Submission by the Commissioner of Competition to the British Columbia Securities Commission

April 10, 2018

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Introduction

  1. The Commissioner of Competition (Commissioner) is pleased to make this submission in response to the British Columbia Securities Commission’s (BCSC) public consultation on its “Securities Law Framework for Fintech Regulation” notice (Notice).
  2. The Commissioner supports efforts to modernize Canada’s securities framework to encourage a regulatory environment that fosters innovation and investor confidence.
  3. In December 2017, the Competition Bureau (Bureau) concluded a significant market study of technology-led innovation (FinTech) in the Canadian financial services sector (FinTech Market Study). This submission builds on the Bureau’s FinTech Market Study Report, with a focus on online lending and advice.

Overview

  1. The Canadian financial services sector has seen a wave of new products and services emerge through innovations in technology, from online lending and equity crowdfunding to robo-advisors providing investment dealing and advice.
  2. These new financial products and services introduce greater competition in the sector. Increased competition and innovation drives lower prices, higher quality, and greater choice and convenience for Canadians. They also present risks to be mitigated and challenges for regulators—it is important to strike the right balance. The BCSC’s consultation highlights a number of barriers that mirror those heard from across the country and abroad over the course of the Bureau’s FinTech Market Study Report. Canada has been slow to adopt FinTech relative to its peers (the United States, Australia and United Kingdom), and as highlighted by thought leaders at the Bureau’s FinTech workshop, the lag is impacting Canada’s global competitiveness and leaving Canada’s innovation potential untapped.
  3. The Bureau applauds the approach of the BCSC in engaging with stakeholders to address impediments to innovation as it evolves—cryptocurrency funds, initial coin offerings and cryptocurrencies, for example—and collaborate on solutions. In this spirit, the Bureau offers its continued support to Canada’s regulators and policy makers (federal and provincial) in fostering a competitive and innovative financial services sector.

Online Lending and Crowdfunding

  1. Many smaller and newer businesses have difficulty accessing financing from formal sources, such as retail banks, because these businesses lack sufficient credit history or collateral. Online lending and equity crowdfunding have the potential to relieve frictions for smaller firms in obtaining financing while allowing investors to access new products typically out-of-reach in traditional markets.
  2. The Notice outlines several regulatory challenges for prospective online lenders and seeks industry views on effecting change. Highlights include:
    • A lack of investment capital available to new entrants;
    • Fragmentation across provincial regimes and commensurate compliance costs negating efficiencies of the “borderless” business proposition;
    • A lack of incentive to use exemptions designed for such business models because sunk compliance costs are outweighed by benefits, such as limits on the types and ways securities can be issued or funding caps; and
    • Know-your-client requirements not being technology-neutral.
  3. The Bureau heard similar concerns from market participants in its FinTech Market Study. For example, firms contemplating crowdfunding prospectus exemptions favour alternatives, such as the Offering Memorandum or Accredited Investor exemptions, because the limited capital that can be raised through the current crowdfunding exemptions combined with the limits on advertising do not warrant the compliance costs in seeking the exemption from provincial regulators.
  4. The Bureau also heard that some structural barriers—consumer confidence and unclear recourse in the event of platform failure—could be overcome by regulation. Online lending and equity crowdfunding are a form of two-sided markets: online lending platforms depend upon a sufficient number of lenders and borrowers in order to create viable loans. As such, establishing confidence and ensuring robust consumer/investor protections are paramount to their growth and adoption. Well-designed rules can enhance trust. Some jurisdictions, such as the United Kingdom and Australia, have introduced tiered regulatory or licensing regimes with requirements proportionate to the risk through, for example, asset caps or limited marketing to less sophisticated investors. The United States is exploring the use of special-purpose bank charters to allow FinTech firms to make loans (among other traditional banking activities) provided such firms meet the strict oversight requirements of the US Office of the Comptroller.
  5. From a competition perspective (and as outlined in greater detail in the FinTech Market Study Report), the Bureau recognizes that some challenges remain that are beyond the scope of provincial rules, including barriers to partnerships between FinTech firms and more traditional institutions arising from federal outsourcing rules and cost-of-credit disclosure. Having said that, the continued efforts of regulators at all levels of government to evaluate and respond to these challenges are important steps to modernize the rules supporting Canada’s financial services sector.

