if we go down that route?

On the first question of balance, I would offer that this is not a typical consultation process in the financial sector in that part of what we see as the role of the consultation is to make sure that a wide group of consumers, individuals or businesses, can be part of the consultations by understanding what this concept is. For some people, it is not very revelatory — open banking, what does it mean?

With that in mind, we did want to spend time speaking to how the establishment of safeguards, rules of the road, protections and regulations could allow innovation to bring forward more services that could help your average consumer or small business. To that end, I think what you are seeing may be more our effort to broaden the dialogue and make sure all parties can see themselves in it. We are certainly not unmindful of risks, and I think Grahame spoke deeply to the nature of risks that we see. While we want to instill these new services for consumers, the idea of protecting privacy, protecting consumers and making sure that provisions are cybersecure is really at the heart of these words “open banking” that are otherwise somewhat opaque. That’s the consultation exercise.

In terms of how we would regulate it, that is a question that we would see ourselves coming back to, once we hear from the committee on whether the merits are potentially there to outweigh the potential risks.

I listened with interest to the last panel, and I would offer that the core thought that we are guided by is to regulate the function as well as the technology. So to the extent that we are looking at a consumer risk, we have protections for that. We would look to make sure that they are appropriately rolled out in an open banking framework, similarly for cyber or stability or privacy.

We don’t have fully equipped answers, but that’s the nature of the consultation and what we see as our forward work.

Senator Stewart Olsen: I see what you are saying, and I appreciate that you keep a very firm hand on our financial systems and we are grateful for that. My concern is that I don’t want to rush forward without changing the fundamental environment for managing all of these risks. I think regulatory environment is crucial to selling this, certainly to us. Can you conceive of actually moving forward with the regulations and have them in place before we would go to this? I’m looking at things like the vaping bill. We still don’t have any regulations for that and, frankly, we are in trouble. I’m just asking that question: Is that a consideration?

Mr. Brazeau: That’s a very good question. Our study is being done in the context of other studies as well taking place on the issue of the digital economy and this issue of data portability. So the department of innovation, science and economic development, who have the lead on policy for issues of privacy, such as the oversight of PIPEDA and the Privacy Act, is concurrently looking at these issues as well. We are closely monitoring those consultations and working closely with them because we realize that many stakeholders from whom we are hearing are saying that their support of open banking is conditional upon having robust frameworks for privacy and cybersecurity. We will continue to work closely within the interdepartmental community in terms of determining the order of things to ensure that consumer confidence reigns.

Senator Klyne: I have three quick questions. First of all, thank you for appearing here again this evening.

In the consultation process, was there a central theme that emerged with all the groups that you were interviewing and consulting?

Mr. Brazeau: It is still early days. Last week was the sort of end of the written responses and we are doing round tables now.

One theme that is coming out and which has been discussed this afternoon is that open banking, or the business case for open banking, is already here. A lot of Canadian consumers are already using data aggregation services but in a way that is putting them at risk. They are invalidating their client relationship with their financial institution and opening themselves to liability. There seems to be a recognition with all the stakeholders — banks and fintechs and consumer groups — that there is a need for movement on this front. As I said, the business case for open banking is already present.

That being said, to reassurances as well to the question that Senator Stewart Olsen stated, issues of privacy and cybersecurity are of paramount importance for stakeholders, and stakeholders are providing us their views on what can be done to mitigate those risks in a potential open banking framework. We are listening to those closely.

Senator Klyne: We keep talking about banking and financial institutions in the context of banking, but does this cut across the four pillars of our financial system, which includes banks, insurance companies, securities and trust companies? What about the credit unions, schedule Bs and foreign banks?

Mr. Brazeau: That’s an excellent question. In the context of the consultation document, we framed the review as related to financial transaction data from federally regulated financial institutions. Mostly what we mean by that is banks.

That being said, different jurisdictions are looking at different scopes of data, but they have all taken a similar approach by first looking at banking data, ensuring that the framework they developed is robust, and then looking at potentially broadening the scope of data.

The question of credit unions is a good question as well, and it is a complicated one, obviously, given federal-provincial dynamics. What we’ve heard from credit unions, overwhelmingly, is the desire, to the extent the government would move forward with an open banking framework, to be at the table and in a position to take part in that framework. How that would take place and what discussions would have to take place with provincial governments in terms of ensuring consistent regulation is still an open question that needs to be looked at.

Senator Klyne: I would think insurance companies would have similar considerations?

Mr. Brazeau: Absolutely, yes.

