THE STANDING SENATE COMMITTEE ON BANKING, TRADE AND COMMERCE
OTTAWA, Thursday, February 21, 2019
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:30 a.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; and, in camera, to examine and report on issues pertaining to the management of systemic risk in the financial system, domestically and internationally (consideration of a draft report); and, in camera, for the consideration of a draft agenda (future business).
Senator Douglas Black (Chair) in the chair.
The Chair: Good morning, colleagues, and welcome to members of the general public who are following today’s proceedings of the Standing Senate Committee on Banking, Trade and Commerce here in the room or via the Web.
My name is Doug Black. I’m a senator from Alberta, and I have the privilege of chairing this committee. I will ask my colleagues, please, to introduce themselves.
Senator Verner: Josée Verner from Quebec.
Senator Griffin: Diane Griffin, Prince Edward Island.
Senator Stewart Olsen: Carolyn Stewart Olsen, New Brunswick.
Senator Wetston: Howard Wetston, Ontario.
Senator Campbell: Larry Campbell, British Columbia.
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
Senator Tkachuk: David Tkachuk, Saskatchewan.
The Chair: Thank you. And, of course, we’re always very ably supported by our analysts from the Library of Parliament and by our clerk.
Today marks our second meeting on our study of the potential benefits and challenges of open banking for Canadian financial services consumers, with a special focus on the federal government’s regulatory role.
I’m pleased to welcome our witnesses for the first portion of our meeting. From the Office of the Privacy Commissioner of Canada, we have Gregory Smolynec, Deputy Commissioner, Policy and Promotion Sector; and Arun Bauri, Strategic Policy and Research Analyst, Policy, Research and Parliamentary Affairs Directorate. From Payments Canada, we have Justin Ferrabee, Chief Operating Officer. From the Competition Bureau Canada, we have Leila Wright, Associate Deputy Commissioner, Policy, Planning and Advocacy Directorate; with Greg Lang, Major Case Director and Strategic Policy Advisor, Competition Advocacy Unit.
Thank you all for being with us today. We look forward to your opening remarks. I understand the Office of the Privacy Commissioner is going to start, followed by Payments Canada and then the Competition Bureau Canada. After that, we’ll move to questions.
Gregory Smolynec, Deputy Commissioner, Policy and Promotion Sector, Office of the Privacy Commissioner of Canada: Thank you for the invitation. I’m joined today by Arun Bauri, the office’s lead analyst on open banking.
Advocates note that there are many benefits to open banking for consumers and businesses. These include access to new products and services, and increased competition and entry to the market for small businesses such as we see in the financial technology sector.
As Commissioner Therrien stated before this committee last May in the context of Bill C-74, while advancements in new technologies and innovation are indeed desirable and can provide many benefits to Canadians, these objectives must be pursued concurrently with robust protections for human rights, including privacy.
In his submission to Innovation, Science and Economic Development Canada on its national digital and data consultations, Commissioner Therrien highlighted how recent events had shed light on the manner in which personal information can be manipulated and used in unintended ways. These events should serve as a cautionary tale on the need to have strong regulatory frameworks in place prior to operationalizing “disruptive” ways of leveraging data.
The OPC recommends that open banking in Canada be built upon a foundation that includes respect for privacy and other fundamental rights at its core.
There are examples of frameworks for open banking, such as in Europe, where the Second Payment Services Directive, or PSD2, and the General Data Protection Regulation, GDPR, govern the manner in which open banking operates. Consent is a fundamental component of the GDPR, and we recommend that meaningful, express consent form part of any Canadian framework governing open banking.
Our private-sector privacy law allows for different forms of consent; namely, express or implied. Where personal information is considered sensitive, express consent is required. Financial information has been held by the Supreme Court of Canada to generally be extremely sensitive. Therefore, we would expect that financial institutions and fintechs, generally, obtain express consent from their customers.
The OPC released guidelines for consent, which took effect this past January. Those guidelines include key elements that should be emphasized by organizations in order for individuals to meaningfully understand what they are consenting to. Those include the nature of the personal information being collected; the parties to whom personal information is being disclosed; the purposes for which personal information is collected, used or disclosed; and the risk of harm and other consequences for the individual.
To ensure consistent ground rules for open banking, we recommend the development of rigorous standards, including technical and privacy standards. We have seen this in Australia, where a data standards body has been established with necessary experience and expertise. Our office would be pleased to provide privacy expertise to support the development of Canadian standards, which would be consistent with the role of our Australian counterpart.
We have seen a variety of approaches to open banking in other jurisdictions. For example, in most jurisdictions, new players require prior authorization to participate in the ecosystem of open banking. Approved firms must be registered and carry professional insurance. We support such a model and recommend that should open banking be implemented in Canada, companies be accredited or licensed before being authorized to participate.
To ensure privacy risks associated with the collection, use and disclosure of sensitive financial information in the open banking context are appropriately managed, we recommend that financial institutions and fintechs be required to document an analysis of privacy risks associated with their activities and the manner in which these risks will be mitigated. There needs to be an auditable record of such a risk assessment so that a regulator, such as the Office of the Privacy Commissioner, would be able to access that record.
The requirement to conduct a privacy impact assessment already exists for federal government institutions, and under the GDPR, for situations, particularly those involving new technologies, that are likely to result in high risks to rights and freedoms.
We believe that modernized privacy laws are a necessary pre-condition to a concept like open banking. For the digital economy to flourish, Canadians must trust in businesses and government to innovate with their personal data. To build this trust, there needs to be an appropriate legal framework in place.
In this context, the office needs stronger enforcement powers under amended privacy law, including the power to make orders, impose fines for non-compliance with the law and independently verify compliance, without grounds, to ensure organizations are truly accountable for protecting personal information.
