The Competition Bureau (Bureau) recently released the final report from its market study, titled Technology-led innovation and emerging services in the Canadian financial services sector (Report), analyzing the regulatory and non-regulatory issues faced by the fintech industry in Canada. The Report makes recommendations to address these issues, many of which are a departure from the current paradigm informing the regulation of financial services. This bulletin summarizes the scope of the Bureau’s market study and the 11 general recommendations.
SCOPE OF STUDY
It has been widely reported that despite local innovation and success stories, Canadians have been slow to adopt some aspects of fintech relative to other countries. The Bureau sought to understand the cause of this and, over the past 18 months, conducted a series of interviews and meetings with various financial services providers, as well as hosting a one-day workshop with stakeholders in February 2017. After publishing a draft version of the Report on November 6, 2017, the Bureau received 30 submissions that they suggest validated their findings in the draft report. The finalized Report includes relatively minor updates and was released on December 14, 2017.
The Bureau makes 11 recommendations for regulators and policymakers. On the whole, the recommendations are focused on reducing barriers to entry faced by fintechs and creating a regulatory regime that can keep pace with technology. The recommendations are as follows:
- Regulation should be technology-neutral and device agnostic. The Bureau found that incumbent financial institutions and fintech start-ups alike are frustrated by trying to adapt modern financial services and products to comply with outdated regulations written with obsolete technology, or sometimes no technology, in mind. General, principles-based regulations would potentially permit regulations to stay relevant for longer despite rapid and constant change in technology.
- To the extent possible, regulation should be principles-based. Regulations should focus on a desired outcome, rather than the means of reaching that outcome, and allow the market to experiment with innovative ways to achieve that outcome.
- Regulation should be based on the functions an entity carries out. Most federal financial services regulations apply to categories of entities. As a result, different types of entities performing the same functions are often subject to different regulations, especially with respect to consumer protection matters.
- Regulation should be proportional to risk. The Report advocates for a tiered approach to regulation differentiating between higher-risk services (e.g., interbank settlement) and lower-risk products (e.g., pre-paid cards), and for tiered regulations within a functional area.
- Regulators should continue their efforts to harmonize regulation across geographic boundaries. The Bureau lauds the efforts of securities regulators to harmonize, but believes there is still much room for improvement. This would reduce compliance costs and facilitate market entry.
- Policymakers should encourage collaboration throughout the sector. The Report discusses several regulatory sandboxes, particularly in the securities space, and encourages other forms of collaboration among regulators and the financial services industry as well as among regulators in other jurisdictions. Regulatory sandboxes, which are essentially constructs set up by regulators that permit fintechs and other innovators to conduct live experiments under regulator supervision without the risk of penalties, have become popular globally as a means of encouraging innovation. To date, Canada has not introduced regulatory sandboxes outside of the securities space.
- Policymakers should identify a clear and unified fintech policy lead for Canada. The United Kingdom, the United States, Singapore, Germany, Australia and Hong Kong are identified as global fintech leaders and the Bureau partly attributes the success in some of these jurisdictions to the establishment of a clear, single policy lead for fintech. The Bureau recommends Canadian policymakers consider this approach.
- Regulators should promote greater access to core infrastructure and services. The Bureau identifies the payment system and banking services as major sources of costs and obstacles for fintechs trying to break into the financial services industry. Accordingly, the Report recommends reducing these barriers where possible, balancing the risks that the barriers are designed to manage.
- Policymakers should embrace broader “open” access to systems and data throughout application programming interfaces. Fintechs often struggle due to the lack of access to data about Canadian consumers. As well, many areas of innovation, such as artificial intelligence, require significant amounts of data. The Bureau encourages open access to consumer data to encourage competition and innovation. Notably, the Bureau is also examining issues regarding competition law and big data generally and released a separate draft discussion paper on this topic earlier in the year.
- Industry participants and regulators should explore the potential of digital identification. New technology could reduce onboarding costs for incumbent financial institutions and fintech start-ups and also facilitate switching between financial service providers. The Report also discusses the possibility of a universal digital ID. This would be a major shift away from the current processes used by financial institutions, especially with respect to anti-money laundering.
- Policymakers should continue to review their regulatory frameworks frequently. Outdated legislation is harmful to businesses that struggle to adapt technology to comply with old standards and also to consumers left exposed to risks that are under-regulated. Regulatory frameworks should be constantly reviewed and revised to keep up with rapid changes in technology.
In addition to the 11 general recommendations, the Report discusses three categories of financial services in detail: payment and payment systems, lending and investment dealing, and advice. The Report makes specific recommendations in each of those categories, many of which overlap with the 11 general recommendations. The Bureau acknowledges that there are many other areas that could benefit from the recommendations.