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A House of Commons committee is calling on the federal government to block Royal Bank of Canada’s RY-T proposed takeover of HSBC Bank Canada HSBC-N, saying that the deal would hurt competition in the financial services industry.

Britain-based banking giant HSBC Holdings PLC announced plans to sell its Canadian subsidiary in October, 2022, as part of a broader move to divest from certain markets globally, prompting a parade of interest from rival banks that culminated in RBC‘s $13.5-billion offer. The deal received its first key approval in September when Canada’s Competition Bureau green-lit the takeover, saying that it was unlikely to substantially harm competition.

But the prospect of RBC – the country’s largest lender – scooping up the seventh-biggest bank as it moves to exit the Canadian market has drawn the ire of opposition parties in Ottawa.

In a report tabled by the House finance committee late Wednesday evening, the group recommended that Finance Minister Chrystia Freeland – who has the final say on the deal – reject the merger. Each of the six opposition party members on the committee voted in favour of the motion, while the six Liberals abstained.

The Conservative-led motion said that Canada’s competitive “intensity” is in decline, that the small number of financial institutions in the Canadian banking sector represents a lack of competition and that the loss of a lender could cause banking fees to rise.

The committee did not comment on British HSBC’s decision to pull its Canadian subsidiary from the market, nor did it offer any alternative option for what could become of HSBC Canada if Ottawa were to terminate the deal.

In an exclusive interview with The Globe in October, Conservative Leader Pierre Poilievre said that Ms. Freeland should not approve the deal because it would reduce banking competition when homeowners are struggling with high borrowing costs.

Mr. Poilievre and Conservative members on the committee have said that HSBC should not be “removed” from the market since it tends to offer more competitive mortgage rates than its larger rivals. But HSBC put itself on the auction block last year after trimming in operations in other countries, including Brazil, France and the United States, to reallocate resources to areas where it has greater growth opportunities.

In its third-quarter earnings call in October, 2022, HSBC chief executive officer Noel Quinn said that it held 3 per cent of the market share in Canada, which is dominated by the Big Six banks. The subsidiary is largely a domestic business and has few connections to HSBC’s other international operations.

If HSBC has deemed its Canadian business unimportant to its strategic priorities but is forced to remain in the market, its clients could be negatively affected, Keefe, Bruyette & Woods analyst Mike Rizvanovic said in an interview. If the deal were rejected, HSBC could put itself back on the auction block for another bank to make an offer.

“If you push out of Royal, then who picks it up?” Mr. Rizvanovic said in a phone interview. “If there’s nobody willing to step in, then that could potentially introduce risk to the existing client base if the parent company is going to de-emphasize the Canadian business over time.”

But Canada’s biggest banks have long coveted HSBC Canada for its strength in commercial lending and mortgages. When it launched a sale as part of a strategic review, it offered its competitors the rare opportunity to substantially expand their operations domestically through an acquisition. The takeover would bolster RBC’s dominance over its rivals by tens of billions of dollars in loans and deposits.

RBC spokesperson Andrew McGrath said in an e-mail statement that the deal provides HSBC’s Canadian clients with continuity and stability, while keeping more financial sector jobs in Canada.

“HSBC Canada’s parent company has announced their decision to exit the Canadian marketplace, leading to uncertainty for HSBC’s 700,000 Canadian clients,” Mr. McGrath said.

In May, the Competition Bureau launched a public consultation requesting comments on how the deal could prevent or lessen competition in financial services. It received more than 1,500 submissions from Canadians.

In its report in September, the bureau said that it reviewed concentration in the sector, and found that market share changes after the proposed merger would not exceed the level where the Competition Commissioner would decide to challenge it.

But in mid-October, the bureau unveiled a separate report on competition across Canadian businesses more broadly. It said that competition has declined over the past two decades as industries have become more concentrated and less dynamic, and that the most concentrated industries have become less efficient.

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