The working groups dedicated to developing Canada’s open banking system are failing to address crucial issues of technical standards and how the future system should be governed, multiple participants have told BetaKit.
Working group participants from the FinTech community and those familiar with the talks expressed concern that delaying governance decisions could hamstring the system, leaving Canadians without recourse if their data or accounts are compromised. FinTech participants are also concerned they would be left without recourse in disputes with other financial institutions.
In response, Two FinTech industry associations have moved to address those concerns by developing or submitting their own reports on future governance options, BetaKit has learned.
Competing interests
As first reported by BetaKit, the working groups kicked off in July, led by recently appointed open banking lead Abraham Tachjian, to design Canada’s open banking system in time for its planned launch in early 2023. The groups, which have met three times and are expected to carry on into the fall, have focused on accreditation for participants, privacy, liability, and security standards for the system.
Canada’s future open banking system will need some form of governance entity to handle dispute resolution between participants, ensure compliance with accreditation requirements, respond to security incidents and assign responsibility for remunerating consumers who’ve been harmed by possible data breaches or stolen funds, according to the advisory committee’s final report, released in August 2021.
“The governance of open banking is the missing piece of the puzzle, and it’s kind of the big one. You cannot have a Mona Lisa without the face and the smile.”
“The governance of open banking is the missing piece of the puzzle, and it’s kind of the big one,” said one FinTech executive, who requested anonymity to speak freely about the working groups. They characterized the FinTech participants in the group as “pushing for” talks on governance. “You cannot have a Mona Lisa without the face and the smile.”
Another working group participant from the FinTech space said the fact that the technical standards for APIs and governance options have been missing from the discussions so far “candidly was concerning.” They noted that there are several options Tachjian and the finance ministry are considering regarding API standards, but “we don’t have a clear indication of what that answer is going to be.”
As a result, two FinTech industry groups are developing or have submitted reports on governance outside of the working group process. The Financial Data and Technology Association of North America (FDATA) submitted a proposal to Tachjian and associate minister of finance Randy Boissonnault that outlines its ideas for a governance entity. Separately, the Paytechs of Canada Association commissioned the Institute of Governance, a Canadian think tank, to develop a report on possible governance options, which is expected to be released in the fall.
“When open banking is up and running, this will be an issue. If there’s a data breach and it’s not obvious who’s liable, maybe the Financial Consumer Agency of Canada doesn’t have a mandate, or a data recipient is cut off without explanation,” said Alex Vronces, executive director of Paytechs of Canada.
“What happens next? … If we’re not asking and answering those questions now, we’re significantly risking the ongoing governance of the system if we leave it to the last minute,” he said.
RELATED: Canada open banking report released
Steve Boms, North American executive director of FDATA, said an independent entity is also necessary for resolving disputes where the commercial interests of competing open banking participants are involved. He gave the example of a security incident, where it would be in a data provider’s interests to turn off access to customer data, but a data recipient would still want to receive it.
Such an entity would also ensure the system can manage and grow with evolutions in the market, Boms said.
Concerns over competing interests between FinTech startups and financial incumbents have existed since the start of the process. Governance is the latest battlefront.
Concerns over competing interests and competitive advantages regarding access and authority between FinTech startups and financial incumbents have existed prior to the release of the open banking report. The most recent flare-up came over frustrations with an early draft version of the CIO Strategy Council’s (CIOSC) minimum viable framework for consumer-directed finance, which some feared would give banks a competitive advantage over startups regarding authentication, consent and data transfer methods. Governance seems to be the latest battlefront.
Neither Tachjian nor Boissonnault was made available for an interview for this story, and the finance department did not directly respond to questions sent by BetaKit regarding the concerns raised by working group participants. In an emailed statement, an official said Tachjian and other department officials are currently engaging with industry, regulators, and consumer representatives through the working groups.
“In addition, a steering committee, which includes all members of the working groups, will meet on an as-needed basis, as determined by the open banking lead, to discuss progress as well as topics outside the remit of the working groups,” the statement reads.
The official added that governance and technical standards were “extensively discussed” in previous consultations and in the advisory committee report’s recommendations. “These recommendations and relevant discussions at the working groups inform our ongoing work. Mr. Tachjian and the [department officials] continue to make progress on this work.”
Boms noted that it’s still early days for the working groups. While he said he initially got the sense that the finance ministry saw governance as a future issue that didn’t need to be dealt with immediately, “that’s changing a little bit and they’re beginning to understand the importance of governance, not just for the tomorrow problems but for the today problems.”
Tachjian and the finance ministry also aren’t shutting down conversations around governance, Vronces said. But he said these talks should be held in a more transparent and structured way. He noted minutes from the monthly working groups have been posted to a dedicated government website to build Canadians’ trust in the work the government is doing, an example of a “level of proactive attention and transparency” that the governance question would benefit from.
