First-step analysis: fintech regulation in Canada

Financial regulation

Which bodies regulate the provision of fintech products and services?

Canada’s provincial and territorial securities administrators are the primary regulators of fintech financial products and services relating to capital markets (including cryptoassets), working together under one umbrella as the Canadian Securities Administrators (CSA), together with the Canadian self-regulatory organisation that governs securities dealers, the Canadian Investment Regulatory Organization (CIRO) . At the federal level, the Office of the Superintendent of Financial Institutions (OSFI) is responsible for the supervision and regulation of banks, insurance companies and trust and loans companies and has highlighted the need for resilient technology infrastructures. The Canada Revenue Agency and its various provincial counterparts have also developed and published policies or guidance on fintech-related matters. The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), Canada’s federal anti-money laundering (AML) authority, also regulates certain fintech products and services, including ‘money services businesses’ (MSBs) dealing in fiat and/or virtual currencies. The Bank of Canada (BoC), Canada’s central bank, closely monitors fintech developments and distributed ledger technologies and has been appointed as the oversight body for the new retail payments regime under the Retail Payments Activities Act  (RPAA). As with other leading central banks, it is developing a cash-like central bank digital currency as a further contingency given the rapid decline in the use of cash and the explosive growth of digital payments. A number of other fintech initiatives are also administered at the local level by various municipal governments.

Which activities trigger a licensing requirement in your jurisdiction?

Fintech businesses may be subject to various provincial licensing requirements under applicable provincial securities and derivatives laws to the extent that they engage in activities or facilitate transactions in securities or derivatives. These rules also govern trading in cryptoassets that are regulated as securities and those that are not but where the manner in which these assets are traded and held constitute ‘crypto contracts’, such that the instruments are treated as ‘investment contracts’ and therefore ‘securities’. The rules include dealer and adviser registration for entities/persons considered to be trading or advising in securities or derivatives for a ‘business purpose’ and related compliance obligations. The management of investment funds also triggers the application of investment fund manager registration requirements in certain situations. Businesses undertaking initial coin offerings (ICOs) or initial token offerings may also be subject to prospectus or product qualification requirements or compliance with related exemptions.

Associated regulations require compliance with know-your-client (KYC) and know-your-product rules, suitability, insurance, financial and customer reporting, custody requirements and cybersecurity risk management protocols, among other requirements. Given the traditional definition of ‘exchange’ or ‘marketplace’ (ie, an entity that brings together multiple buyers and multiple sellers of securities or derivatives), the CSA requires that fintech businesses involved in cryptocurrencies also consider whether they must be registered as exchanges or alternative trading systems.

In addition, both foreign and domestic MSBs must register with FINTRAC and comply with KYC, reporting, record keeping, travel rule and compliance programme requirements. MSBs include businesses that deal in fiat and virtual currencies and foreign exchange. MSB registration may also be required in Quebec under MSB legislation in that province. Similar legislation has also been recently introduced by the government of British Columbia but is not yet in force.

A number of other fintech-related activities, including lending, factoring, invoice discounting, secondary market loan trading, providing yield generating products and deposit-taking and trust company-type activities may be subject to a number of different regulatory requirements, depending on the relevant features of the business.

Is consumer lending regulated in your jurisdiction?

Consumer lending is not as highly regulated in Canada relative to certain other jurisdictions. Nevertheless, aspects of consumer lending are regulated in Canada at both the federal and provincial level. At the federal level, the regulation depends on the regulated status of the entity providing the consumer credit. Banks and other financial institutions have cost of borrowing disclosure obligations for mortgages, credit cards and certain other types of credit. Criminal interest rate provisions in the Criminal Code (RSC 1985, c C-46) preclude the effective annual interest rate for an advance of credit from exceeding 60 per cent per year. No distinction is drawn between commercial and consumer contracts in this regard, though certain low value (payday) loans are exempt.

Provincially, payday lenders are subject to a licensing requirement in most provinces. In addition, provincial consumer protection legislation in New Brunswick, Nova Scotia, Quebec, and Saskatchewan imposes a lender licensing requirement (or permit or registration requirement) for consumer lending. A number of provinces have implemented or are in the process of implementing high-cost credit legislation, which can impose a licence or registration requirement.

Are there restrictions on trading loans in the secondary market in your jurisdiction?