Changes in financial policy and legislation require concurrent updating of Canada’s privacy legislation to ensure that consumers and their data are not just viewed as a commodity or as raw material from which data can be extracted. While there is merit in privacy laws continuing to be principles-based and technologically neutral, they should also incorporate enforceable rights for individuals. Privacy is a necessary precondition for the protection of fundamental rights and values in Canada, including those pertaining to liberty, equality, dignity, human rights and our democratic rights, and our laws should reflect this.
We need to reform our privacy legislation to make it fit for purpose to ensure that the privacy of Canadians is protected as technologies and the economy changes.
Thank you, and I look forward to your questions.
The Chair: Thank you very much, sir.
Mr. Ferrabee, please go ahead.
Justin Ferrabee, Chief Operating Officer, Payments Canada: Good morning. My name is Justin Ferrabee, and I am chief operating officer of Payments Canada. Thank you for the opportunity to speak to you today.
Payments Canada is an inter-financial institution exchange. We are guided by our legislative mandate and the public policy objectives of safety, soundness and the efficiency of the Canadian clearing and settlement systems. We ensure payments between financial institutions are safely and securely settled each day.
Through our modernization initiative, we are leading an industry-wide effort to modernize these systems and to support faster, more flexible and more secure payments. This includes the introduction of a real time, data-rich payments network— or rail— designed to promote the innovation in payments processing. This real-time rail will provide immediate 24/7/365 payments that are final and irrevocable. It will be supported by a robust international payments information standard — known as ISO 20022 — that allows for larger amounts of more useful information to travel with payments.
We see two elements emerging in open banking. The first is the collection and aggregation of a customer’s financial information across multiple sources, including full payment transaction data, in an integrated and flexible manner to suit their needs. We refer to this as open banking data. The second is the facilitation of payments directly from a bank account as an alternative to credit and debit card payments. We call this payment initiation.
For open banking data, the deployment of data-sharing requirements combined with the transparency and real-time exchange of information will create exciting opportunities. Moving towards standardized interfaces, or APIs, and giving customers greater control over their data will serve to reduce frictions in the development and adoption of new services.
In much the same way, payment initiation has the potential to create further opportunities for innovative financial services. Combining the ability to reliably access financial data with the ability to initiate payments or transfer funds between institutions will increase the range and competitiveness of new financial services.
We have full confidence that open banking can be implemented successfully in Canada. The demand is there and the benefits are clear. Canada has an opportunity to lead open banking in North America and beyond. Our financial institution members have invested heavily in modernizing the payments infrastructure and Canada has proven that we can make financial advancements safely. For example, our transition to safe, secure and convenient online and mobile banking services. Our financial institutions are among the strongest, most secure and most capable in the world. They are trusted, highly competitive, well resourced and staffed with the industry’s best and brightest people.
The conditions are right, the investments have been made, and the opportunity is here for the government to play a leadership role as a catalyst to move the industry forward.
Right now, tens of thousands, if not hundreds of thousands, of Canadians are seeking out technologies and financial applications that mimic the services open banking would provide. In so doing, they are compromising their credentials, putting their finances at risk, creating exposure to privacy and other breaches, and potentially nullifying the account-holder agreements that protect them. They are willing to do this to meet their needs for a more personalized, digital banking experience that allows them to better control their financial lives. Open banking will protect them. It will allow Canadians to access the services and convenience they need to manage their finances, while keeping them safe.
Open banking will allow our financial institutions to develop competitive negotiations that position them for global opportunities.
If we delay, we put Canadians at further risk and create the prospect of foreign companies gaining competitive advantage. To be safe and competitive, we need to bring open banking to Canada.
As in other jurisdictions, we need the leadership of the Canadian government to ensure progress and success. Governments around the world have been actively involved in open banking initiatives to ensure that a strong and balanced legislative and regulatory framework underpins the system.
We believe that to successfully realize open banking, two key roles are required. The first is to manage the setting and continued evolution of the open banking standards and specifications, including the use of robust digital identification for access and control. The second is a role to manage and ensure compliance through the full implementation of open banking. This is a delivery organization that supports financial institutions as they make the transition to an open banking environment.
The government can set an ambitious timeline for open banking implementation given the investments and the progress in modernization programs across the industry, as well as the legislative initiatives under way that are likely to broaden access and competition in payments services.
Finally, it’s important the government takes a leadership role in public engagement and communication to help Canadians understand the merits of open banking, as well as their rights and responsibilities.
In summary, while moving to open banking is a large undertaking, it’s important the government progresses swiftly. Canadians’ need for financial control is driving behaviours that create unnecessary risk. Open banking will make these services available in a safe and convenient way. At the same time, our industry must ensure we keep up with global competitors who are forging ahead with open banking. If we act, Canada can continue to be a leader in innovative financial technologies.
Canada’s payments modernization program is progressing. Open banking will flourish with this new infrastructure. Now is the time to align and to lead an industry into the future of financial and payment services in Canada.
The Chair: Thank you very much, Mr. Ferrabee. It was very interesting.
Ms. Wright, please.
Leila Wright, Associate Deputy Commissioner, Policy, Planning and Advocacy Directorate, Competition Bureau Canada: Mr. Chair, members of the committee, thank you very much for having me here today. I am the Associate Deputy Commissioner of Competition Promotion at the Competition Bureau and I’m joined by my colleague Greg Lang, who is the Major Case Director and Strategic Policy Adviser in our Competition Advocacy Unit.
The Competition Bureau is an independent law enforcement agency that ensures Canadian businesses and consumers prosper in a competitive and innovative marketplace.
