Canada’s progress in FinTech

Artificial intelligence and other innovations allow customers to have online interactive conversations that help them search for new products and services. Regulators and businesses can leverage these new technologies when it comes to gathering information. Using artificial intelligence is one way that businesses can gather information to advise customers and ensure regulatory compliance without the need for face-to-face interaction.

In February 2018, the British Columbia Securities Commission's (BCSC) consultation on its Securities Law Framework for Fintech Regulation focused on a number of regulatory challenges. The Bureau's submission applauded the BCSC's consideration of automation to meet compliance obligations for "know-your-client"^{Footnote 4} assessments. This signals a shift away from relying on face-to-face conversations to ensure compliance and paves the way for automation and artificial intelligence to improve the quality and efficiency of investment advice, for example, through a broader variety of options at different prices that are tailored to each customer.

Regulators are changing the way they think about rules to avoid requirements that will be immediately outdated as a result of advancements in technology.

In May 2018, the Department of Finance Canada (Finance Canada) launched a consultation on the CPA. It builds on a proposed oversight regime that takes into account the specific risks associated with processing payments. In particular, the consultation highlights important oversight principles for the new "Real-Time Rail"^{Footnote 5} (RTR), such as, requiring that any payment service provider holding customer funds overnight (or longer) must place those funds in a trust account with an institution protected by a deposit insurance regime. In this way, consumers can be assured that their funds are safe, regardless of how they make payment, whether by credit card, debit, e-transfer or mobile app.  In the Bureau's submission to the consultation, it advised that Finance Canada's principles-based approach will ensure customers are covered and oversight can evolve as Canadians explore new ways to pay.

The current financial sector regulatory framework is usually structured around who you are (entity-based) versus what you do (function-based). Finance Canada's Revised Anti-money laundering/counter-terrorist activity financing (AML/CT) regulations move toward a function-based approach. For example, no matter the entity, if the business "deals in virtual currencies," ^{Footnote 6} it must implement a full compliance program and register with Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). This ensures the same compliance obligations for any business engaged in such activity.

In February 2018, the Government of Canada (GoC) introduced amendments to the Bank Act (and related legislation) to allow trust companies, credit unions and co-operatives^{Footnote 7} to use words like "bank" and "banking" to promote their own products and services. The amendments also expanded the scope of technology-related activities banks can participate in so they are not as restricted simply by virtue of being banks. These changes provide greater flexibility for such firms to enter into new arrangements with third parties, such as FinTech firms.^{Footnote 8}

Risk exists in every industry, and when it comes to financial products and services, consumers need to know that their money is safe and the industry is free from fraud and loss of privacy. But there is no one-size-fits-all solution. A failure when you are paying for coffee with your handheld is not the same as the failure of Canada's financial system. The rules should match the risk.

In 2017, Finance Canada's consultation on a new retail payment oversight framework proposed a new set of rules focused on the payment process. From the moment a consumer taps their credit or debit card to the moment when the vendor receives the funds, there is a certain level of risk at each stage of the process. The new framework adapts its rules to match the level of risk at every stage.

Imagine you have a great idea and the know-how to start an online business that will help Canadians better manage their finances. Your home office is in Central Canada, but your employees and customers are across the country. How do you navigate the rules if they are different in every province?

Provinces are working together to help address this regulatory fragmentation so businesses can easily cross provincial boundaries. For example, over the past year, Canada's securities regulators have been monitoring the evolution of virtual currency - in particular, its use as a means to raise business capital. In June 2018, the Canadian Securities Administrators (CSA) published additional guidance on how provincial securities rules may apply to this new FinTech space.

Similarly, in 2018, the CSA, the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association, announced a harmonized response to conflicts of interest associated with embedded commissions and other third-party compensation as part of its "Client-Focussed Reforms" to promote the best interests of their clients.

Regulators are working together to create new regulatory ecosystems in Canada and abroad. They are reaching out to stakeholders, and more and more, speaking with one voice. Similarly, the provinces are collaborating and consulting across the country and the globe to learn from each other and find the right balance in their oversight of the industry.

In August 2018, in collaboration with 11 financial regulators and organizations around the world^{Footnote 9} , the OSC announced its participation in the Global Financial Innovation Network (GFIN). This collaboration aims to support firms who want to operate in multiple countries. The regulators in GFIN are also encouraging input from industry and the public through consultation.