Senator Klyne: How would that be approached?

Mr. Brazeau: As I said, the initial scope is looking at banking data, but then there could be other applications, including insurance.

Senator Klyne: Schedule Bs and foreign banks —

Mr. Brazeau: Those as well. If you look at the Australian example, while they started in financial and banking data, they are looking at broadening it to data more broadly. They’re looking at energy and telecom data, so the potential applications are many.

But for the purposes of our consultations, we are looking a bit more narrowly at the financial transactions.

Senator Klyne: Who or which entity is likely to take on the responsibility of developing the framework for this, and then later, the role of vetting?

Senator Duffy: Enforcement.

Mr. Brazeau: That’s still an open question. We are at the stage of studying the merits, having come to a determination — or having heard at least from the committee on whether they will be recommending moving forward with open banking. No decision has been made yet in terms of how that would be implemented. There are certainly different models. The U.K. model is to have a registry whereby the Financial Conduct Authority firms would apply and have to meet certain privacy and cybersecurity standards.

Senator Klyne: To whom would they apply?

Mr. Brazeau: They apply to the Financial Conduct Authority in the U.K. If we were to follow a similar model in Canada, there could be a regulator that would be appointed.

Senator Klyne: Do you think it would fall within the purview of the Department of Finance?

Ms. Ryan: If I could, senator, I think the questions you are posing all go to the scope, the sequencing and the structures of how we would proceed. Given that open banking is not one thing — it is data standards, whom it would apply to, in what sequence. Would you target individuals first? Would you look toward the small business sector? The answers that we would get through our consultations would inform where we start and how big. That, in turn, would point us toward a short list of which regulators are best placed to take up which functions.

Senator Klyne: I was trying to get to who is paying for this? Is it the taxpayer who will pay for the regulation?

Ms. Ryan: In these jurisdictions or others, your choices are taxpayer-supported or funded by the institutions themselves, through levies.

Senator Wetston: Thanks for coming. I wanted to ask you two questions. The first one is around scope, standards and commercial model. You’ve talked a bit about that, generally. I’m looking for an idea of the direction you may be heading in. For example, with banks, you’d be looking at what accounts would open data access? Are those the kinds of things you would think about?

Mr. Brazeau: Yes.

Senator Wetston: With respect to banking data, are there other examples of things you would be looking at?

Mr. Brazeau: At the moment, what we’re envisioning, at least from an initial scope perspective, is transactional and credit card data.

Senator Wetston: Standards — just to get a sense of what you are seeing. How prescriptive might standards be? How mandatory might they be? Have you given any thoughts about that in the context of the consultations?

Mr. Brazeau: The issue of standards is an important one, and one that is being discussed internationally, as well. The United Kingdom was very specific in wanting to apply standards. If you look at the European Union, they chose not to apply standards.

We see the issue of standards as potentially beneficial in the context of ensuring fair competition. To the extent that you do not apply standards, institutions are left to develop their own technology and platforms, and then firms that wish to have access to those APIs have to hook up to all those different platforms.

So the issue of standards comes in terms of consideration of competition, but they also give us the opportunity to set benchmarks in terms of security, privacy and cyber resiliency.

Senator Wetston: But Europe has set standards for their privacy.

Mr. Brazeau: They have.

Senator Wetston: So, basically, they’ve done it another way — more or less?

Mr. Brazeau: They have set privacy levels through GDPR — they have — but they have not set standards in terms of the types of information, how the information is translated and how the technology is defined.

The Chair: Quickly, Senator Wetston.

Senator Wetston: The commercial model is getting at what Senator Klyne was getting at. I’m not talking about self-financing models, although they’re pretty attractive.

How will the costs and liabilities be distributed, potentially? Looking through the various submissions — any thoughts about that?

Mr. Brazeau: The issue of liability is a critical one. Through talking to international policy-makers in the U.K. and Australia, which have been first movers in this space, they have reiterated the importance of looking at the issue of liability at the outset. The way the United Kingdom has dealt with it is through GDPR and there has been an emergence of a cyber insurance market, whereby fintechs can update cyber insurance. If they want to be able to make the consumer whole, that could be an expensive proposition.

It is still early days in our study in terms of looking at what liability would entail, but we are looking at those different liability frameworks in different jurisdictions to see what might be most adaptable to Canada.

Senator Wetston: Thank you.

