On November 6, 2017, the Competition Bureau (Bureau) released a draft report on its market study into technology-led innovation in the Canadian financial services (Fintech) sector. The Bureau has invited feedback from interested parties only until November 20, 2017, an uncharacteristically short comment period.
Financial services are an area of interest for the Bureau due to their significance to the Canadian economy and Canadian employment as well as the critical role they play in the daily lives of Canadians. While offering a variety of products and services across many financial service segments, Fintechs are typically internet-based and application-oriented, promising user-friendly, efficient consumer interfaces. The Bureau asserts that Fintech represents an opportunity to increase competition in Canada’s financial services sector, which in turn could potentially lead to lower prices and increased choice and convenience for consumers and small and medium-sized enterprises (SMEs). To that end, the report covers Fintech innovation in segments that directly impact consumers and SMEs: (i) payments and payment systems (e.g., mobile wallets), (ii) lending (e.g., crowdfunding), and (iii) investment dealing and advice (e.g., robo-advisors). The report specifically does not cover insurance, cryptocurrencies/blockchain, payday loans, loyalty programs, deposit-taking, accounting, auditing, tax preparation, large corporate, commercial or institutional investing and banking (e.g., pension fund management, mergers and acquisitions) or business-to-business financial services.
The report is intended as guidance for financial services sector regulators and policymakers. It is a dense report, but the Bureau’s core message is that regulation of Fintech is necessary to protect the safety, soundness and security of the financial system, but should not unnecessarily impede competition and innovation in financial services. Or as Goldilocks might say, regulation should be “just right”. In examining the regulatory barriers to entry in Fintech, the Bureau makes 11 key recommendations, summarized below, which are intended to modernize financial services regulation by reducing barriers to innovation and competition in order to encourage Fintech growth.
Bureau’s Recommendations For Pro-Competitive Financial Services Regulatio
- Technologically-neutral. The Bureau asserts that regulation should be technology‑neutral and device‑agnostic to accommodate and encourage new (and yet‑to‑be developed) technologies. For example, requiring “wet” signatures (i.e., in person with a pen) prevents the use of new digital signature technology that also provides sufficient security.
- Principles-based. The Bureau asserts that regulation should be based on principles or expected outcomes and not strict rules on how to achieve the desired outcome. This is to allow for the implementation of new technologies, which might otherwise be barred by a prescriptive regime, while still protecting policy goals.
- Function-based. The Bureau asserts that regulation should be based on the functions carried out by an entity, not its identity (e.g., if a bank and a start-up are engaging in the same activity, they should face the same regulation with respect to that activity). This is to ensure that all entities have the same regulatory burden and consumers have the same protections when dealing with competing service providers.
- Proportional to risk. The Bureau asserts that regulation should be proportional to the risks that it aims to mitigate. Along with technology‑neutral, device-agnostic, principles‑based, and function‑based regulation, proportional regulation would level the playing field between Fintech entrants and incumbent service providers that offer the same types of services.
- National harmonization. The Bureau asserts that regulations should be harmonized across Canada. Although there has been improvement, a patchwork of provincial and federal regulations can make compliance unduly difficult and costly.
- Facilitate sectoral collaboration. The Bureau proposes that collaboration throughout the sector should be encouraged, including (i) among regulators to enable a unified approach, (ii) between the public and private sector to improve understanding of the latest services among regulators and of the regulatory framework among Fintech firms, and (iii) among industry participants to help bring more products and services to market (while avoiding anticompetitive collaborations). The UK, Australia, and Hong Kong currently facilitate such collaboration and the Bureau asserts that Canada should follow suit.
- Policy leadership. The Bureau proposes that a Fintech policy lead for Canada to facilitate Fintech development should be identified. The Fintech policy lead can then act as a gateway to other agencies, give Fintech firms a one‑stop resource and encourage investment in innovative businesses and technologies in the financial services sector.
- Facilitate access to core services. The Bureau supports promoting greater access to the financial sector’s core infrastructure and services to facilitate the development of Fintech services. Fintech firms often require access to core services (e.g., the payment system) in order to provide their services (e.g., bill payment app). Under the appropriate risk‑management frameworks, Fintech firms should be provided with access, so that regulation does not stifle useful services.
Open banking. The Bureau supports embracing more “open” access to systems and data (also described as “open banking”). With appropriate customer consent and risk mitigation frameworks, the Bureau asserts that this will allow Fintech firms to access consumer banking information in order to develop bespoke price‑comparison tools and other applications that facilitate competitive switching by consumers. Looking abroad, the UK competition regulator has mandated the implementation of “open banking” (the Bureau does not have this authority). The Bureau has recognized the key role of data (specifically, big data) in Fintech and other sectors in its recently released draft paper for consultation, Big data and Innovation: Implications for competition policy in Canada (see our further comments on this paper). The comment period for this paper is open until November 17, 2017.
Digital identification. The Bureau supports exploring the potential of digital identification for use in client identification processes. Digital identification could reduce the cost of customer acquisition (for new entrants and incumbent service providers), reduce the costs of switching for consumers and facilitate regulatory compliance where identity verification is needed.
Continuing review. The Bureau supports continuing the frequent review of regulatory frameworks and the adaptation of regulation to changing market dynamics (e.g., consumer demand and advances in technology) to ensure they achieve their objectives in a way that does not unnecessarily inhibit competition.
The report comes in the context of a number of ongoing Fintech-related consultations and initiatives, including the recent announcement by the Government of Ontario that it would create a “regulatory super sandbox”, the launch earlier this year of regulatory sandboxes by the Canadian Securities Administrators, the modernization initiative of the Canadian payments system by Payments Canada, the federal consultation on the national retail payments oversight framework and the federal consultation on the federal financial sector framework.
The Bureau has clearly put significant thought and effort into this report. The impact it will have on financial services regulators and policymakers remains to be seen.
 In May 2016 the Bureau announced it would launch this study. The Commissioner of Competition has emphasized the Bureau’s commitment to use its authority and jurisdiction to support Fintech innovation noting that “competitive intensity fosters innovation”. Earlier this year, the Bureau hosted industry stakeholders and federal and provincial regulators at a workshop to discuss the regulatory challenges faced by Fintech and possible approaches that could enhance the efficiency and effectiveness of Canada’s financial services sector.