On Monday, November 6, 2017, the Canadian Competition Bureau ("Bureau") released a draft of its market study report into technology-led innovation and emerging services in Canada’s financial services sector (the "Study") for public consultation. The Study is available on the Bureau’s FinTech portal.
The Study provides policymakers and regulators with recommendations to encourage competition and innovation in Canada’s financial services sector. The Bureau’s Study addresses the following five over-arching questions:
- What has been the impact of FinTech innovation on the competitive landscape for financial services?
- What are the barriers to entry, expansion or adoption of FinTech in Canada?
- Are the barriers regulatory or non-regulatory?
- Are changes required to encourage greater competition and innovation in the sector?
- What issues should be considered when developing or amending regulations to ensure competition is not unnecessarily restricted?
The Study focused on three broad service categories: payments and payment systems, lending, and investment dealing and advice.
The Study includes both general recommendations as well as recommendations specific to the service categories noted above. The following is a brief summary of the general recommendations:
- Regulation should be technology-neutral and device-agnostic.
- To the extent possible, regulation should be principles-based.
- Regulation should be based on the function an entity carries out.
- Regulators and policymakers should ensure regulation is proportional to the risks that the regulation aims to mitigate.
- Regulators should continue their efforts to harmonize regulation.
- Policymakers should encourage collaboration throughout the sector.
- Policymakers should identify a clear and unified FinTech policy lead for Canada with federal, provincial and territorial expertise to facilitate FinTech development.
- Regulators should promote greater access to core infrastructure and services to facilitate the development of innovative FinTech services under the appropriate risk‑management framework.
- Policymakers should embrace broader "open" access to systems and data through application programming interfaces.
- Industry participants and regulators should explore the potential of digital identification to facilitate client identification processes.
- Policymakers should continue to review their regulatory frameworks frequently and adapt regulation to changing market dynamics (e.g. consumer demand and advances in technology).
Payments and Payment Systems
Recommendations specific to payments and payment systems ("PSP"), in summary, are as follows:
- Regulators should allow PSPs and financial institutions to participate in pro-competitive collaborations while recognizing the potential risks of such collaboration.
- Merchants should continue to be permitted to use discounts or other incentives to entice consumers to adopt alternative or lower-cost payment methods. Regulators should also examine the benefits of introducing measures aimed at interchange fees, such as surcharging or regulation, similar to other jurisdictions.
- A clear delineation of the regulatory and legal responsibilities between a PSP and the financial institution supplying its accounts is necessary. Adhering to regulatory requirements, such as AML/CTF and the new retail payments oversight framework, should afford FinTech entrants the opportunity to maintain bank accounts and access established payments infrastructure.
- When terminating or refusing to provide account services to a business, such as a money service business, financial institutions should be required to provide their reasoning along with supporting evidence. Applicants who are refused or clients who have their accounts terminated should have a suitable course of redress if they have been unduly terminated or refused, such as the Ombudsman for Banking Services and Investments.
- Policymakers should consider replacing the current volume requirement for direct clearers in the automated clearing settlement system ("ACSS") in favour of a more objective, risk-based measure.
- Payments Canada should consider allowing non-financial institutions to access the exchange function of payment systems such as the ACSS and in the future, the real-time rail.
- Payments Canada should explore the possibility of providing an application programming interface ("API") or a direct technical interface or access point for eligible participants, particularly for the real-time rail.
- Regulators should assess the possibility of moving toward a real-time settlement model for its core clearing and settlement system in an effort to provide broader direct access to the payment systems operated by Payments Canada for PSPs and financial institutions.
Recommendations specific to lending are as follows:
- Securities regulators should continue to provide clarity and guidance regarding the regulatory framework for P2P lending, including the requirements and process to obtain exemptive relief from KYC, KYP, suitability and prospectus requirements, as appropriate.
- Consumer protection regulators should ensure their guidance and regulations are technology-neutral and device-agnostic. Regulations should be written to achieve principles rather than to prescribe how those principles are met.
- Securities regulators should continue to harmonize their approach to prospectus exemptions for innovative business models, including P2P lending and equity crowdfunding, to ensure differences in their laws do not unduly inhibit competition and innovation.
- Regulators contemplating "sandboxes" should look to other jurisdictions, such as the UK and Australia, for best practices and lessons learned with respect to FinTech lenders.
- FRFI regulators should consider the impact that rules related to outsourcing and partnership agreements may have on competition, innovation and collaboration to ensure these rules do not unnecessarily hinder an FRFI from tapping into FinTech ingenuity, while ensuring that appropriate risk-management frameworks are in place.
Investment Dealing and Advice
Recommendations specific to investment dealing and advice, in summary, are as follows:
- Regulators should continue their efforts to increase price transparency and plain-language disclosure.
- Regulators should continue their financial literacy and consumer education efforts.
- Regulators should encourage the use of technology to facilitate account switching. Regulators should reduce barriers to switching by allowing and encouraging firms to leverage technology such as e-signatures and digital identity verification to facilitate client onboarding.
- Regulators should continue to collaborate with robo‑advisors on the design of regulation to facilitate entry of these low-cost alternatives to traditional advice — for example, by providing clarity and certainty in interpretation and expectations. Regulators should review their regulations periodically to ensure they do not place unnecessary burden on market participants.
- Regulators should consider providing firms with more freedom to automate additional processes, including analysis of KYC information and portfolio matching for suitability and portfolio rebalancing.
- Regulators should continue to promote the existing passport system to facilitate Canada-wide market entry by FinTech companies, and continue efforts to ensure such systems adapt and remain relevant in an increasingly digital world.
The Bureau indicates that publication for public consultation of the draft of the Study precedes the final report, which the Bureau plans to publish before the end of 2017. Comments can be submitted in writing to the Bureau until November 20, 2017.