Illustration of a man standing at a crossroads
iStock / Erhui1979

Canada’s financial sector, a cornerstone of our economy, faces a critical crossroads. The rapid evolution of financial technology, regulatory technology and artificial intelligence (AI) is reshaping global markets. Yet, Canada’s regulatory framework has not kept pace, creating systemic challenges that threaten productivity, entrepreneurship and consumer trust. Modernizing this framework is not only a regulatory necessity but also an economic imperative if Canada is to remain competitive with the global leaders in financial services.

Canada’s financial legislation, designed for a simpler, less interconnected world, is struggling to accommodate the complexities of a tech-driven financial ecosystem. This misalignment results in several challenges. Small and medium enterprises (SMEs) in the fintech space, for instance, bear disproportionate compliance burdens due to regulations designed for large legacy institutions. These costs siphon resources away from innovation and limit the ability of startups to scale.

Emerging sectors like digital lending and insurtech are particularly affected, facing overlapping and contradictory requirements that stifle growth and innovation. Rigid regulatory structures also hinder the adoption of transformative technologies like blockchain and AI, which have the potential to reduce costs, improve transparency and provide personalized consumer experiences. Furthermore, outdated regulations limit access to innovative financial solutions such as robo-advisors and usage-based insurance, leaving consumers dissatisfied and perpetuating financial exclusion among underserved groups.

The inefficiency of Canada’s complaint-handling processes compounds these issues. Lengthy and opaque dispute resolution mechanisms erode consumer trust. For example, app-based lenders often face criticism for delays in addressing complaints, discouraging consumer engagement with innovative financial platforms. Without reform, such inefficiencies will continue to hinder the sector’s growth and diminish consumer confidence.

The economic consequences of Canada’s outdated regulatory framework are far-reaching. Productivity growth in the financial sector has stagnated, impacting industries reliant on efficient financial systems. Entrepreneurship is also stifled as overly complex regulations deter new ventures, limiting job creation and economic diversification. Regulatory uncertainty discourages both domestic and international investment, as businesses and investors increasingly seek jurisdictions with clearer, more adaptive environments. If unaddressed, these shortcomings could leave Canada trailing in the global race to attract financial innovators, investment and talent.

Despite these challenges, Canada has significant opportunities to position itself as a global leader in financial innovation. More extensive use of regulatory sandboxes, for instance, can provide a controlled environment for startups to test their products under regulatory oversight. Countries like the U.K. have aggressively implemented such initiatives, accelerating financial innovation and fostering collaboration between regulators and innovators. Similarly, secure digital identity systems, such as Singapore’s SingPass, can simplify customer onboarding, reduce fraud and improve operational efficiency. By adopting a nationwide digital identity framework, Canada can enhance financial inclusion and streamline compliance.

Another area of opportunity lies in embedding financial products into nontraditional platforms, such as integrating insurance services within e-commerce websites or car dealerships. This approach simplifies consumer access and opens new distribution channels for financial services providers. AI and machine learning also present transformative possibilities for regulatory oversight. AI-powered tools can identify emerging risks, improve fraud detection and enhance compliance processes. Advanced data analytics enable regulators to monitor market trends in real time, facilitating timely interventions and ensuring that regulations remain relevant in an evolving landscape.

To unlock these opportunities, Canada must take bold steps toward regulatory modernization. Developing flexible frameworks is essential to simplifying licensing and reporting requirements while accommodating new technologies. A principles-based regulatory approach, tailored to fintech and regtech, can provide the clarity and adaptability needed to support innovation.

Enhancing consumer protection is equally important, particularly with AI-driven financial products, to ensure fairness, transparency and accountability. Expanding regulatory sandboxes and digitizing complaint-handling processes will not only foster innovation but also build consumer confidence through efficient and transparent systems.

Collaboration with stakeholders is another critical component. Regular dialogue with industry leaders, consumer advocates and policymakers can ensure that regulations address diverse needs and keep pace with global standards. Investing in technology, such as AI and advanced analytics, will equip regulatory bodies to oversee complex systems more effectively, promoting data-driven decision-making and improved consumer outcomes.

The urgency of reform cannot be overstated. Canada’s financial sector generates significant economic activity, supports millions of jobs and serves as the backbone of other industries. Modernizing financial legislation will catalyze innovation, attract investment and strengthen Canada’s position in the global marketplace. By embracing a forward-looking regulatory approach, Canada can create a financial ecosystem that drives entrepreneurship, enhances consumer trust and supports sustainable economic growth.

The time to act is now. As global markets continue to evolve at an unprecedented pace, Canada must seize the moment to modernize its financial legislation. Failure to adapt risks leaving the nation behind, while proactive reform can secure its place as a leader in financial services innovation and economic resilience.

This article appears in the February issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.