[Translation]

Senator Dagenais: Thank you to the witnesses. Mr. Johnson, in exploring the use of new technologies in the banking system, we’ve learned about the risks to consumers, including privacy and personal data breaches. You focused on the merits of modernizing the financial system for institutions. As I said earlier, nothing is free when it comes to banks. Can you tell us where the money to pay for this modernization initiative will come from? I fear the cost will be passed on to consumers.

Mr. Johnson: That’s a great question. Thank you for asking. You’re absolutely right. At some point, someone has to foot the bill.

[English]

It doesn’t necessarily have to be the consumer. I would say in cases where competition is enhanced, there is actually a net benefit to the consumer. It may be the case that — and I will use the term carefully here — “rents” the existing incumbents had been earning — rents above and beyond a perfectly competitive market — are reduced as the level of competition is opened up. I think there are numerous examples of that in telecommunications and things like this.

Things that have generally enhanced competition has resulted in the consumer getting better choice at a lower price, then perhaps some of the incumbents with a more significant market share have seen the rents they have been able to earn on those activities decline.

To put it bluntly, bank shareholders may end up...

[Translation]

Senator Dagenais: The shareholders are going to pay? My goodness. Ms. Ryan, I’ll be shocked if you say you don’t have any information or real-life examples of the shortcomings or downside of these new technologies. I’d like to hear about the glitches you’ve observed, so we can learn from them and perhaps avoid certain pitfalls when rolling out these new systems.

Ms. Ryan: We talked about cybersecurity risks and privacy breaches. To come back to screen scraping, I can give you a real example: a person gives their account password to another company. In that person’s case, the risk that a hacker might steal their password voids their service agreement with their own institution. When it comes to risks around identity theft and fraud, we are already seeing those implications in the sector. As Julien mentioned, we are already there. That sort of risk is already apparent, so we are inclined to explore a defensive approach, rather than simply adopting an attractive concept.

Senator Dagenais: Will this benefit institutions, fintechs or consumers, or will there be something in it for everyone?

Ms. Ryan: I think there are advantages all around. The innovation is already happening. There are people who want to apply this technology to the financial sector. In fact, the entire sector revolves around managing information and agreements. The potential to do things better using these technologies is huge, for example, to manage personal finances or find a more competitive mortgage. The key is to establish rules that promote innovation so that consumers and companies have access to more services.

Senator Dagenais: Thank you very much to the witnesses.

Senator Verner: This is a very quick question, which I put to our previous panel as well.

Mr. Brazeau, you mentioned that the consultation process had just wrapped up. You consulted stakeholders in Montreal. As a senator from Quebec, I wonder about something. Given Quebec’s extensive network of Caisses Desjardins institutions, how do you see the network participating in an open banking system? Is there resistance to the idea? When I think back to the securities issue, I wonder whether you’ve given any thought to how provincially regulated financial institutions might play a role in the system.

Mr. Brazeau: That’s a complex question because of the provincial and territorial jurisdiction involved. I think the network itself is in a better position to answer that than I am. That said, provincial financial institutions, on the whole, have expressed a keen interest in exploring open banking platforms; they want to be consulted and included in any models that could be used for implementation.

We are also in talks with our provincial counterparts to explore open banking further. If the government decided to move forward and implement such a system, those discussions would continue to arrive at a system in which everyone could participate.

Senator Verner: Thank you.

[English]

Senator Tkachuk: Thank you very much. There are a couple of comments here on which I’d like some clarification. How does open banking help those who are “under-banked.” What does it mean to be underbanked?

Mr. Brazeau: There is a variety of use cases that have arisen in jurisdictions where opening banking is taking place. If we take the example of people who haven’t established credit histories, new citizens to Canada who might not have a credit score with Equifax or with a credit bureau, open banking, through opening up their transaction data, can give fintechs or financial institutions who want to offer them a loan the ability to see a host of transactions that could inform their decision to offer them that loan. They could see that they are getting paid, that they are making monthly rent payments and they have regular transaction histories. It would allow these people, who traditionally would have to build up credit histories, access.

Senator Tkachuk: If a person is an immigrant to Canada and doesn’t have a bank account but maybe has a job, how does open banking help him? What does that mean?

Mr. Brazeau: They would have a bank account, but in terms of getting a loan or a mortgage or applying for credit, often that depends on having an established credit history, and often these individuals who are new to the country haven’t established credit histories. But by being able to show the history of their transactions, those fintechs or financial institutions may be able to adjudicate loans on their behalf in an easier manner.

Senator Tkachuk: I noticed in your report you identify several key barriers for entry faced by fintechs trying to enter the financial services marketplace. One is a lack of consumer awareness and demand for their products. What business is that of ours? Should it not be up to the businesses to make consumers aware of their products? Why is that an issue for us?

