This year was a tremendously active year for Fintech in Canada and internationally, and 2017 promises to be even more so. In the Fall of 2016, we co-authored a comprehensive report together with the Digital Finance Institute, “FinTech in Canada: British Columbia Edition” on the state of the Canadian Fintech ecosystem, highlighting a number of the then-current industry and regulatory developments. As we head into 2017, we provide a brief summary of some of last year’s Fintech regulatory developments in Canada and globally, and some developments to watch for in the upcoming year.
Canada – Federal
In May 2016, the Competition Bureau announced the launch of a market study on Fintech. This study is intended to explore whether regulatory reform is necessary to promote innovation while also ensuring consumer confidence. The Competition Bureau is expected to publish its report in the Spring of 2017.
On August 26, 2016, the Department of Finance Canada announced its launch of a two-stage consultation process on the federal financial sector legislative and regulatory framework. It provided a consultation document containing an overview of the landscape of the Canadian financial sector and describing the current trends and regulatory environment in Canada. The Department of Finance Canada asked stakeholders to provide those submissions by November 15, 2016 as part of the first stage of its consultation process. Those submissions will shape the policy paper that it will publish in 2017 as part of the second stage of its consultation process.
A number of other developments also occurred that will affect or affected Fintech entities. On the payments front, Payments Canada is currently undergoing a modernization project to modernize the Canadian payments system, as detailed further in its consultation paper issued in April 2016. There were also a number of developments with respect to anti-money laundering (“AML”) requirements in Canada, including the issuance of amendments and new guidance with respect to identification requirements and dealing with politically exposed persons. In addition, the Financial Action Task Force released its Mutual Evaluation Report for Canada in September 2016. While the report indicated that Canada’s existing AML regime is generally strong, it noted that the quality of AML practices lag in a number of sectors, including in money services businesses. It also identified open loop prepaid cards, white label ATMs and virtual currencies as inadequately covered by the AML regime and stated that upcoming amendments to the AML regime will be introduced to address these.
With the increase in electronic and digital payments, the Office of the Privacy Commissioner of Canada (the “OPC”) began to take an interest in this area as well, recently publishing a consumer guide to privacy considerations with respect to a number of different payment mechanisms. The stakes could be higher in 2017 for companies using personal information, as it is widely expected that the draft regulations for the federal privacy legislation in respect of mandatory breach reporting, recordkeeping, and penalties will be published, and potentially implemented shortly thereafter. Finally, subsequent to the OPC’s consultation and review of consent to the use of personal information (particularly in the context of data analytics and big data, both of which underlie many Fintech initiatives), we expect that the OPC will make recommendations to Parliament on this issue. These issues will become increasingly important in the financial sector as both incumbents and newer entrants seek to share personal information, either on a proprietary basis or via an Open Application Program Interface (“API”) model.
In January 2016, a new equity crowdfunding regime came into effect in Ontario (with similar regimes introduced in Québec, Manitoba, New Brunswick and Nova Scotia). It gave companies access to a bigger pool of investors by allowing them to raise money online through a registered crowdfunding portal from Canadians looking to make equity investments. Under this regime, Ontario “everyday investors” can make crowdfunding investments of up to $2,500 per investment (capped at $10,000 annually) and Ontario accredited investors (i.e. those who meet certain asset and income thresholds) can make crowdfunding investments of up to $25,000 per investment (capped at $50,000 annually).
In October 2016, the Ontario Securities Commission (the “OSC”) launched OSC LaunchPad, the first Fintech hub for a Canadian securities regulator, seeking to engage with Fintech companies to help them navigate securities regulation and support them through the authorization process. The OSC also announced it had signed an agreement with Australia’s financial regulator to allow Fintech companies based in Ontario and Australia to leverage the combined resources of the Ontario and Australian regulators as the companies look to operate in the other’s market.
The OSC also announced in November 2016 that it was seeking applications for a Fintech advisory committee.
