Stephen Redican is a partner in the financial services group of law firm Borden Ladner Gervais LLP.
Regulating the financial sector to manage risk is the collective job of our various Canadian regulators. However, the Canadian regulatory framework is an uneven, fragmented, divergent and overlapping patchwork when it comes to financial technology.
For example, Canadian banks are heavily regulated primarily at the federal level, with the possible overlay of some provincial and territorial laws. Meanwhile, outside of securities laws, financial technology (fintech) companies are only lightly regulated under provincial or territorial laws, and possibly to some degree under certain federal laws.
Some say this is appropriate. They argue our largest six banks control 93 per cent of the financial assets in Canada, have extensive branch networks and need to be heavily and centrally regulated. Meanwhile, fintech startups competing with banks are said to drive innovation and should be left largely unregulated, or at least less regulated, as the industry develops. This results in our financial institutions competing with fintech companies that have the ability to very quickly attract a substantial client base and scale up, typically through the Internet, with lower costs and fewer regulatory burdens.
In recent months, the Competition Bureau, the Bank of Canada, the Department of Finance and the Ontario Securities Commission have all made known their interest in this area. These regulators have somewhat divergent views on the risks related to fintech, which is expected given the statutory mandate of each regulator.
While there is some risk, it should not be overstated. Much of what we consider fintech is not readily apparent to the casual observer, but is behind the scenes, enabling more efficient and modernized processes within our existing financial services sector. The quest to use distributed ledger technology to allow the settlement of payments and other financial transactions in real time is a prime example of this.
Even when fintech companies are customer facing, many of them are partnering with financial institutions to bring products to market (for example, faster loan approvals through new credit-adjudication technologies), as opposed to entering into direct competition. If partnering does not result in the direct application of regulation on fintech services, compliance will likely be required, since financial institutions will not want the partnership to create regulatory compliance risk or introduce reputational risk.
As such, only fintech developments largely outside the regulatory framework should be of concern; it's only when fintech companies compete directly against the regulated financial services sector, or create new risks in the financial system, that there is a need for regulation to ensure a level playing field, sound prudential risk management and consumer protection.
However, not all fintech companies need to be regulated in a heavy-handed manner. For example, there have been concerns raised about the know-your-client and anti-money-laundering requirements from which many fintech companies are generally exempt. In response, given the nature of the data they collect and the less conventional way they collect it (in real time through "big data" analytics), some fintech companies have made the point that they know their customers better than the banks know theirs.
Over all, it seems that in some areas of systemic importance and inherent risk, regulation should extend to a particular activity regardless of the entity performing it. To be effective, the federal government and the provinces and territories must co-operate. Different regulators have different mandates and objectives, and these will have to be addressed effectively in regulating – or not regulating – fintech companies and their activities.
Given Canada's constitutional division of powers and the historical lack of extensive co-operation or regulatory alignment between the federal government and its provincial and territorial counterparts, this will be challenging. However, in light of the current high profile and degree of scrutiny being brought to bear on fintech in Canada, the hope is that this challenge won't be insurmountable.