In December 2017, The CSA announced a new cooperation agreement with the Australian Securities and Investments Commission (ASIC) that brought together seven Canadian securities regulators to extend the CSA's Regulatory Sandbox and ASIC Innovation Hub which provide controlled environments for authorized businesses to test innovation. The goal is to support greater information sharing among participants and streamline the referral process for any business seeking entry into new markets. The CSA has also put in place similar agreements with the Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) and Autorité des marchés financiers (France).

A common characteristic of successful FinTech hubs, in terms of talent, funding, government policy and consumer demand, is a unified approach to FinTech. It is easier to understand how to enter the market, when there's a one-stop shop for policy and information.

Finance Canada and provincial regulators, in particular, have advanced a number of initiatives to support changes to Canada's financial regulatory framework, but there remains no clear policy lead in Canada.

In the financial sector, some competitors have direct access to the system that moves your money from one account to another. Regulators are making access to this behind-the-scenes payment infrastructure more accessible to new business models, removing a significant barrier to entry for new innovators to enter and compete.

Finance Canada's 2018 consultation on the CPA proposed broader, risk-based access to the RTR through the creation of a new membership class that would allow new (eligible) participants to use the RTR and develop new overlay products and services such as budget tracking apps. The Bureau's submission cautioned that while broader access is desirable, having distinct categories can create new barriers and reduce incentives for new entrants to grow. The Bureau recommended the broadest levels of access to payments infrastructure in order to encourage competition between new entrants, incumbents and future providers. This recommendation built on the Bureau's December 2017 submission to Payments Canada's consultation on payments modernization. In the latter submission, the Bureau emphasized the importance of open access models for modernization because lack of access is the largest barrier to entry in retail payments.

In 2018, Finance Canada launched consultations on Canada's AML/CT regime, and in particular, on the practice of "de-risking". Banks can terminate, or refuse to provide, banking services to clients who use payment or money transfer services in order to minimize their own risk of non-compliance. This gives banks (and similar institutions) the unique ability to potentially foreclose entry of new competition. In its submission, the Bureau recommended that an evidence-based reason be required when account services are refused or terminated and that there be suitable recourse available for clients.

New applications to compare products, organize your bills and estimate your household budget are becoming available every day. To use them, you need to be able to share your financial data. With the right regulatory framework, one that protects you and your data, the choice of how and with whom your financial data is shared could literally be in your hands.

In Budget 2018, the GoC committed to study the merits of an open banking regime in Canada to give Canadians access to their banking data and enable customers to access competitive and innovative tailored products and services. It will be important to keep an eye on the progress of the United Kingdom and Australia's open banking implementation to inform Canada's approach.

Imagine that access to new financial products and services was as easy as a swipe of a screen, and switching banking providers was as simple as a mouse click. No more walking into a storefront merely to prove who you are.

The Revised AML/CT regulations, referenced in recommendation 3, repealed the prohibition on the use of scanned or photocopied documents and allowed for an "authentic, valid and current" document. The proposed amendments would also allow firms that must report to FINTRAC under the AML/CT regime to rely on identification performed by third-parties, paving the way for new digital authentication services.

As well, the amendments to the Bank Act (referenced in recommendation 3) will expand the scope of services that "banks" and similar institutions can provide to include identification, authentication and verification services.

In an era of continuous and dynamic change, regulatory leaders now have an exciting opportunity to demonstrate adaptability in how they design and enforce rules as they become the "regulator of tomorrow."^{Footnote 10}

Particularly in the last year, Canada's financial regulatory regimes have been under review at both the federal and provincial level. In addition to its review of Canada's AML/CT regime, Finance Canada launched its review of the CPA, which aligns with Payment Canada's multi-year payments modernization project. This builds on Finance Canada's previous consultations on a new retail payments oversight framework, and potential policy measures to update Canada's federal financial sector legislative framework. The Bureau provided submissions to each of these reviews, most recently applauding Finance Canada's comprehensive review and highlighting the importance of regular reviews to ensure that innovation is supported in an increasingly dynamic environment.

Ontario's Red Tape Challenge: Financial services report utilized public consultations over the course of 2017 to highlight 51 opportunities to modernize regulations in the financial services sector.