Additionally, the OSC had an active year of working directly with Fintech companies to help pave the way for them to operate within the existing regulatory framework imposed by the OSC. Vault Circle (a subsidiary of Lendified) became Canada’s first digital lending platform to receive an exempt market dealer license from a Canadian securities regulator. That license enables Vault Circle to present lending opportunities to Ontario investors who qualify as accredited investors. Lending Loop became registered as an exempt market dealer in Ontario (and all other Canadian provinces), enabling Lending Loop to operate a peer-to-peer lending platform that connects small businesses seeking financing with Canadian investors (who need not be accredited investors) looking for alternative investing opportunities. AngelList received novel exemptive relief from the OSC, enabling it to operate (under a two-year trial program) a platform that brings together syndicates of investors with startup companies in need of financing, provided the investors and startups each meet certain criteria imposed by the OSC.
In addition, Ontario reiterated its intention to proceed with a new provincial financial services regulator, the Financial Services Regulatory Authority of Ontario, which will replace and consolidate existing regulators in the financial services space. It announced consultations to identify any “unclear, outdated, redundant or unnecessarily costly” financial services or insurance regulation in Ontario. The consultation process will remain open until January 31, 2017, and the Ontario Government will publish its findings on July 31, 2017.
In June 2016, the Québec Autorité des marchés financiers (“AMF”) announced that it created a Fintech working group mandated with analyzing technological innovations in the financial sector and anticipating regulatory, market efficiency and consumer protection issues. Québec follows an integrated regulator model, thus the AMF oversees insurance, deposit institutions, securities, derivatives, distribution of financial products and services, as well as the financial planning sectors. The AMF Fintech working group can examine how Fintech impacts all of these sectors individually and as a whole. The AMF announced the eleven members of the AMF Fintech working group in December 2016; in line with the group’s focus on engaging with the industry, most of the members represent industry stakeholders involved in financial sector technological innovations.
Globally, the major development in 2016 was the increasing popularity of “regulatory sandboxes”, which seek to create a regulatory “safe space” in which businesses that qualify can test innovative products and services without immediately incurring all the normal regulatory consequences of engaging in such activity. The United Kingdom’s Project Innovate for example features a regulatory sandbox, as well as an advice unit and an innovation hub. A number of other jurisdictions also moved forward with regulatory sandboxes, including Australia, Switzerland, Singapore and Hong Kong.
There were a number of important developments in the United States in 2016 as well. In particular, on December 2, 2016, the Office of the Comptroller of the Currency (the “OCC”) announced that it would move forward with considering applications from Fintech companies to become special purpose national banks. The OCC published a paper discussing the issues and conditions that it will consider in connection with such applications. Comments on the paper are due on January 15, 2017. In addition, the Consumer Financial Protection Bureau (the “CFPB”) also has in place its Project Catalyst aiming to promote consumer-friendly innovation and is engaging with key stakeholders and other government agencies and hosting “office hours” as outreach for the Fintech community. The Director of the CFPB also made headlines at Money20/20 when he endorsed the concept of “open data” in the financial context and stated that the CFPB is “gravely concerned” that financial institutions are limiting or shutting off access to financial data, rather than “exploring ways to make sure that such access…is safe and secure.”
What to Watch for in 2017
- The Competition Bureau is expected to publish the results of its market study in the Spring of 2017.
- The Department of Finance is expected to release its policy paper on the federal financial sector legislative and regulatory framework in 2017.
- Amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the “PCMLTFA”) may be introduced in 2017 in respect of, among other things, open loop prepaid cards and virtual currencies. In particular, the PCMLTFA was previously amended in 2014 to specifically extend the definition of “money services businesses” to include “persons dealing in virtual currencies”, but the regulations implementing this change remain outstanding, even as virtual currencies have become more popular.
- In Europe, the first real steps toward implementing the Directive on Payment Services (“PSD2”) Access-to-the-Account provisions will occur in 2017. The provisions will require banks to provide standardized API access to third parties under the auspices of the European Banking Authority. This is a significant shift toward the creation of an Open Banking ecosystem.