Through the administration and enforcement of Canada’s Competition Act, the bureau is responsible for investigating and addressing price-fixing, deceptive marketing practices, abuses of market power, and corporate mergers and acquisitions.
As Canada’s competition expert, the bureau has a mandate to act as an advocate for competition throughout the Canadian economy. To fulfill this mandate, we often work with regulators and policymakers to promote pro-competitive regulations and a continued focus on the benefits of competition.
In this context, the bureau recently completed an extensive study on how to foster technology-led innovation and emerging services in Canada’s financial sector. This study, released in December 2017, includes 30 recommendations designed to support fintech adoption.
Of particular interest to today’s proceedings, the study recommends that Canada consider the benefits of open banking. To further support this recommendation, the bureau made follow-on submissions regarding the merits of open banking to the Department of Finance, who appeared here yesterday.
We make these recommendations because open banking has the potential to increase competition, promote innovation, and deliver better results for consumers in Canada’s financial services sector.
Historically, financial markets in Canada have been characterized by consumer inertia. A 2013 Ernst & Young study found that only 14 per cent of Canadians switched banks over the last five years and that 71 per cent had been with the same bank for the past 10 years. These are important statistics because they indicate that consumers may be finding it difficult to shop around and take advantage of the range of products available in our modern financial sector.
For the forces of competition to deliver their full benefits, consumers need to have access to clear and complete information about alternative products and providers. Our research shows that open banking can help deliver these benefits.
With innovative new tools enabled by open banking, Canadians could have, at their fingertips, the power to more easily comprehend and compare a variety of complex financial products available in today’s marketplace. This form of innovation empowers consumers to make the financial decisions that are best for them and their families.
Open banking can also be good for financial service providers. When it is easier to attract new customers, it is generally simpler for businesses to successfully introduce new products. New, innovative products have the power to disrupt and revolutionize industry in ways that deliver better outcomes for Canadians.
More competition generally results in increased service levels, greater consumer choice and, importantly, more attractive prices.
International experience has shown that open banking stimulates the development of innovative products that help consumers improve their financial well-being. For example, the bureau’s counterpart in the U.K. estimates that open banking reforms will generate direct economic benefits for the U.K. economy of up to $440 million per year.
To fully achieve the benefits of open banking, the bureau recognizes that there are important policy considerations that need to be taken into account, such as those related to privacy and cybersecurity. Centrally, our research acknowledges that an open banking regime can only succeed if it earns the trust and consent of consumers. It is important that regulators strike the right balance between achieving legitimate policy goals and preserving sufficient scope for competition.
The merits of open banking are extensive and, as with any large-scale change, there is the possibility of bumps along the road. As we navigate those key regulatory issues, we should focus on the opportunity that exists for Canadians to benefit from open banking and the greater levels of competition and innovation that it would bring.
The bureau would like to thank the committee for the opportunity to provide its views on the competitive benefits of open banking. We look forward to your questions. Thank you.
The Chair: Thank you very much, Ms. Wright. That was very helpful. Let’s move to questions, starting with the deputy chair, Senator Stewart Olsen.
Senator Stewart Olsen: Thank you for being here. It’s a very interesting, very complicated study, and new to me, for sure. I have two questions, and my first goes to Mr. Smolynec.
How on earth can we ensure that informed consent is actually informed consent? I worked in the medical field, and I know that when you ask a patient to sign a consent form, they generally just sign it. With this, I think we’re getting into very murky waters, where people really have to know what they’re signing. How would you suggest we go about ensuring consent is actually informed?
Mr. Smolynec: I’d like to bring to the attention of the committee that the Office of the Privacy Commissioner issued guidelines on consent. They came into effect this January. This guideline is available on our website, and it provides great detail on meaningful consent, express consent. So there are practical ways in which meaningful consent can be, so to speak, operationalized and sought out.
The key here is that we’re in the realm of express consent because of the sensitivity of the financial information that’s at stake in open banking. The guidelines, it should be pointed out as well, were developed after an extensive, lengthy consultation process. They had a lot of input from industry, stakeholders and advocacy groups as well. Those are some key points I would like to make.
Senator Stewart Olsen: Thank you. You’re suggesting that in crafting the legislation, we should be using these guidelines?
Mr. Smolynec: Yes. The guidelines will certainly be a good resource for the development of legislation. We would also point out that our privacy laws themselves should be modernized, and within the context of privacy law reform, express consent or consent measures could be enhanced in that legislation as well.
Senator Stewart Olsen: Thank you.
For Mr. Ferrabee, I know you have a brief thing here about Payments Canada and what you do, but can you explain that a little better to me?
Mr. Ferrabee: Yes. Payments Canada is what we call a large-value exchange, so you may have sent a wire transfer before for closing a house or something like that. We run the high-value system, which is the wire system in Canada, and it’s for all the exchanges between financial institutions and it’s the large-value exchange. Then we run the batch system, which is the clearing and settling of point-of-sale, automatic debits, EDI or other electronic payments, cheques as well. So all the payments in the economy each day go into the banks, then the banks do a “to, from, to, from, to, from,” and we settle up in Central Bank dollars at the end of the day.
Senator Stewart Olsen: Thank you. And have you worked with the Privacy Commissioner on exactly what you’re doing as you’re suggesting open banking would be a very good thing? I don’t think people actually know their transactions run through another place. I’m just wondering if you have done that.
Mr. Ferrabee: Not on this matter, but we have worked together in the past.
Senator Stewart Olsen: Thank you.
Senator Tkachuk: Welcome, witnesses. I have a couple of questions, Mr. Smolynec, on the issue of privacy. We’ve discussed this issue here at numerous meetings. It’s always about giving away privacy. They say, “Well, it’s okay. By consent.”