The regulation of trading loans in the secondary market depends on whether the loan instruments would be regarded as securities (ie, under a multi-factor test to determine if the particular loan instrument is an ‘investment contract’ or ‘a bond, debenture, note or other evidence of indebtedness’). Loans acquired on the secondary market are much more likely to be characterised as securities than are originated loans.

Describe the regulatory regime for collective investment schemes and whether fintech companies providing alternative finance products or services would fall within its scope.

Collective investment schemes, generally referred to as ‘investment funds’ under Canadian securities regulations are primarily subject to provincial securities laws. Investment funds include non-redeemable (or closed-end) funds as well as mutual funds. Primarily, persons operating or administering collective investment structures (including those that hold or invest in virtual currencies or that provide alternative finance products or services) may also be subject to investment fund manager registration requirements, in addition to dealer, adviser and prospectus or private placements requirements. The structures themselves may also be subject to the reporting and conduct requirements that apply to investment funds, including under National Instrument 81-102 – Investment Funds (NI 81-102), and National Instrument 81-104 – Alternative Mutual Funds (NI 81-104) (which applies specifically to retail alternative funds), National Instrument 81-106 – Investment Fund Continuous Disclosure (NI 81-106), and a number of other instruments, including, depending on the nature of the regulated intermediary, IIROC rules and, in the case of mutual fund dealers, the rules of the Mutual Fund Dealers Association of Canada, which, effective 1 January 2023, will be merged with IIROC into the New Self-Regulatory Organization of Canada (the New SRO).

Are managers of alternative investment funds regulated?

Yes. Any person or company acting as a manager of an investment fund must register as an investment fund manager and comply with registration and related requirements, or rely on certain exemptions. This requirement is triggered in the provinces of Ontario, Quebec and Newfoundland and Labrador if the fund has investors resident in that province. Across Canada, investment by Canadian investors in investment funds is subject to provincial prospectus requirements and, in the case of private placements, related exemption requirements, as well as dealer registration requirements and regulations that govern the content and delivery of offering documents and post-trade reports. Under securities legislation, these obligations apply to both managers of conventional investment funds, as well as alternative investment funds (AIFs). Domestic retail funds are also subject to additional regulations under NI 81-102 and NI 81-106, with AIFs permitted to engage in a broader range of investment strategies (eg, including more latitude to engage in short-selling, borrowing and the use of derivatives) than is permitted for conventional investment funds.

Describe any specific regulation of peer-to-peer or marketplace lending in your jurisdiction.

Peer-to-peer (P2P) lending businesses in Canada may be subject to registration as dealers with the provincial securities regulators in the provinces in which they operate. As a result, P2P lenders may also be required to comply with prospectus and other regulatory requirements applicable to any other securities dealer operating in the same jurisdiction, including restricting investing opportunities to qualified accredited investors. Other provincial entities have enlisted the help of affiliated companies to issue notes and agreements on a prospectus-exempt basis. Additionally, some P2P lenders have obtained exemptions from certain requirements such as prospectus filing obligations through existing exemptions under the provincial securities legislation.

Describe any specific regulation of crowdfunding in your jurisdiction.

Fintech companies that raise capital through crowdfunding are subject to provincial securities regulations. Various provincial securities regimes have adopted crowdfunding prospectus exemptions through a range of regulations and instruments. For example, the Ontario Securities Commission adopted Ontario Instrument 45-506 – Start-Up Crowdfunding Registration and Prospectus Exemptions, which provided specific registration and prospectus exemptions for start-up crowdfunding companies.

Similar regimes have also been adopted in other provinces through, among others, Multilateral Instrument 45-108 – Crowdfunding and Multilateral CSA Notice 45-316 - Crowdfunding Registration and Prospectus Exemptions permit early-stage companies and small businesses to raise limited amounts of capital through crowdfunding platforms. Both public and non-public companies are permitted to rely on the prospectus exemption. Also, where securities crowdfunding offerings are facilitated through a funding portal, the funding portal generally must be registered under National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) and with the applicable provincial securities regulators.

The CSA published a new regulation, National Instrument 45-110 – Start-up Crowdfunding Registration and Prospectus Exemptions (NI 45-110), that contributes to a harmonised national framework and will replace similar instruments previously adopted by provincial securities regulators. NI 45-110 came into force on 21 September 2021. 

