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Competition Regulator Endorses ‘Open Banking’ to Expand Customers’ Choices

Canada’s Competition Bureau has suggested that the federal government establish an open banking framework to enhance customer service and promote competition within the banking industry.

The Department of Finance has been advised by the bureau to quickly implement a consumer-centric banking framework, according to a March 21 news release.

The proposal for “open banking” would enable customers to securely transfer financial data to different banks, facilitating the process of switching financial institutions.

This framework would grant consumers access to budgeting or financial management applications and allow them to consolidate various bank accounts and credit cards in one location.

Additionally, the recommendation would provide Canadians with more options to improve credit scores by allowing lenders to access individual banking information, offering insights beyond the current credit score. This would allow consumers to enhance their scores by, for example, submitting reliable rent payments.

The bureau believes that such a change would stimulate competition among established financial entities and simplify market entry for new providers.

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“We encourage policymakers to prioritize and promote pro-competitive measures to address ongoing concerns regarding affordability and productivity in the Canadian economy,” stated Commissioner of Competition Matthew Boswell.

“Fifty-one percent of Canadian households indicate they face difficulty or occasional struggle with their financial obligations,” noted the bureau in its report. “Seventy-one percent reported their debt increased by over $5,000 in the past 12 months.”

Citing a recent competition study, the report highlighted a decrease in the country’s “competitive intensity.”

“In a thriving competitive market, businesses must strive to attract consumers by offering competitive prices, a wide variety of choices, and enhancing the quality of their goods or services,” the author observed.

This recommendation was one of two presented by the bureau in response to a consultation initiated by the finance department in December 2023. The consultation aimed to identify strategies for enhancing competition in the financial sector, as per the news release.

Eliminate Mortgage Stress Test on Renewals

The second proposal from the Competition Bureau involved eliminating the stress test requirement when a mortgage borrower opts to renew with a different lender. This alteration provides uninsured mortgage borrowers greater flexibility in switching banks.

Currently, the stress test is waived if the borrower remains with the same lender. However, if they desire to switch, mortgage holders must undergo a new stress test, preventing them from switching lenders and benefitting from lower rates, as mentioned in the report.

“It is widely known that borrowers stand to gain from exploring various lenders and changing mortgage providers,” outlined the report. “Requiring the same stress test at the time of renewing uninsured mortgages risks impeding borrowers and the competitive process.”

The bureau remarked that this regulation hindered or made it nearly impossible for homeowners to switch banks.

“When borrowers are unable to switch to another lender, the current lender faces minimal competition and can offer heightened rates to these captive borrowers without the risk of losing their business,” the author explained.

If implemented, this change could alleviate the pressure on the 2.2 million homeowners expecting to renew mortgages in the coming years.

The chief banking supervisor in Canada has alerted financial institutions about a potential surge in defaults due to increasing inflation and interest rates, pushing a considerable number of homeowners to the brink with their mortgages.

The tipping point is reached when the loan’s interest equals the total monthly payment, resulting in no payment towards the principal amount.

Peter Routledge cautioned bankers in a regulatory notice on March 11, advising them to pay attention to risky products like variable rate mortgages with fixed payments.

The notice highlighted that mortgage holders are already encountering increased payments, and others will soon face a “payment shock” during their renewal this year.

It has been estimated that the mortgages in questions amount to approximately $369 billion.
A survey by revealed that 68 percent of Canadian homeowners find it increasingly challenging to meet their monthly mortgage payments. Additionally, 66 percent expressed concerns about an upcoming mortgage renewal.

“It’s clear that mortgage holders facing a more demanding rate environment upon renewal are exploring options to mitigate the impact—significantly, nearly 29 percent intend to refinance their mortgages,” stated Ratehub’s content director, Penelope Graham.

Many respondents mentioned they were trying to reduce housing costs by downsizing or refinancing, with 17 percent considering alternative lenders.

Ottawa has announced its intentions to formulate an open banking framework as part of Budget 2024, expected to be introduced on April 16.

The Canadian Press contributed to this report.

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