I think it should be educating Canadians about privacy, i.e., there are certain things that you want to keep private, your financial affairs. In this day and age, it’s more easily gotten to than in the old days with a gun and walking into a bank. Your health records, your bank records, your home, these are things that people should not give away. That’s my point. They should keep it in as minimal a place as possible. In other words, don’t maximize all that stuff, because once it’s gone, it’s gone.
I want you to comment on that, because what privacy is there if, by consent, you give it all away? And people think it’s secure. I don’t believe it’s secure. A little explosion down at the coal mine in Saskatchewan and everything goes down, right? Everything, the whole province goes down.
Mr. Smolynec: I’d start by saying that it’s clear to us, and it’s based on survey data as well conducted by ourselves but also other pollsters that Canadians are very much concerned with their privacy rights.
Senator Tkachuk: They should be.
Mr. Smolynec: You can see this in the headlines on all sorts of recent events. There’s a growing awareness of the importance of privacy. It affects our democratic rights, it affects our lives as consumers and, of course, as individuals. There’s a growing awareness. I think there’s also a growing awareness that privacy is a human right under Article 12 of the UN Universal Declaration of Human Rights. It may also be seen as inalienable, or it is, I should say. The question then becomes: How does one, so to speak, without consent surrender their personal information?
It’s very important to protect it. That having been said, to be clear, the Office of the Privacy Commissioner, Commissioner Therrien himself, we support innovation. We support innovation in the digital realm as well. But we stress and we caution that there must be robust privacy protective measures as a foundation for such innovation — not as a balancing of innovation, not as a barrier to innovation, as we sometimes hear, but it’s foundational. Privacy protective measures should be built into the design of any new initiatives, in any sphere of the economy, but especially in open banking, given the sensitivity of the information involved.
There are guidelines and measures that would enhance the privacy protective measures that would underpin this new banking world. To be more specific, we have to get into the development of robust standards, both security standards and privacy standards. We would recommend that this be done before the rolling out or going too far down the road, and we would offer that we have expertise that could contribute to the development of those standards.
Senator Tkachuk: The data we are always talking about. The only reason people want this data is to market it. They want to increase their competitive edge to sell products. Otherwise, why would they need it? The Government of Canada tried to get banking records so they could use that data to plan programs, but they are using private data. They get it through a survey or something like that, where there were consents and then destruction, not actually moving the data from one place to another and keeping it there.
How are you going to handle all of that? I think the time has come. Everybody’s records are public. I don’t think there is any privacy anymore. It is that bad. I do. And if the government is involved in it, that means everybody is involved in it.
Mr. Smolynec: There are many details around open banking that are unknown to us at this point which makes it a little bit difficult to assess all of the risks from a privacy perspective. That having been said, we do see some potential risks associated with it which could be mitigated through standards, accreditation, licensing, and improved privacy laws.
Among the issues that you flagged is control over the manner in which the information is used. One of the key questions I have is what is the business model that attends to these new open-banking enterprises? How will they make their money? Will it be on the basis of fees, or will there be any effort to aggregate data and personal information, to sell it, or perhaps even to hive off what is known as behavioural surplus data which may then be traded as a futures commodity?
Senator Tkachuk: Okay, thank you.
Senator Wetston: This issue of privacy is important so I will hold it for the second round. I have a couple of questions now, though.
Ms. Wright, I pursued this with yesterday’s panel. You may have caught some of that.
We live in a market economy. Let’s not suggest that opening up innovation to create new products, new services and opportunities is seen as a negative thing. I don’t see it as a negative thing at all. I am sure the bureau doesn’t either, or any of you.
We have a highly concentrated banking sector today. We recognize the opportunities that exist in financial markets today. We have some sense of fintechs and engagement and APIs and how that may create more competition, data, services and more products. I am also concerned about concentration because we are looking at this in a vertically integrated context. We need to look at it somewhat differently, potentially. Let me talk about vertical integration for a moment.
As large institutions start acquiring fintechs in a vertical environment, there will be potential here for increased corporate concentration, less competition, and, of course, the opportunity then of having to deal with these issues from the point of view of the Competition Act. What is your view on vertical integration enhancing corporate concentration rather than creating an opportunity for more competition, price and service competition?
Ms. Wright: Thank you for that question, senator. When we do advocacy work and engage in large-scale advocacy projects, we take the market as it is. We don’t look at whether there may or may not be competition and considerations in the market. What we are looking at is how we can increase competition in that marketplace.
Regarding vertical integration, there are two ways that the Competition Bureau can look at this under the Competition Act. The first is under the merger review. The Competition Bureau has the mandate to review any merger in Canada and determine if that merger will substantially prevent or lessen competition in a market.
Second provision is our abuse of dominance provision. It looks at situations where companies with significant market dominance are engaging in behaviour that may be lessening competition in the marketplace, such as potentially excluding rivals by buying them up. So there are two ways that we can look at this under the Competition Act.
Senator Wetston: My second question: I read an article in The Globe and Mail. I can provide it if you like, but I don’t think it is necessary. Who is afraid of open banking? We heard some views of where that fear might be. It states that the method would allow new service providers to access customer data to offer more competitive financial products but there are questions that might be addressed first.
We kind of focused on this a bit yesterday. There is a question about scope, standards, commercial issues associated with how it could be rolled out, but the big question is regulation. Why do I say that? Because when we look at the U.K., they have a national securities regulator. In Australia, they have a national securities regulator. We’ve been trying since 1934 to have a national securities regulator.
