ONE | FINTECH AND E-COMMERCE
Fintech is the single hottest topic for 2016 and the foreseeable future. From mobile payments to paperless processes to block-chain technology, the increased use of emerging and innovative technologies to pay for or obtain financial services has the regulators’ attention. Regulators have taken steps to address a few of the various challenges and risks that arise when engaging in such activities. These include (1) proposed changes to Canada’s anti-money laundering laws, which provide for greater flexibility regarding identity verification in non-face-to-facesituations and use of electronic signatures when opening a customer’s account, (2) additions to the code of conduct that applies to payment networks, issuers and acquirers regarding merchant acceptance of mobile payments, and (3) guidance from insurance regulators on the steps to take when establishing an online sales channel for insurance products. Amendments were also proposed to Canada’s anti-money laundering (AML) laws in 2014 that included measures to regulate dealers in virtual currencies, such as bitcoin. Previously expected in 2015, these amendments are now expected to be released in mid-2016.
We will likely see additional regulation and guidance as more fintechs enter the Canadian market, either on their own or in collaboration with financial institutions such as banks and insurance companies. Canadian financial institutions considering such collaborations will need to conduct careful due diligence to ensure regulatory (and any outsourcing) requirements are met, particularly since the regulatory schemes, as administered by the regulators, do not always fit the desired business models.
TWO | MORE AML LAWS IMPOSED
The Government of Canada introduced new amendments to Canada’s AML laws in 2014. These included additional risk assessment requirements as well as diligence requirements when providing services to individuals engaged in specified prominent public functions in Canada and their families and close associates (known as “domestic PEPs”). Although draft regulations were released in 2015 to implement such changes, final regulations are not expected until early 2016.
FINTRAC, the regulatory body enforcing Canada’s AML laws, has published guidance regarding its expectations on reporting entities meeting the risk-based obligations under AML laws. This is a sign that the risk-based approach has now become even more prescriptive. Additionally, in July 2015, the Department of Finance released itsAssessment of Inherent Risks of Money Laundering and Terrorist Financing in Canada report to provide critical risk information to reporting entities subject to AML legislation. In the report, the Department of Finance encourages reporting entities to use the report’s findings to inform their efforts in assessing and mitigating risks. Reporting entities will need to review their risk assessments to ensure these new expectations are met.
The Financial Action Task Force (FATF), the international inter-governmental body charged with setting standards and promoting measures to combat money laundering and terrorist financing, has completed its audit of Canada’s AML regime. Its report, to be released in June or July of 2016, may lead to further legislative changes in this area.
THREE | LONGEVITY RISK TRANSFER/PENSION DE-RISKING
With significant longevity risk transfer transactions taking place in the United Kingdom and, more recently, in the United States, these types of transactions have garnered interest from both pension plan administrators and insurers in Canada. The initial Canadian transactions triggered action by the Office of the Superintendent of Financial Institutions (OSFI), which oversees private pension plans and financial institutions. OSFI issued its Longevity Insurance and Longevity Swaps policy advisory in June 2014, which indicated OSFI’s implicit acceptance of such arrangements, if conducted prudentially. The longer life expectancy now enjoyed by Canadians required upward adjustments to actuarial life tables, highlighting longevity risks to pension plan administrators. A number of insurers are refining their market offerings, and pension funds are closely evaluating the need for such offerings. Given that much of the capacity for these risks is found in international reinsurance markets, structuring these transactions in an efficient manner is critical to their success.
FOUR | THE SUPREME COURT’S MARCOTTE DECISION: CONTINUED
In its September 2014 Marcotte trilogy of cases, the Supreme Court of Canada held that Quebec credit card foreign-exchange fee disclosure requirements apply to bank-issued credit cards. Throughout 2015, banks and other federally regulated financial institutions identified provincial laws that might constitutionally extend to their operations and grappled with any potentially applicable obligations. We expect these efforts to continue. There had been talk of a comprehensive consumer code at the federal level, which could mitigate the impact of Marcotte. However, with a new federal government elected in October 2015, it is not clear when or if such code will be brought forward.
FIVE | REGULATORY COMPLIANCE
Federally regulated financial institutions are facing increased scrutiny by various regulators, particularly OSFI. OSFI has turned its attention to regulatory compliance management programs, outsourcing, governance and operational risk, including cybersecurity and quality of data systems, among other things. As a result, what may have been “good enough” in the past may not meet current and evolving expectations.