Not my jurisdiction
Open banking governance questions in Canada are thornier due to jurisdictional issues between federal and provincial regulators. Major financial institutions, including most banks, and insurance and trust companies, are regulated federally by the Office of the Superintendent of Financial Institutions (OSFI) and the Financial Consumer Agency of Canada (FCAC). Most credit unions are overseen by provincial regulators.
How do you create a governance entity that can oversee everyone?
FinTech companies are subject to various federal and provincial pieces of legislation: companies with payment products, for example, are regulated under the retail payments activities act federally, but are subject to market conduct and consumer protection legislation at the provincial level.
The question the open banking working groups must answer: how do you create a governance entity that can oversee everyone?
“That same issue is what creates a bit of a challenge in the open banking context as well, because you’re not just talking about banks making data available — it’s supposed to be reciprocal, and everyone abiding by the same sets of requirements,” said Vronces. “But with the Canadian divide of powers, it’s not easy to operationalize that principle.”
The federal government’s Digital Charter Implementation Act, currently in its second reading in the House of Commons, will provide the legislative foundation for open banking by setting out consumer data portability rights. While the legislation, known as Bill C-27, guarantees financial institutions and FinTech companies alike participate in the open banking system, it doesn’t solve who governs it.
How to govern?
Other countries with more robust open banking systems have taken different approaches to oversight.
In the United Kingdom, the Competition and Markets Authority (CMA) established the Open Banking Implementation Entity (OBIE) in 2017 to oversee the roll-out of the country’s system. OBIE, a public-private partnership that is funded by the nine largest banks in the UK, is responsible for developing industry guidelines and software standards, maintaining security principles within the system and handling dispute resolution and complaints between participants. The country’s implementation phase of open banking is set to complete this year, and in March, the UK’s Treasury, Financial Conduct Authority, Payments Systems Regulator and the CMA proposed to establish a long-term regulatory framework and a new permanent governance entity to manage the system.
RELATED: As CIOSC preps consumer framework, Canadian FinTech startups fear another open banking boondoggle
In Australia, meanwhile, the Australian Competition and Consumer Commission (ACCC) and Office of the Australian Information Commissioner are jointly responsible for compliance and enforcement of the country’s open banking system, which came into effect when Australia’s consumer data right launched in mid-2020.
In its submission to Tachjian and Boissonnault, FDATA proposed a governance entity that would function as a neutral body with an executive director and a board of directors made up of financial institutions, FinTech startups, government, small business and consumer representatives. Boms said the association drew on the advisory committee report’s recommendations and looked to the OBIE to propose a public-private partnership entity with a narrow set of governance responsibilities.
Vronces said Paytechs and its members decided to commission independent research because the advisory committee’s recommendation leaves the door open to several possibilities, “some better than others.” He noted other formal governance entities with large industry representation had faced infighting and accusations of financial interests taking priority.
“I like the [advisory committee] report, I think they’re probably right given Canada’s facts and circumstances, but there’s value in checking that assumption again and doing a wider analysis,” Vronces said.
The ticking clock
After years of delays, the development of open banking has accelerated from its glacial pace, with the federal government setting an aggressive timeline of early 2023 for implementation. But the window to decide how the system will be overseen is rapidly closing.
In March, the federal finance ministry appointed Tachjian, PwC Canada’s digital banking director, as the country’s open banking lead to drive the system design. Participants BetaKit spoke with praised Tachjian for his commitment to moving quickly to implement open banking rather than focusing on seeking consensus, and his in-depth understanding of the subject. They said the meetings to date have been productive, with Vronces calling them “quite technical, really in the weeds with an eye toward implementing something rather than philosophical conversations.”
In the final open banking advisory committee report, the committee acknowledged that, based on consultations with stakeholders, establishing a formal governance entity could take “multiple years.” To speed up the process, it called for an 18-month system design and implementation period headed up by an open banking lead, which would establish key pillars of common rules for system participants that eliminate the need for bilateral contracts; an accreditation framework; and technical specifications for data transfer and APIs.
Following that period, the advisory committee called for the government to establish a “purpose-built governance entity” to manage the ongoing administration and evolution of open banking in Canada. The committee recommended the government set mandates while the entity is charged with making decisions. The entity should be made up of representatives from banks, other participants and consumer groups, the report said.
“The transition from the implementation phase to a fully operating system should be as seamless as possible to ensure that no momentum is lost during this time,” the report reads.
The finance department confirmed to BetaKit that Tachjian intends to return to the private sector at the end of his 18-month term. The FinTech executive BetaKit spoke with said the ticking clock hanging over the process makes governance an even more pressing issue, particularly given that Tachjian’s term is already one-third complete.
“That’s fine” that Tachjian plans to leave government after the appointment ends, they said. “But after 18 months, then what?”