OSFI may be the start, if it were related to banking, but they are not a market conduct regulator. They are a prudential regulator, and you need market conduct associated with that. We look at the fragmented system we have and ask ourselves how we will organize this to protect the public. We want to do that. Consumer protection is important not just around privacy. What are your thoughts around viability?
The first step might be you need to get the regulatory framework in order, while developing scopes and standards, and we have not had a lot of success in doing that. The Capital Markets Regulatory Authority made some progress. Some provinces signed on. The federal government is a strong supporter of it, but we are not there yet. Any comments from any of you?
Mr. Smolynec: It is difficult for regulators to share information currently. So, to your point of coordinating regulators, we would need to have some legislative review to enable the regulators to share information among themselves. It sounds mundane, but it is consequential.
Senator Wetston: Thank you. Any other comments?
Ms. Wright: One of the issues we heard frequently while conducting our market study was this idea of businesses having to look at a lot of different rules in different provinces and trying to figure out how to abide by all of those rules, even though they were, oftentimes, quite dissimilar to one another. One of the recommendations we made was that harmonization is critical to the success of the financial market because, through harmonization, it opens the market up to more competition throughout Canada.
Senator Dagenais: I thank our guests. My first question is for Mr. Smolynec.
Mr. Smolynec, in the model you suggest, to what extent will new players, such as financial technology businesses, be Canadian? To what extent will consumers and their personal information be protected? What will be their remedies against those who fail to follow the rules in place? Dissatisfied consumers must be able to sue those companies.
Mr. Smolynec: That is an excellent question, Senator Dagenais. We have few details on the open banking system model at this point. So it is difficult to analyze it.
There are certainly questions on the transfer of personal data through a third party. That is another aspect. Corporate responsibility is another. Our privacy legislation applies around the world. It applies to Canadians, but we need more details on the proposed model.
Senator Dagenais: Mr. Ferrabee, I have two questions for you. You presented a typical profile of potential users. Who will be the bank clients who will have to very quickly make financial transactions, especially when costs will certainly be attached to those transactions? When we go to a bank, we never know how much it will cost us. Who will the potential users be?
Mr. Ferrabee: Payments Canada doesn’t control the fees or the pricing of a service delivered by a financial institution. It’s largely governed by market forces and opportunity for competition, in our view.
The opening up of payments as a function — we’re modernizing the payment system now — are intended to make it more accessible, faster and cheaper, ideally. Although we can’t control the price, we believe that if we do the infrastructure in a way that makes it more accessible, that creates more opportunity and will make more competition. But we don’t have the ability to set those prices. We believe that corporates, as they advance in their understanding of payments and take more assertive action in managing their banking relationships, will drive change to that.
Senator Dagenais: Much has been said about Australia, China and the United Kingdom, but what has become of the United States’ banking system? We know that the situation is different there, but I assume that market has evolved.
Mr. Ferrabee: Yes. Thank you. I would say it’s not progressing as quickly and that there’s an opportunity for Canada in North America. It is a more fragmented market, including the payment infrastructure and all the way down. It’s bigger, more fragmented, and as we are hearing now, the coordination is a challenge. Their coordination challenges are quite a bit larger than ours, which in our view creates an opportunity for Canada.
Senator Dagenais: There are ramifications for some Canadian banks in the United States, such as the Royal Bank in relation to NBC. If the Royal Bank, for whatever reason, decided to implement that system in Canada, it would surely transfer it to its partner in the United States, right?
Mr. Ferrabee: I think that’s right. I think we can play a leadership role there. With operations in both countries, you can take what you learn and do and start to migrate your services in a direction towards more competition and to be more competitive.
Senator Klyne: Thank you for appearing this morning. I have questions for the Office of the Privacy Commissioner and the Competition Bureau.
We know that the four pillars of Canada’s financial system — the banks, insurance companies, securities and trusts — are kept separate to prevent risks associated with, say, the emergence of the “too big to fail” institution or unfair competition. This is a two-part question. Will those institutions within those four pillars, for this to be successful, be required to comply and approach their customers to authorize the exchange under some due diligence, which you mentioned? Or can an insurance pillar opt out of the whole program?
Mr. Smolynec: At the Office of the Privacy Commissioner, we are not aware of any planning about the various pillars and how the various pillars would play in open banking. I don’t have any insight into that particular issue. I would just say that privacy laws are applicable to all of the pillars.
Senator Klyne: I am just wondering if banks can access insurance data under this, or can the insurance companies say they are not going to participate.
Mr. Smolynec: I have no insight into how that is envisioned in the model proposed.
Senator Klyne: I don’t understand why financial institutions want to give up their client data and encourage that unless they figure out how to monetize this.
My question on that, if the tier 1 financial institutions decide that they will go after this in a full-force offensive, if you will — pardon the expression, but a crush-kill-destroy approach to doing business — how would the second tier and third tier institutions fare out of all of that? Is this an opportunity for tier 1 financial institutions to take on a bigger piece of the pie?
Ms. Wright: Thank you for that question. It is a very good one.
I’ll begin by saying that there are often issues with regard to business incentives. As well, when you have a large-scale project such as this one, where there are a lot of different policy considerations, including privacy and cybersecurity, it is often in the best interests of everyone for the government to be taking the lead and creating that framework within which open banking will happen.
From a competition perspective, one of the most important principles is that there be a level playing field so that all competitors in a market are able to play by the same rules and are able to compete for the business of customers in the same way. So as details are ironed out regarding open banking, it is very important to ensure that there is a level playing field on which all financial institutions are able to play.
Senator Klyne: I don’t know how you govern the tier 1’s from going too hard on this, but okay.
Senator Griffin: Thank you. I have one question, and I think it is Mr. Lang that I want to direct it to.