Mr. Brazeau: In the context of open banking I don’t think we’re necessarily trying to advocate in favour of one group over another and try to educate Canadians necessarily about fintechs. The point about fintechs that we are trying to make is that fintechs in Canada face challenges, especially in terms of scale, and those fintechs that have been successful so far are the ones that have been able to partner with financial institutions. But absent the ability to get access to that data, the ability of fintechs to scale and continue to grow in Canada and remain a viable competitive option is questionable.

Senator Tkachuk: If there is no demand for something, why would we try and create demand for it? Should it not be up to the businesses to create the demand? What is the banking industry doing sharing information that they have no business sharing anyway? I don’t understand the business model. Maybe I’m missing something. PayPal is easy, right? That’s simple. But this seems to be a lot more complicated when they have access to stuff that I don’t want them to have access to, and why would I give it to them? How will that help the consumer? I still don’t get it.

Ms. Ryan: Maybe I will go to a few examples, senator, if that would help?

Senator Tkachuk: Yes, that would help.

Ms. Ryan: To the extent that you would have modest income Canadians who are working really hard to pay their bills and perhaps carrying debt, paying down debt, they may not be aware of the advantage to them from some fairly simple budgeting practices. For example, a really surprising number of Canadians carry a credit card balance in any given month at the same time as they will carry a savings balance in another account. To the extent that a fintech could, in a sense, combine or aggregate their financial information that perhaps they’re carrying in different accounts or even carrying in different financial institutions. Their credit card is with one bank, and their savings are with another bank. That could provide a tangible financial benefit to a wide number of Canadians. But to the extent that right now it is really quite difficult to combine your financial information and find out how you might be better able to manage your finances from some relatively simple management techniques, people aren’t aware that they could do better.

I think the section of the report that you’re reading from speaks to some of the challenges that I referenced earlier. This consultation does have a challenge in trying to convey to people what has been identified in other countries as a benefit for ordinary citizens from the modernization of the financial system that would bring in new services to solve relatively everyday problems.

Senator Marshall: I think my question will be something similar. We’re just beginning this now and I want to make sure I understand it because it is shaping up to be very negative in my mind.

I can see the financial institutions, banks and the government would want open banking. But we’re talking about regulating, security and privacy issues that have to be built in. Somebody has to pay for it. If the government is paying, then really the consumer will pay through taxes. If the bank pays for it, they are going to pass it on by increasing their fees. So, really, at the end of the day, it’s the consumer or the taxpayer that will pay, whichever way you will shape it. One of you said earlier that there will be a net benefit to individuals on transactions when dealing with the bank, but I would say that whatever they save will really pale in comparison to what the banks will charge them and to the taxes that the government is going to spend maintaining or regulating the system. I can’t see the consumer saving money so what exactly are the benefits to government? I have worked in government for 45 years so I have a jaded view of government. How do you know that consumers want this? The banks want it. The government wants it. You’re telling us that consumers want it, but I have a feeling they’re being sold a bill of goods. Do consumers really want that? I’m a consumer; I don’t want it, based on what I have heard so far. I would run from it. Just convince me that consumers really want this.

Mr. Brazeau: I don’t know that I necessarily want to convince you. That’s the question that we’re asking of Canadians: Do you want open banking? Do you see merits in open banking?

What we know is that close to 4 million Canadians use data aggregation services and use screen-scraping technology where they’re invalidating their client relationships with their banks. They are putting themselves at high liability risks without knowing it.

Senator Marshall: Is open banking the only solution to that problem?

Mr. Brazeau: Possibly not, but it is a solution that has been put forward so we are reaching out. In the context of your question, we are reaching out to consumer groups and doing public opinion research to try to find out the answer in terms of the use cases that might arise. In reality, it is still early days for open banking. The United Kingdom has been a leader on this front went live about a year ago. The types of use cases that can arise are sometimes hard to foresee.

We were talking a bit earlier with Senator Dagenais about lessons learned from other jurisdictions. In talking to the U.K. and Australia, they tell us that engaging consumers and small- and medium-sized businesses at the outset of the review process is critical to finding out what uses they think could be found in an open banking system. If they are putting an open banking system forward, they want to design it in a way that will benefit consumers and small businesses in the end.

Senator Marshall: Privacy and security are two big issues.

