On December 14, 2017, the Competition Bureau (Bureau) released its final report on its market study into technology-led innovation in the Canadian financial services (Fintech) sector. The final report is substantially the same as the draft report the Bureau released for consultation on November 6, 2017. The most significant change is the addition of an executive summary, which is welcome given the length of the report.
The Bureau’s report is intended as guidance for financial services sector regulators and policymakers. The following are the key takeaways, which we covered in more detail when the draft report was issued.
Bureau’s Recommendations For Pro-Competitive Financial Services Regulation
- Technologically-neutral. The Bureau asserts that regulation should betechnology‑neutral and device‑agnosticto accommodate and encourage new (and yet‑to‑be developed) technologies. For example, requiring “wet” signatures (i.e., in person with a pen) prevents the use of new digital signature technology that also provides sufficient security.
- Principles-based. The Bureau asserts that regulation should be based on principles or expected outcomesand not strict rules on howto achieve the desired outcome. This is to allow for the implementation of new technologies, which might otherwise be barred by a prescriptive regime, while still protecting policy goals.
- Function-based. The Bureau asserts that regulation should be based on thefunctions carried out by an entity, not its identity (e.g., if a bank and a start-up are engaging in the same activity, they should face the same regulation with respect to that activity). This is to ensure that all entities have the same regulatory burden and consumers have the same protections when dealing with competing service providers.
- Proportional to risk. The Bureau asserts that regulation should be proportional to the risks that it aims to mitigate. Along with technology‑neutral, device-agnostic, principles‑based, and function‑based regulation, proportional regulation would level the playing field between Fintech entrants and incumbent service providers that offer the same types of services.
- National harmonization. The Bureau asserts that regulations should be harmonized across Canada. Although there has been improvement, a patchwork of provincial and federal regulations can make compliance unduly difficult and costly.
- Facilitate sectoral collaboration. The Bureau proposes that collaboration throughout the sector should be encouraged, including (i) among regulators to enable a unified approach, (ii) between the public and private sector to improve understanding of the latest services among regulators and of the regulatory framework among Fintech firms, and (iii) among industry participants to help bring more products and services to market (while avoiding anticompetitive collaborations). The UK, Australia, and Hong Kong currently facilitate such collaboration and the Bureau asserts that Canada should follow suit.
- Policy leadership. The Bureau proposes that a Fintech policy lead for Canada to facilitate Fintech development should be identified. The Fintech policy lead can then act as a gateway to other agencies, give Fintech firms a one‑stop resource and encourage investment in innovative businesses and technologies in the financial services sector.
- Facilitate access to core services. The Bureau supports promoting greater access to the financial sector’s core infrastructure and services to facilitate the development of Fintech services. Fintech firms often require access to core services (e.g., the payment system) in order to provide their services (e.g., bill payment app). Under the appropriate risk‑management frameworks, Fintech firms should be provided with access, so that regulation does not stifle useful services.
- Open banking. The Bureau supports embracing more “open” access to systems and data (also described as “open banking”). With appropriate customer consent and risk mitigation frameworks, the Bureau asserts that this will allow Fintech firms to access consumer banking information in order to develop bespoke price‑comparison tools and other applications that facilitate competitive switching by consumers. Looking abroad, the UK competition regulator has mandated the implementation of “open banking” (the Bureau does not have this authority). The Bureau has recognized the key role of data (specifically, big data) in Fintech and other sectors in its recently released draft paper, Big data and Innovation: Implications for competition policy in Canada (see our further comments on this paper).
- Digital identification. The Bureau supports exploring the potential of digital identification for use in client identification processes. Digital identification could reduce the cost of customer acquisition (for new entrants and incumbent service providers), reduce the costs of switching for consumers and facilitate regulatory compliance where identity verification is needed.
- Continuing review. The Bureau supports continuing the frequent review of regulatory frameworks and the adaptation of regulation to changing market dynamics (e.g., consumer demand and advances in technology) to ensure they achieve their objectives in a way that does not unnecessarily inhibit competition.