What if Canada did not adopt open banking? What if we decided we are not going there? What would be the challenges for our country if we did not do that?
Greg Lang, Major Case Director and Strategic Policy Advisor, Competition Advocacy Unit, Office of the Privacy Commissioner of Canada: I think that’s actually a question for Ms. Wright.
Senator Griffin: Thank you.
Ms. Wright: I’m happy to answer that question. As you know, our counterparts around the world are beginning to adopt open banking. What we see is that if Canada doesn’t adopt open banking, there may be issues with regard to our ability to compete on an international stage.
Senator Verner: I will address you, Ms. Wright, regarding the study published in 2017. In your study, you cite an Ernst & Young report, which shows that the financial technology usage rate was 18 per cent in Canada and that the firm anticipated a rate of 45 per cent in the near future, but without giving a specific timeline. What do you think about that statement and when in the near future should the increase to 45 per cent occur?
Ms. Wright: Thank you for your question. I will begin by saying that when we began our market study, that was the main question that we had, the question that was posed by that study. The study showed that one in five of us used a fintech product two times in the last six months, whereas our international counterparts are about double that amount.
So the main question we had in our study was why; why is that the case? Are there regulatory and non-regulatory reasons why fintech companies are not having the same adoption rates in Canada as in other jurisdictions?
With regard to your question on time, I would not have a comment on the amount of time it should take in order for us to get up to a certain number. I don’t know what that correct number is, but the interesting question we looked at was: Why aren’t we doing as well as our counterparts in this area?
Senator Verner: Since your market study was published, have you had an opportunity to look into the economic benefits that could arise from an open banking market? You mentioned earlier the economic benefits in the United Kingdom, which you estimated to be $440 million per year. Have you had an opportunity to extrapolate and consider the economic benefits for Canada?
Ms. Wright: We have not had an opportunity to do that for Canada. When we look at open banking, it’s interesting that Canada is currently on the leading edge rather than the bleeding edge. I mean that we have international counterparts around the world that are starting to adopt open banking. We are able to look at their experiences, and see the advantages and opportunities with open banking, as well as to some of the risks that need to be addressed.
We have that number from the U.K. regarding the benefits of up to $440 million. There are other measures the U.K. has put out showing there is adoption of open banking in their country. Things are looking promising in other jurisdictions. It is still early days, and time will tell.
Senator Verner: My last question is related to the discussion you had with my colleague, Senator Wetston. In your study, you encourage Canadian political decision makers to designate a single entity to be in charge of financial technology policies in the form of a single point of contact for businesses, consumers and investors. Given what has happened in the securities file, how do you expect Quebec and Alberta to react to this kind of a proposal? I’m not saying that I’m against it. However, considering the experience with the two provinces that did not want to participate, what do you anticipate their reaction to your proposal will be?
Ms. Wright: I will begin by saying that our market study recommended that there be a policy lead on open banking. We made that recommendation because there are so many different policy considerations that need to be taken into account, and we need a lead who is looking at all of those different perspectives as regulations are being developed. By doing that, we will get a framework that works for everybody.
Senator Marshall: My first question is for Mr. Smolynec. Mr. Ferrabee and Ms. Wright seem to be supporters of open data, but you said right at the end of your opening remarks that we need to reform our privacy legislation. Could you give us some insight on what is happening in the Office of the Privacy Commissioner to prepare for this? It is most likely coming. Could you talk to us about whether you have draft legislation prepared? Are you adequately resourced? Could you give us some insight on whether you will be in a position to do your job, should open data arrive in Canada?
Mr. Smolynec: As you are no doubt aware, Commissioner Therrien has in the past before this and other committees called for an updating and modernization of our privacy laws. The economy is moving ahead at a rapid pace. There are all sorts of technological innovations. Over the past couple of decades, privacy has become increasingly important for all kinds of reasons, not least, I would point out, because it affects our democratic rights. I would posit that you cannot have a viable public democratic life without a private life.
It is important, and the stakes are high, not just from a consumer’s point of view but from a citizenship point of view.
So yes, we are working diligently to study and assess how privacy laws can be improved. There are a range of things we are proposing, which includes the creation of rights-based legislation. Our laws now are principles-based and technologically neutral. There is a lot of merit to having technologically neutral laws and principles reflected in those laws. But we suggest that a rights basis, as we see, for instance, in the GDPR. We are not suggesting we should adopt the GDPR, but we could create a Canadian model suited for Canadian purposes and a Canadian context, including our international trading relationships. A rights basis that confers distinct rights upon Canadians would be helpful.
The other very critical thing is that the order-making powers for the commissioner and the Office of the Privacy Commissioner of Canada is indicated, as well as the ability to impose fines. All of these issues that pertain to how we regulate are critical, as well. With that would come an augmentation of the resourcing capacity of the Office of the Privacy Commissioner of Canada.
Senator Marshall: How confident are you that the office would be ready to respond? In the past, you must get some feeling as to whether the government would be receptive to providing more resources. Do you feel encouraged that, when the time comes, you will be in a position to properly respond on behalf of Canadians, or do you have some trepidation with regard to what you will be able to do?
Mr. Smolynec: I have no doubt that we could contribute with value to any legislative reform initiatives. We have expertise, we have deep knowledge and we’ve been studying the issues for years.
That said, we are busy; we are busy across the board. There are a lot of complaints and pressures. As I speak of the democratic rights and the stakes involved — these are big issues — but there are increased localized demands. When people complain — they want answers — and the complaints are real, we have to attend to those as well.
We have to operate on different levels. I’m not without my concerns, but we have a lot to offer.
