Competition Watchdog Recommends ‘Open Banking’ to Give Customers More Options

Commissioner of Competition Matthew Boswell speaks at Canada's Competition Summit hosted by the Competition Bureau Canada in Ottawa on Oct. 5, 2023. The Canadian Press/Sean Kilpatrick

Canada’s Competition Bureau has recommended the federal government develop an “open banking” framework to improve customer service and boost competition in the banking sector.

The Department of Finance should “swiftly adopt a consumer-driven banking framework,” the bureau said in a March 21 news release.

The recommendation for “open banking” would allow customers to securely transfer financial information to different banks, making it easier for them to switch financial institutions.

The framework would allow consumers access to budgeting or money management apps and enable them to pool different bank accounts and credit cards in one place.

The recommendation would also allow Canadians more ways to strengthen credit scores, as lenders would be able to access individual banking data to look behind the customer’s current score. Consumers could then build their scores in different ways, such as providing reliable rent payments.

The bureau said the change would boost competition among established financial institutions and make it easier for new providers to enter the market.

“We urge policymakers to prioritize and foster pro-competitive measures to help tackle ongoing concerns around affordability and productivity in the Canadian economy,” Commissioner of Competition Matthew Boswell said.

“Fifty-one percent of Canadian households report having trouble or sometimes struggling with their financial commitments,” the bureau said in its report. “Seventy-one percent said their debt increased by more than $5,000 in the past 12 months.”

Pointing to a recent study of competition, the report noted that the country’s “competitive intensity” has dropped.

“In a healthy, competitive market, businesses must work hard to win consumers by offering better prices, more choices, and improving the quality of their products or services,” the author wrote.

The recommendation was one of two that the bureau provided in response to a consultation launched by the Finance Department in December 2023 to look for ways to boost competition in the financial sector, the news release said.

Eliminate Mortgage Stress Test on Renewals

The second change recommended by the Competition Bureau was to remove the requirement for a stress test if a mortgage borrower decides to renew with a different lender. This would allow uninsured mortgage borrowers more freedom to switch banks.

The stress test is not required if a borrower stays with the same lender. Mortgage holders who want to switch banks must undergo a stress test, the report noted, preventing borrowers from switching lenders and getting lower rates.

“The benefits for borrowers to shop around and switch mortgage lenders is well known,” the report said. “The expectation to conduct the same stress test again at the time of renewing uninsured mortgages risks harming borrowers and the competitive process.”

The bureau said the rule made it difficult if not impossible for homeowners to switch banks.

“When a borrower cannot switch to another lender, the current lender faces almost no competition and can offer higher rates to these captive borrowers without fear of losing their business,” the author wrote.

If accepted, this change could help ease the pressure on the 2.2 million homeowners who anticipate renewing mortgages in the next couple of years.

Canada’s chief banking inspector has warned financial institutions that a wave of defaults could be on the horizon as rising inflation and interest rates have pushed a “large number” of homeowners to the trigger point on their mortgages.

The trigger point is when the interest on the loan is equal to the total monthly payment and nothing is being paid on the principal of the loan.

Superintendent of Financial Institutions Peter Routledge warned bankers in a regulatory notice on March 11

The chief bank inspector has directed financial institutions to start assessing mortgages that could be at risk for default, focusing on risky products like variable rate mortgages with fixed payments.

The notice says that mortgage holders are already facing higher payments, and others will soon face “payment shock” when they renew this year.

It has been estimated that the mortgages in question total about $369 billion.

A survey by Ratehub.ca found that 68 percent of Canadian homeowners are finding it more difficult to make monthly mortgage payments. In addition, 66 percent said they were worried about an upcoming mortgage renewal.

“It’s evident that mortgage holders facing a more challenging rate environment upon renewal are exploring options to mitigate the impact—notably, nearly 29 percent say they plan to refinance their mortgage loans,” says Ratehub’s director of content, Penelope Graham.

Many of those surveyed said they have been trying to cut housing costs by downsizing or refinancing. Seventeen percent said they were looking for an alternative lender.

Ottawa announced its plans to develop a framework for open banking in its upcoming budget, expected to be introduced on April 16.

The Canadian Press contributed to this report.