Key Updates: Open Banking and Canadian Mortgage Charter in Fall Economic Statement

On November 21, 2023, the federal government released the 2023 Fall Economic Statement (FES), outlining its economic plan and next legislative steps. The FES sets out several key legislative and regulatory initiatives impacting the financial services sector, including on open banking, payments modernization, a new mortgage charter, anti-money laundering legislation, and low-cost banking and fees.

Open Banking

In August 2021, the Advisory Committee on Open Banking released its Final Report, proposing January 2023 as a potential (but ambitious) launch date for operationalizing an open banking system. However, since the release of the Final Report, there had been little apparent movement on open banking, save for the appointment of Canada’s first Open Banking Lead in March 2022. While the 2023 federal budget did not provide an update, the FES commits the government to adopting legislation through the upcoming 2024 federal budget (Budget 2024), and fully implementing the necessary governance framework for open banking (or consumer-driven banking) by 2025. The FES outlines benefits of a consumer-driven banking framework (Framework), including:

• Empowering Canadians to securely access and share their financial data while protecting them from fees when doing so

• Phasing out screen scraping

• Allocating liability for damages or data breaches to the party at fault

• Facilitating the development of innovative financial products and services, including budgeting tools, credit building products and account aggregators

The FES also includes a detailed Policy Statement on Consumer-Driven Banking (Policy Statement) that sets out the process through which the government will implement the Framework. According to the Policy Statement, core Framework elements include:

• Governance: System management and oversight

• Scope: System functionality, what data types are supported, establishing the pace of system expansion

• Accreditation: What criteria should be used to enable participation in consumer-permissioned financial data sharing

• Common Rules: Governing consumer protection, privacy, security and liability

• Technical Standards: Establishing, maintaining and overseeing technical standards that facilitate the data flow in the system

The Policy Statement clarifies that the government intends to adopt a phased approach to much of the Framework’s scope, including with respect to participants, breadth of data sharing and functionality. The initial phase will mandate participation for federally regulated financial institutions (FRFIs) that meet specified retail payments volumes (i.e., larger Canadian banks), while allowing the remaining FRFIs, credit unions and accredited third parties to opt into the Framework. Notably, the framework also mandates reciprocal access, which means that all participating entities will be subject to the same data access requests. Initially, data that is shared will have to be shared free of charge, in its original, unaltered format. However, the scope of data sharing could be expanded over time.

With respect to next steps, the Policy Statement notes that the Department of Finance will carry out the work required to stand up the Framework. In doing so, the Department of Finance will engage with industry, regulators, provincial and territorial governments and other stakeholders.

Payments Modernization

As part of a multi-year effort to modernize Canada’s payments systems, the FES announced the government’s plan to introduce changes to membership in Payments Canada by amending the Canadian Payments Act (CP Act). Long anticipated by the industry, these amendments will expand membership eligibility to include payment service providers (PSPs) supervised by the Bank of Canada under the Retail Payment Activities Act (RPAA), certain credit unions and operators of clearing houses designated under the Payment Clearing and Settlement Act. These amendments were first considered in part in the Department of Finance’s 2018 Review of the Canadian Payments Act, which noted the changing makeup of the payments ecosystem and solicited feedback on a proposal to create an associate membership framework under the CP Act. This framework would have enabled PSPs supervised by the Bank of Canada to become associate members of Payments Canada. These associate members would not have been granted full access to Payments Canada’s systems. Instead, they would have been eligible to participate in the exchange and settlement of payments in the Real-Time-Rail (RTR), which has been subject to multiple delays since the Review. The FES does not reference associate membership, the RTR, or payments system access. As such, access rights and obligations of these new members remains to be seen.

The FES also notes that amendments to the CP Act will clarify the composition of Payments Canada’s Stakeholder Advisory Council and will provide for a statutory review of the legislation within four years.

Canadian Mortgage Charter: What Is New?

Canadians with mortgages, including those facing inflation pressures and higher interest rates at renewal were top-of-mind for the federal government in the fall fiscal update. As part of the government’s housing affordability measures and overall strategy to “help Canadians address the financial burdens associated with homeownership”, the FES announced a new Canadian Mortgage Charter for FRFIs. The Mortgage Charter details six specific measures that FRFIs are expected to employ to provide tailored relief that is “fair, reasonable and timely” to support more Canadians “through the temporary financial stress caused by elevated interest rates and help them stay in their homes.” The relief measures include:

1. Allowing temporary extensions of the amortization period for mortgage holders at risk

2. Waiving fees and costs that would have otherwise been charged for relief measures

3. Not requiring insured mortgage holders to requalify under the insured minimum qualifying rate when switching lenders at mortgage renewal

4. Contacting homeowners four to six months in advance of their mortgage renewal to inform them of their renewal options

5. Giving homeowners at risk the ability to make lump sum payments to avoid negative amortization or sell their principal residence without any prepayment penalties

6. Not charging interest on interest in the event that mortgage relief measures result in a temporary period of negative amortization

Although the FES brands the Mortgage Charter as “new,” many of the relief measures that make up the Mortgage Charter are already captured in the Guideline on Existing Consumer Mortgage Loans in Exceptional Circumstances (Guideline) that was issued by the Financial Consumer Agency of Canada (FCAC) on July 5, 2023.