Senator Marshall: You are all familiar with Statistics Canada’s pursuit of financial data that was in the media several months ago. I know this is the early stages with the open data; we are just talking conceptually. Ms. Wright, I know you said you expect government would take the lead. Do you think that the information Statistics Canada is looking for will now be more readily accessible if we move to open data? My first reaction was that this was to get the same data through the back door that they could not get through the front door.
I would like each of you to respond to that.
Ms. Wright: There are still a lot of details that need to be worked out with regard to open banking, and there are issues with regard to trust in the market that need to be worked out before open banking is implemented in Canada. In order for open banking to be taken up by consumers, consumers need to trust in the idea of open banking and what that means. That’s an issue that needs to be figured out before we’re able to implement open banking in Canada.
Mr. Ferrabee: I’m not sure that open banking would change the dynamic. I don’t think by creating open banking all of a sudden that would open up new ways. It’s a question of who is gating the information. In some ways, I applaud the interests of getting more accurate financial forecasting and in some ways the system works to say not if you’re going to get private information. I think open banking is saying: Who is gating? If it’s my financial institution who currently is doing a good job protecting my data, in open banking I’m protecting my data. So now it’s a question of who is controlling it. In our view, a separate attempt from Statistics Canada to do the same thing would not be successful under an open banking regime.
Senator Marshall: Do you feel the same as Ms. Wright that governments should take the lead?
Mr. Ferrabee: Yes.
Senator Marshall: Any further comments from the Privacy Commissioner’s office?
Mr. Smolynec: As you’re aware, we have an ongoing investigation on Statistics Canada, so I’m not at liberty to discuss that investigation.
Senator Marshall: We’ll be fully familiar with it by the time we get open banking.
Mr. Smolynec: In general, I’d make the following observation: With open banking we don’t have specificity as to what data is necessarily involved. We would ask what accounts are being implicated in open banking: information transfers, insurance and mortgages. What exactly are we talking about?
What we’re seeing now are technologies that are allowing for the vast accumulation of incredible amounts of data. This new phenomenon — it’s not just in the financial sector but in social media platforms, et cetera — of the amazing accumulation of vast amounts of data is transforming the way we think about privacy, because it’s not just one individual’s privacy that needs to be protected. It’s on a global level, involving sometimes billions of people.
Senator Frum: Mr. Ferrabee, you just mentioned the “gating mechanism.” We currently have a system where it’s the financial institutions that are gating the data and open banking depends on the individual to be the gatekeeper for their data; is that it?
Mr. Ferrabee: I would say it’s not as binary as that. I still control my data, but it’s also controlled by or protected by. I trust my bank to protect my data. I would still rely on them to protect the data they have. But if I’m having access and I’m choosing to give somebody else access I am gating.
Senator Frum: It boils down to this idea of how much financial literacy the general public has when they sign on to these things and their ability to consent. We also know there’s a gigantic generational gap. The people around this table are much more concerned about their privacy, but the millennial generation is accustomed to waiving their privacy but perhaps not with a full understanding of the implications. This seems to be based on a culture where an upcoming generation is accustomed to waiving their privacy rights.
Mr. Ferrabee: Perhaps, and there’s definitely some of that. I think what we’re asking in open banking is to tell us what the rules are because in some cases they’re not there and people are making decisions that are more risky for them than if there were a set of rules. That expectation of a customer’s awareness, knowledge, consent and all of that would be part of gaining access, whereas right now people are doing things assuming it will be fine and it could very well not be.
Senator Frum: For people of my generation and this generation at this table it sounds predatory, taking advantage of the openness of an upcoming generation that is really innocent about the exposure they would be taking on. Mr. Smolynec, do you want to comment on that?
Mr. Smolynec: I wouldn’t mind.
One of the Office of the Privacy Commissioner’s priorities over the last few years has been assessing how privacy issues affect vulnerable populations, so we have strategies developed by our communications directorate to address vulnerable populations, one of which is youth. It may be a good idea, when with considering open banking, to put a lens on how open banking affects different segments of the population; in this case, youth.
Senator Tkachuk: I believe it was you, Mr. Ferrabee, who talked about how this would increase competition, how consumers would benefit. I’m still trying to get my head around all this. Let’s see if we can kindergarten it a bit.
I deal with two banks. There are probably many people who deal with an investment bank, where they may be saving stock, and then a regular bank account. How would I profit from open banking?
Mr. Ferrabee: I’ll qualify this to say I have an interest primarily in the payments area, but I have an opinion on what you’re asking, so I’ll share that.
The idea, I believe, is that the consumer or a service provider can access those various points and provide a service to you that brings it all into a single place so you can see holistically where your assets are and what they’re doing. Once you see the full picture in an integrated manner, the payment initiation allows you to then rebalance to make a transaction. The goal is to provide a more holistic view versus having to get your statement from one and then from another, pull them together and look for the most current date. I made a trade and I can’t remember exactly how that settled and what the amount was and having to call on your bank while using different vehicles to get there. It’s all your information as it is now. There’s not new information. It’s the medium that’s being accessed.
Senator Tkachuk: It’s just slapping another entity on what already exists and saying that what I’ll do for you is to coordinate all this stuff so you’ll get one piece of paper or one website where you can see everything at once.
Mr. Ferrabee: That would be an example.
Senator Tkachuk: I can’t say how that benefits anybody. I don’t really understand that. If I go to my bank, I get all the information I need about my bank, and if I go to my other bank, I get all the information. What would be the difference between that and getting it too? Or is it the fact that this institution now can mine the data in my banks to sell to other people? That’s what this is all about, is it not?