On 14 February 2022, the federal government took the unprecedented step of invoking the Emergencies Act (Canada) to end disruptions, blockades, and the occupation of the city of Ottawa. These developments led to further action to limit the flow of financing of the blockades by extending the requirement to register as money services businesses (MSBs) under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA, SC 2000, c 17), Canada’s federal anti-money laundering legislation, to crowdfunding platforms and certain payment service providers that were not previously regulated for this purpose.

Describe any specific regulation of invoice trading in your jurisdiction.

There is no specific regulation in Canada of invoice trading. Depending on its characteristics, invoice trading may be subject to provincial securities laws and/or FINTRAC obligations, to the extent it falls under the existing scope of securities trading activity or an MSB service, respectively. Further, if carried out by a banking entity or an entity affiliated with a bank it may be subject to federal banking legislation.  Provincial loan and trust legislation may be applicable if the services include extending loan and trust services to the public and provincial consumer protection laws may also apply.

Are payment services regulated in your jurisdiction?

The continuation of the 2016 Payment Canada modernisation programme, amendments to the existing Payment Clearing and Settlement Act (PCSA, SC 1996, c 6), and the new RPAA, are expected to provide robust support and innovation opportunities for payment services in Canada. Payment services will continue to be subject to FINTRAC licensing to the extent that they are subject to MSB licensing requirements.

In December 2020, Payments Canada published the Modernization Delivery Roadmap, outlining the implementation process for two national payment systems enabled by the global ISO 20022 messaging standard: Lynx and the Real-Time Rail (RTR). Lynx, Canada’s new high-value payments system, began operations on 30 August 2022, replacing the Large Value Transfer System (LVTS), which had operated since 1999.  Lynx will enable payment and settlement finality and flexibility for the application of future technologies, as well as enhanced cyber security capabilities. The RTR will provide real-time irrevocable credit payments and allow fintech service providers to develop new and enhanced ways for individuals to pay for goods or services and transfer money.  The RTR was set to launch in 2022 but its delivery has been postponed.

The RPAA will apply to all retail payment activities performed by payment service providers (PSP) in Canada, as well as all activities performed by providers outside of Canada who provide retail payment activities to an end user within Canada. Under the RPAA, PSPs will be required to register with the BoC. Certain retail payment activities, such as those performed by systems under the PCSA, payment functions performed by Payments Canada, the BoC or, other designated entities and activities, will be exempt from the new RPAA. The new requirements will be fleshed out in future implementing regulations.

Are there any laws or regulations introduced to promote competition that require financial institutions to make customer or product data available to third parties?

In August 2021, the federal government published its Final Report – Advisory Committee on Open Banking. The report, which focused on supporting innovation and competition in the Canadian financial services sector system, proposed a two-phased approach set to be completed by 2023.

The recommendations outlined a consumer-focused framework for implementing secure open banking in Canada. Under proposed new regulations, such as the Consumer Privacy Protection Act (Bill C-27, Digital Charter Implementation Act, 2022, 1st Sess, 44th Parl, 2022, cl 2 (second reading 23 April 2023)), individuals would be granted more freedom to direct and transfer their personal information from one organisation to another, including to accredited third-party service providers. Other Canadian organisations such as the Canadian Competition Bureau have also made strong recommendations to further modernise Canada’s financial sector following consultations with industry and regulatory stakeholders in light of global developments in open banking.  Further, to amendments made under the PCMLTFA in 2022 discussed above, FINTRAC regulatory guidance was also amended to provide that certain types of payment service providers may also be subject to registration as money service businesses under that legislation.

Do fintech companies that sell or market insurance products in your jurisdiction need to be regulated?

Fintech companies that provide insurance services are subject to the same regulations as conventional providers of insurance services, as well as broader legislation applicable to fintechs under Canadian AML, consumer protection and privacy legislation.

Are there any restrictions on providing credit references or credit information services in your jurisdiction?

There is no consolidated federal authority governing credit reference and information services. Consumer protection legislation such as the Consumer Reporting Act (RSO 1990, c C-33), Personal Information Protection and Electronic Documents Act (PIPEDA, SC 2000, c 5), and individual contracts govern the disclosure of credit information, activities related to credit cards and other credit agreements such as payday loans.