In that Guideline, the FCAC outlines the measures FRFIs are expected to implement to assist consumers with existing residential mortgages that are at risk of defaulting on their obligations due to severe financial distress caused by economic conditions, including rapid interest rate increases. Among other requirements, the Guideline requires FRFIs to develop policies that are based on the key principles of fairness, appropriateness and accessibility for Canadian consumers, and that will assist FRFIs to adopt fair and consistent approaches when they offer relief measures to financially distressed mortgage borrowers who are at risk of defaulting on their home mortgage. Although the Guideline does not provide an exhaustive list of relief measures, it does outline processes for helping borrowers in financial distress adjust to higher costs by lengthening the amortization period for their mortgage, discouraging FRFIs from charging “interest on interest” if a borrower is temporarily in a period of negative amortization, and other short-term measures like waiving internal fees or costs for a limited time, as well as waiving prepayment penalties for borrowers looking to make a lump sum payment to prevent negative amortization. In this regard, the purpose, intent and most of the specific relief measures set out in the Mortgage Charter are expectations imposed on FRFIs by the FCAC under the Guideline.

Notably, there are two specific relief measures under the Mortgage Charter that are unique and will be new for FRFIs. The first involves the expectation that FRFIs contact homeowners four to six months in advance of their mortgage renewal to provide renewal options. Although FRFIs are already required under the Financial Consumer Protection Framework Regulation to advise a borrower at least 21 days before the end of the term of their renewal options, the expectation for FRFIs to contact borrowers within a four-to-six-month period under Mortgage Charter suggests a significantly longer runway for mortgage renewals. The second measure, which is also related to mortgage renewals, involves a policy change in the application of the mortgage stress test to provide relief to insured mortgage holders from requalifying under the insured minimum qualifying rate when switching lenders at mortgage renewal.

This will undoubtedly be a welcome change for insured borrowers with looming mortgage renewals who want to switch lenders to take advantage of more competitive rates, as they will not have to re-qualify by meeting the qualifying interest rate of 5.25% or the contract rate on offer, plus two percentage points — whichever is higher. It is also a change that many in the mortgage industry have been requesting for some time. 

With respect to implementation, the FES indicates that the federal government will continue to monitor FRFIs implementation of, and compliance with, relief measures set out in the Mortgage Charter, including the Guideline.

Changes to AML Legislation 

The FES proposes changes to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) that will affect regulated entities and bring new entities within its scope.

In the recent consultation on Strengthening Canada's Anti-Money Laundering and Anti-Terrorist Financing Regime published by the Department of Finance earlier this year (Consultation), the Department of Finance explored regulating additional participants in the real estate ecosystem. In that respect, the PCMLTFA will now extend to title insurers and will require real estate representatives to identify unrepresented parties and third parties in real estate transactions. The Consultation also recommended regulation of white label automated teller machines (ATMs). The FES confirms that the PCMLTFA will now be expanded to apply to intermediary acquirers that offer cash withdrawal services for white-label ATMs.

In addition, recent amendments made to the PCMLTFA require regulated entities to report to FINTRAC where a reporting obligation arises under certain sanctions legislation, giving FINTRAC broader scope in dealing with sanctions matters. In keeping with the foregoing, the PCMLTFA will be amended to permit FINTRAC to use its expertise to develop “intelligence products”, and where appropriate, disclose its findings to law enforcement partners in an effort to support law enforcement and Canada’s sanction-based asset seizure and forfeiture regime. In respect of “intelligence products”, the Consultation Paper explored the possibility of FINTRAC maintaining a politically exposed person database. It remains to be seen whether this will occur, but in any event, it is clear that FINTRAC will be taking a much more active role in sanctions matters.

The FES indicates that there will be technical amendments to the PCMLTFA to address inconsistencies and close loopholes. It is unclear exactly what those loopholes are, but regulated entities should be on the lookout for further regulation.

Other Initiatives 

NSF Fees: The FES signaled the government intention to bring down fees for nonsufficient funds (NSF fees). The government will provide an update by Budget 2024 on the steps that it is taking to reduce NSF fees.

Low-Cost and No-Cost Bank Accounts: The government has directed the FCAC to work with banks to improve the features of low and no-cost accounts, such as providing additional debit transactions, online bill payments and e-transfers with no extra fees.

OBSI: The FES reiterates the appointment of the Ombudsman for Banking Services and Investments as the single external complaints body for Canada’s banking sector under recently enacted amendments to the Bank Act.

Amendments to FRFI Statutes: The FES notes that the FRFI statutes will be amended “to adjust the scope of permitted non-financial activities by financial institutions.” We note that the FRFI statutes were amended in 2018 to expand the financial institutions’ business powers and allow them to engage in more financial technology activities, but these amendments have not since been promulgated into force.

Security Risk Management: Following the enactment of final RPAA regulations in November 2023, the FES notes that the Department of Finance is working with security and intelligence partners to implement the national security review process of payment service providers applying for registration under the RPAA in 2024. The FES also references OSFI’s draft new Integrity and Security Guideline, which was released for public consultation in October 2023, as well as the government’s own ongoing consultation on the impact of technological and geopolitical changes in the financial services sector. The FES notes that further measures will be introduced in Budget 2024 if the government concludes that additional changes are required to protect the safety and integrity of Canada’s financial sector.

Crypto Asset Disclosures: The FES makes reference to OSFI’s consultation, launched on November 20, 2023, on the implementation of a public disclosure framework for crypto-asset exposures by FRFIs.

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