I remember Facebook was supposed to allow people to privately engage with each other; family sending snapshots and all that stuff. But in reality, the money is in the mining of the information and the fact that very private information is going out and being sold into the marketplace. That’s why I’m concerned that all of these things start off so innocently but really the information is where the money is. No one is going to tell me that the website is where the money is. It’s the information that’s where the money is and that is a dangerous thing.
Mr. Ferrabee: I agree.
Senator Tkachuk: I hope you’re watching. That’s all I can say.
Mr. Ferrabee: With every opportunity there are challenges and I believe that can be managed, but I agree with you.
Ms. Wright: If I could add a response to that question, which is a good question. I’m similar to you, senator. I have a number of different bank accounts that hold a number of different things. I have savings accounts, I have RESPs, I have RRSPs, and they’re all with different financial institutions. The opportunity that comes with open banking is that there could be a service provider whom I could give that information to so that the service provider would be able to see my full picture and they could then make suggestions as to how I could grow my money. Currently, each of my banks only sees a sliver of my entire financial picture and they’re not able to provide me with the advice that would benefit from that full picture. Open banking provides that opportunity for a service provider to have that full picture and be able to provide that advice to me.
Senator Stewart Olsen: I just want to say that’s what financial advisers do already. I just want to put that out there.
Ms. Wright: It’s very true. That is what financial advisers do already. This is about giving consumers the choice to either have a financial adviser or to go with this online option.
Senator Wetston: Just a quick question. This is the value of this. Having these very skilled people presenting today demonstrates that we touch on very important areas of investor education and financial literacy, and it’s not just about financial products. A lot of work, however, has been done on these things in Canada around financial literacy and investor education.
I just want to remind the committee and the panellists here, Mr. Chair, if I may, that Canada has had a varied record in embedded mutual-fund fees and high trailer fees. We’ve paid a great deal for these products over a long period of time and investors paid that. Institutions collected that money. I’m not being critical, but it’s a reality.
Services might be able to enhance the competitive environment to reduce those kinds of fees and the environment in which that occurs. Work has been done, but it leads me to this very simple question, which is this: We’ve talked, I think, privacy, and what you believe you may need to do in the event that open banking became a reality in Canada. It depends on the scope and standards and what comes with regard to open banking. Payments Canada, I know you’re under review now. What do you need to ensure you’re ready to participate in an open banking environment?
And for the Competition Bureau, are you comfortable with where the competition is at today? Do you need amendments or reform? What do you need to deal with technology in this particular sector?
Mr. Ferrabee: Payments Canada embarked on a modernization initiative a number of years ago and we’re midstream on that. We’re active with the Department of Finance and have been well supported. We voiced all the way along and are not at a gap position where we need to take strategic action to close that. We’re very well supported.
Ms. Wright: With regard to the Competition Act, we have a number of different provisions and tools under the Competition Act. It is remarkably flexible and allows the opportunity for us to look at a number of different business conducts in the marketplace. We will continue to apply the Competition Act to business conducts that may be anti-competitive, and we won’t hesitate to take action.
Senator Klyne: I wanted to applaud the Office of the Privacy Commissioner for the rigour you see being put into how clients would authorize their data. It’s kind of a full knowledge what they’re getting into and it’s fully explained to them. I guess it’s up to the financial institution to make sure they train these people on the front line to be able to do this. At the same time, there will have to be some external audit on the process to make sure they’re compliant. The question was asked if you will be ready and resourced to do this.
I can’t help but think about the Canadian version of Sarbanes-Oxley creeping into this whole process at some level, and maybe it’s the agency side.
Just a quick question to Ms. Wright: You mentioned that the government should take the lead on this. I assume that is in the context of being responsible for developing the framework of this, but also vetting third parties and fintechs on this, which sounds like the creation of another empire building here for the federal government. I don’t mean that in any sense other than somebody is going to have to pay for that if it’s an agency of the government that takes the lead.
Is it the taxpayer or the consumer paying a fee somewhere financially or will the shareholders of banks step up to pay for this right to have open banking that is regulated?
Ms. Wright: I’m likely not the best person to comment on who would pay for open banking. What I can say is the reason why I think it is important for there to be a policy lead on this is because there are so many different policy considerations and they all need to be taken into consideration in order for the open banking framework to be robust.
The Chair: On that question of a lead, did I understand yesterday, when the gentleman from the Department of Finance was here that he indicated he was the lead? Would that have just been for the Department of Finance’s project, or is it across government?
Ms. Wright: Yes, I believe the former.
Senator Dagenais: Based on what we have heard recently, Canada will have trouble protecting its electoral system from potential Russian intrusions. I think sufficient protection must be provided for privacy before information as sensitive as financial data is processed. I see that there is a rush to take certain risks. I think we should ask the Americans to tell us about what they experienced recently with the Russian intrusion into the electoral system. The situation worries me. If they can dig around in the electoral system, others could dig in our personal finances. Perhaps lessons should be learned from what happened in the United States. I am thinking of everything to do with Internet systems, but I don’t want to go any further.
Mr. Smolynec: We know that Russia targeted Canadian residents’ personal data. The office has investigated the World Anti-Doping Agency, WADA. It turned out that Russian intelligence services targeted athletes’ personal data in WADA’s system.
In addition, we are already noting that some countries are trying to interfere in the election. That interest appears as soon as databases contain sensitive information. It is very important to protect that data, from a security perspective, with measures proportional to the threat.
Senator Dagenais: Thank you very much.
The Chair: Witnesses, thanks very much. This has been extremely helpful to us. Thank you for being here and thank you for being so frank. It’s been meaningful to us.
We’re going to suspend and we’ll have an in camera session, senators. We will do that now and then I’d ask folks if they would leave the room at their convenience.
(The committee continued in camera.)