January 24, 2018 / 9:01 PM / a year ago

Canadian Competition Bureau recommends flexibility in fintech regulation

TORONTO/NEW YORK (Thomson Reuters Regulatory Intelligence) - The growth of the financial technology industry in Canada is being held back by barriers to entry including a complex regulatory structure, high compliance costs, low levels of consumer awareness and a lack of access to start-up capital, according to a study on “fintech” challenges conducted by the Competition Bureau in Canada.

A Bay Street sign is seen at the financial district in Toronto, October 10, 2008.

To encourage growth in fintech, the study recommended steps including a flexible regulatory environment in which risk determines the level of oversight and compliance requirements.

The study on regulatory issues for fintech businesses in Canada, titled Technology-led Innovation and Emerging Services in the Canadian Financial Services Sector(bit.ly/2F8JWF3), sought to analyze some of the barriers to entry and provide recommendations on establishing a regulatory framework that can support technological innovation.


The Competition Bureau commissioned the study primarily based on the perception that Canada lags behind other jurisdictions in adopting fintech, a fast growing segment of the financial services sector. According to the EY Fintech Adoption Index in 2017(here), only 18 percent of digitally active consumers in Canada had used at least two fintech products in the prior six months, compared to an average of 33 percent in other countries. Canada lagged behind a number of other countries such as Australia, France, the United States and the Netherlands.

Fintech adoption in emerging markets such as China, Mexico and Brazil was on average, slightly higher at 46 percent.

While financial regulators in Canada have expressed interest in supporting homegrown fintech start-ups, the fragmented and undefined regulatory landscape has proved challenging for many businesses.

Commentators in the study, including financial services providers and fintech businesses, pointed to regulatory barriers to entry as one of the main reasons why fintech appears to be struggling to take off in Canada, although non-regulatory obstacles also were cited.

Regulatory barriers to entry include the present structure of financial regulation in Canada. Commentators felt that the financial services sector is heavily regulated by federal and provincial agencies, making it difficult for start-ups to break into the market. At the federal level, regulators such as the Office of the Superintendent of Financial Institutions (OSFI), the Minister of Finance, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) and the Financial Consumer Agency of Canada (FCAC) oversee various aspects of prudential and consumer protection matters. Securities regulation is overseen by provincial regulators.

In addition to securities regulators, self-regulatory organizations such as the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) impose additional regulatory compliance obligations on fintechs that operate in the investment advisory space.

The majority of regulatory barriers fall into four categories: anti-money laundering, securities, payments and other laws such as privacy and data protection rules. Generally, fintechs expressed the opinion that the cost of compliance with these rules was a substantial barrier to entry.


The Competition Bureau made a series of general policy and regulatory recommendations with the purpose of fostering competition and innovation for fintechs in Canada. Although it cautioned that regulatory responses should be balanced with priorities such as investor protection and market stability, the recommendations sway towards a lighter regulatory touch for fintechs.

The Competition Bureau recommended that regulation be proportional to risk. It suggested that fintechs whose failure poses comparatively lower risks to market stability should not be subject to the same prudential compliance requirements as businesses that pose higher risks. Lowering the requirements for lower risk fintechs would foster a more competitive environment for start-ups.

The bureau also recommended that rules should be principles-based. Less prescriptive guidance could give businesses the opportunity to use new technology to comply. Using biometrics for Know-Your-Client compliance was one of the examples cited by the regulator.

Furthermore, the Competition Bureau encouraged financial regulators to allow regulated entities to use new technology to facilitate client identification, such as digital identification and other processes carried out by third parties.

Given the rapid pace of development in technology and fintech, the Competition Bureau cautioned financial regulators on the need to keep up with changing market dynamics. The bureau recommended that regulators continuously review financial regulation to ensure that rules remain relevant and accommodate for advances in technology.

In a nod to reducing the risk of regulatory arbitrage, the Competition Bureau called on financial regulators to further harmonize regulation across geographical borders. This recommendation is particularly pertinent for securities dealers and listed companies. Securities regulation is currently administered on a provincial level. While some efforts have been made to harmonize oversight, enforcement and prioritization is largely left to the individual provinces, resulting in regulatory arbitrage and fragmentation.

While securities regulators in some provinces such as Ontario have made efforts to set up infrastructure and resources such as sandboxes and concierge services, regulators in other provinces have not. Harmonizing fintech initiatives across provincial borders would likely be beneficial for start-ups looking to expand across Canada.

On a national and supranational level, the Competition Bureau encouraged the federal government to identify a clear and unified fintech policy lead for Canada with federal, provincial and territorial expertise. Having unified representation could serve as a gateway to agencies in other countries as well as provide a centralized resource of information for fintechs.


The market study from the Competition Bureau is worthy of consideration by compliance professionals for a number of reasons. While the recommendations do not come from a standpoint of a financial regulator, the bureau's main objective of creating an environment that is welcoming for fintech is shared by multiple federal and provincial regulators(here).

Federal agencies such as the Department of Finance Canada have already begun to adopt initiatives that are more inclusive of fintech. Some provincial regulators have set up services meant to assist fintech start-ups, particularly in the investment advisory sector. Various other government agencies have also undertaken efforts to consider how to amend the Canadian regulatory landscape to be friendlier to fintechs.

As a result, financial regulators could be open to shifting towards a more principles-based approach. Compliance officers at traditional financial institutions should monitor fintech industry and regulatory developments carefully. Changes in areas such as client identification processes are likely to have significant implications for anti-money laundering compliance and Know-Your-Client policies and procedures, among other areas for all participants in the financial services sector.

Generally, the growing prevalence of fintech poses a number of challenges to compliance functions at financial services firms. In addition to AML and KYC obligations, financial technology challenges for firms include upgrading legacy systems and cyber resilience.

As outlined in Fintech, Regtech and the Role of Compliance in 2017 (here), a Thomson Reuters Regulatory Intelligence Special Report, compliance officers are becoming more involved in assessing the implications of fintech innovation. Emerging risks and development trends in fintech are fast becoming subjects in which compliance officers need to be proficient.

(Helen Chan is a regulatory intelligence expert in the Enterprise Risk Management division of Thomson Reuters Regulatory Intelligence. Email Helen at helen.chan@thomsonreuters.com)

This article was produced by Thomson Reuters Regulatory Intelligence and initially posted on Jan. 12. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters

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