Mr. Johnson: Julien made a good point that there is a very significant number of Canadians who are effectively creating their own open banking system by going to third-party providers, handing over passwords and login credentials, and using these aggregators. The demand for this type of service is growing. I asked earlier, to what extent do you let that build from the bottom up? And to what extent do you need or is it appropriate to put some sort of regulatory framework around it to protect it?

The evidence says, on a bigger scale during the financial crisis, that regulation has a cost but its benefits can far outweigh the cost if it offers protection to the system as a whole. Again, by talking about open banking here, you are giving the consumer ownership of their own data. They get something; ownership of that data. They may elect to say, “Thank you; I’m not sharing it with anyone,” or they may say, “I have ownership and I will now share it with a select number of people.”

I do believe the demand will grow and continue to build from the bottom up. The question is to what extent, how and in what sort of regulatory framework do you put a top-down layer on that? It may be very small, as it is in the United States. It may be much larger, something akin to Europe. That’s an open question. It is something we’re looking at. The consultation that the Department of Finance has taken is a valuable initial step to addressing that.

As my last point, without sounding too much like an economist, there can be net benefits in making a market more efficient, in reducing frictions. There are frictions in financial services. Search costs are fairly high; financial literacy is fairly low. Switching costs are quite high. This is why fintechs are growing. When they see search costs are high, they say: “Great, I will put in an app that will handle that for people.” Switching costs are high so I will create an app to make that easier. Financial literacy is relatively low so I will do things like robo-advisers that rather easily will offer relatively high quality advice. All those things could be much better facilitated through the use of open banking.

Going back to my remarks again, there are real benefits, costs and risks to this. There is a lot of work to do to balance that.

Senator Marshall: After listening to you, I wonder how extensive the interest in this is. If you don’t have a lot of people interested in this, would you need to build this great, big machine which has to be supported financially? As I listen to you speak, I think people who are informed would not want open banking. That’s my conclusion at this point.

The Chair: If I may interrupt, I think you’re on an excellent line of questioning and I hear the witnesses asking the same questions.

Mr. Johnson: Indeed, we are.

The Chair: So the answers are to be found.

Senator Duffy: I just wanted to make the point that, in Canada, your income tax information is considered sacred and inviolate, as are medical and DNA records. Where will this end? Pharmaceutical information? Your prescriptions? I know people who take 10 or 12 different drugs a day to stay alive. As we open all the doors, will someone be able to see another person’s prescriptions and then make decisions against that person? How might that affect other areas? I think there is an awful potential here that this could grow out of control and damage vast numbers of people who are unaware, or not fully aware, of the risks involved.

Senator Wetston: Could I be so bold as to suggest that if we do not get a handle on this, we will face similar issues to those we now have with digital currency and crypto-currency? We do not have a framework that regulates it; we can’t even decide what it is. You indicated very clearly that about 4 million Canadians are accessing an open banking-type model and I have no reason to differ with you on. It’s really important that we get ahead of this. If it’s going to happen, we need to develop the framework to ensure that some of the risks we’ve been talking about don’t develop.

It is simply a matter of worrying about allowing it to happen without creating the standards and framework around it. My last point would be — and I was just looking at this — are you familiar with Butter?

Mr. Johnson: The food, senator?

Senator Wetston: I want to mention this to the committee. I congratulate RBC Ventures because it’s an RBC product. You may be aware of it, Mr. Brazeau. What it does is there is one place to track your subscriptions to all matters of things. It keeps track of your spending, gives smart alerts as to what you’re spending, lowers recurring expenses for these products, and it finds deals on new products and services. That is a kind of open banking-type model, and why would they do this and who is paying? Obviously, for RBC — which is a very successful bank and I don’t criticize them for this — what they’re doing is attracting customers to their bank.

That’s maybe a valuable thing, a competitive thing they might do. I see the same thing potentially could occur in a fintech/open banking model.

The Chair: When do you intend to wrap up your consultation? What is the next step?

Mr. Brazeau: As I said, we’re conducting the round tables at the moment. The round table in Montreal is taking place tomorrow, and we’re meeting with stakeholders on an ongoing basis.

The committee has committed to providing its report to the minister by the spring.

The Chair: By this spring?

Mr. Brazeau: By this spring. That being said, the report will be to the minister at that point, then it will at the minister’s discretion on when that report is made public. But the department does intend to continue to consult with Canadians and stakeholders on these issues over the period.

The Chair: It is our hope that we can be helpful in this process. That’s why we’re here.

Thank you very much, as always, for the very informed, intelligent and helpful presentations.

(The committee adjourned.)