Open banking recommended to bolster competition

Canada’s competition watchdog is urging Ottawa to adopt an open banking framework that would ease the barriers to switching institutions and boost competition in the financial sector.

The Competition Bureau says open banking, which allows consumers to share their banking data with other firms, would challenge established providers and clear some of the hurdles facing new service providers.

It was one of two main recommendations in the bureau’s submission to the Department of Finance, which held a consultation on potential measures to strengthen competition in the financial sector.

Open banking can grant consumers access to budgeting or money management apps and companies, and allow them to pool different bank accounts and credit cards into one place. Other emerging uses include simpler payments, automated accounting and business management.

One of the biggest areas of growth is in credit assessments. Under open banking, lenders could directly access an individual’s banking data, so they can look beyond credit scores. Consumers can also use it to build their credit scores, for example by proving reliable rent payments.

The federal government has promised to introduce open banking framework legislation as part of next month’s budget.

“The bureau encourages (the finance department) to swiftly implement such a framework so that Canadian consumers and businesses can benefit from competition as soon as possible,” the watchdog said in its submission.

“An effective consumer-driven banking framework will significantly support competition in the financial sector by reducing barriers to entry, promoting consumer switching, and facilitating multi-homing practices.”

The Competition Bureau also suggested allowing uninsured mortgage borrowers to switch between banks without undergoing a stress test.

The test requires federally regulated financial institutions to ensure borrowers can still make mortgage payments if they experience financial shocks such as an increase in mortgage interest rates or an increase in household expenses.

However, it said the stress test is “not applied evenly” when borrowers renew their uninsured mortgages.

For instance, if a borrower wants to switch lenders at renewal, the Office of Superintendent of Financial Institutions requires the new lender to apply the stress test. However, if the borrower renews with its current lender, then OSFI does not require the incumbent lender to apply the stress test again.

“The benefits for borrowers to shop around and switch mortgage lenders is well known,” the Competition Bureau said in its submission.

“The expectation to conduct the same stress test again at the time of renewing uninsured mortgages risks harming borrowers and the competitive process. This rule makes it difficult if not impossible for some homeowners to find a new lender and take advantage of cheaper interest rates.”

The Competition Bureau noted the framework for reviewing proposed mergers could also be improved.

The federal consultation looked into questions such as whether mergers between large banks should be formally banned and whether the government should limit how large banks can grow through acquisitions.

The bureau said that while it did not contemplate recommending a ban on mergers involving particular firms, or when specific size thresholds are exceeded, it does favour certain reforms.

Those include shifting the burden to merging parties to prove why a merger would be unlikely to substantially lessen or prevent competition.

On Thursday, the Royal Bank of Canada said it would close 25 HSBC Bank Canada branches and rebrand dozens more after its takeover deal closes next week.

The closures come as RBC is also preparing to turn its soon-to-be-acquired HSBC properties into RBC locations on March 28, the same day its $13.5-billion takeover deal will close. RBC announced plans to purchase HSBC Bank Canada in November 2022.

With files from Ian Bickis and Tara Deschamps