In May of 2016 the Competition Bureau (the “Bureau”) launched a market study into technology-led innovation in the Canadian financial services sector, better known among industry players as “FinTech.”
Recognizing that – although financial services contribute to approximately 7% of Canada’s gross domestic product and some 800,000 jobs nationally – the adoption of FinTech in Canada lags behind that of its international peers, the Bureau launched the study to gain insight on how to ensure that financial regulation does not unnecessarily impede innovation and competition.
In particular, the study examined three broad service categories (retail payments and the retail payments system, lending and equity crowdfunding and investment dealing advice) to address 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?
On December 14, 2017, after extensive fact-finding consultation including 130 stakeholder interviews, 10 information sessions, 13 outreach events and a one-day workshop, the Bureau released its final report (the “Report”). The Report provides policymakers and regulators with recommendations to encourage innovation but also raises a number of considerations for companies operating in the FinTech sector.
More specifically, while recognizing that the barriers to Fintech growth are multi-faceted and can incorporate such issues as consumer awareness, reputation and risk mitigation, the Bureau focused on the area of regulation in developing 11 broad recommendations for financial sector regulators and policymakers.
Those 11 recommendations are:
- Regulation should be technology‑neutral and device‑agnostic. Rules that can accommodate and encourage new and yet‑to‑be developed technologies open the door to more innovative offers today and down the road.
- To the extent possible, regulation should be principles‑based. Instead of prescribing exactly how a service must be carried out, a principles‑based approach will allow regulators to be more flexible in their approach to enforcement as technology changes.
- Regulation should be based on the function an entity carries out. This will ensure that all entities that perform the same function carry the same regulatory burden and consumers have the same protections when dealing with competing service providers.
- Regulation should be proportional to risk. This requires a tiered approach: functions whose failure poses lower risks to the financial system should not necessarily face the same strict oversight as those whose failure poses higher risks. This will give smaller players a level playing field to innovate.
- Regulators should continue their efforts to harmonize regulation across geographic boundaries. Differences in regulations across provinces can lead to increased compliance burden. Consistency, on the other hand, can facilitate entry and expansion of FinTech across Canada and abroad.
- Policymakers should encourage collaboration throughout the sector. Mechanisms for doing so include the use of regulatory sandboxes and innovation hubs. Greater collaboration will enable a clear and unified approach to risk, innovation and competition.
- Policymakers should identify a FinTech policy lead for Canada to facilitate FinTech development. This would give FinTech firms a one‑stop resource for information and encourage greater investment in innovative businesses.
- Regulators should promote greater access to core infrastructure and services. This includes access to the payments system (under the appropriate risk‑management framework) and banking services to facilitate the development of innovative new FinTech services.
- Policymakers should embrace broader “open” access to systems and data through application programming interfaces. With better access to consumer data (obtained through informed consent), FinTech can help Canadians overcome their inability or unwillingness to shop around and switch between service providers.
- Industry participants and regulators should explore the potential of digital identification verification. This would reduce customer‑acquisition costs for service providers, ultimately reducing the costs of switching for consumers and facilitating regulatory compliance where identity verification is needed.
- Policymakers should continue to review their regulatory frameworks frequently. Doing so will ensure that these frameworks remain relevant in the context of future innovation and can achieve their objectives in a way that does not unnecessarily inhibit competition.
While implementation of the recommendations set out in the Report presents its own challenges, the effort expended by the parties involved in the study evidences the far-reaching commitment to finding solutions to facilitate FinTech expansion, and should provide encouragement to industry participants going forward.