Online Advice

  1. More affordable, automated investment advice can help Canadians grow their savings and encourage greater participation in financial markets. Shifting consumer demand, combined with the advent of new technologies and the mobile Internet, has led to new tools for investors. Online advisory services and platforms target customers who may not want or have time to meet with an advisor in-person. These “robo-advisors” could open the door to a broader variety of investment options and different pricing structures, tailored to investors’ individual needs.
  2. The Notice highlights the continued growth of automation and robo-advice models. The BCSC’s outreach led to the following observations:
    • That regulation should anticipate greater automation, particularly in the context of meeting Know-Your-Client (KYC) obligations and in generating investment recommendations; and
    • That regulation needs to be modernized to address the interplay between online advisers and traditional portfolio managers, as well as requirements specific to the bricks-and-mortar context, namely, “wet” signatures to transfer capital.
  3. The Bureau is encouraged by the BCSC’s consideration of the aforementioned issues and would like to highlight, in particular, the consideration given to artificial intelligence and automation. From a competition perspective, automation has the potential to improve both the quality and efficiency of investment advice, for example, through the automation of KYC and portfolio matching for the purposes of determining suitability or portfolio rebalancing. Canada’s peer jurisdictions are also exploring these ideas. Australia, for example, released guidance (in 2016) that establishes how firms should monitor those systems that automate suitability assessments, including ensuring there are individuals within the firm who can understand the technology underlying the advice generated by an algorithm. Further customization of certain processes can increase the efficiency of traditional advisers and the development of online platforms. Similarly, the Bureau is encouraged by the BCSC’s recognition of the potential for technology to facilitate meeting compliance obligations.

Collaboration is Key

  1. Competition is good for both businesses and consumers. As a result, regulation should be minimally intrusive on market forces, which allow competition to drive innovation. During periods of rapid technological change, regulation can inhibit new business models from challenging the status quo. To stay abreast of change, regulators are encouraged to maintain regular dialogue with a diverse range of stakeholders to inform how technology impacts risk and to facilitate firms’ understanding of compliance.
  2. The Notice highlights a number of initiatives undertaken by the BCSC and other provincial regulatory authorities (in Saskatchewan and Alberta) to improve harmonization of crowdfunding regimes. The Bureau is encouraged by these efforts and recommends continued dialogue to minimize differences between provincial regulatory schemes.
  3. These efforts include continued development of mechanisms to encourage collaboration (across government and industry) to promote growth of FinTech in Canada. For example, the Canadian Securities Administrators’ “regulatory sandbox”, of which the BCSC Tech Team is a member, fosters dynamic yet efficient rule-making. It reduces the sunk costs and uncertainty of bringing new ideas to market that do not fit neatly within an existing regulatory scheme and enables regulators to better maintain resilience and confidence in the face of changing risks in, for example, cyber-security and anti-money laundering. It is, however, equally important to complement this dialogue with transparent and timely decision-making and guidance—providing clarity on both the application of the rules and the rationale for those rules enhances trust and builds shared understanding of the risks to be mitigated. Such regulatory “innovations” can be combined with the introduction of “passports” to enable more timely entry from other jurisdictions and further strengthen competition in Canada’s financial services sector.
  4. The Commissioner applauds the BCSC’s proactive engagement with industry, academia, Canadians, and other stakeholders to find balance through a combination of outreach, guidance, feedback and incremental change. Such efforts should continue and the Commissioner would encourage similar models in future. The Bureau further encourages all financial sector policy makers and regulators to continue to leverage these and other regulatory “best practices” to build momentum, overcome the barriers to FinTech adoption and ultimately put consumer-friendly innovation into the hands of all Canadians.
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