Innovation hub in a sandbox

At the same time, the team also is embracing the regulatory sandbox approach, which has been pioneered in other countries, such as the U.K. and Australia: regulators using this strategy give startups some limited relief from existing regulatory requirements to promote experimentation with novel products or services that may not fit neatly into a regulatory structure designed for the traditional financial services sector.

Pat Chaukos, chief of OSC LaunchPad, says that the idea for the unit grew out of the regulator’s effort to open up the exempt market to greater retail participation. That initiative led to the creation of a crowdfunding regime (among several other new prospectus exemptions), that is designed to both make raising capital easier for small firms and enable ordinary investors to supply capital to startups.

“As part of that [effort to expand the exempt market], we started seeing very novel business models, such as crowdfunding platforms, online advisors, lending platforms, even trading platforms for private securities,” says Chaukos, who was, at the time, manager of the dealer team in the OSC’s compliance and registrant regulation branch. As a result, OSC staff came to realize that there was a need for an initiative like OSC LaunchPad to engage better with these emerging firms.

The initial goal for OSC LaunchPad is to help innovative firms get off the ground more quickly, and to help them avoid getting bogged down in regulation. Longer term, what the regulators learn in their dealings with the fledgling fintech community is expected to feed back into regulatory policy and possibly lead to regulatory innovation.

That’s expected to happen as regulators get comfortable with new ways of doing business and new ways of fulfilling traditional regulatory obligations, such as “know your client” (KYC) requirements, disclosure and suitability.

“[The thinking behind OSC LaunchPad] is to help the fintech companies, but also for [regulators] to learn,” says Chaukos. “So, part of what we need to be doing is listening to some of the challenges that these companies have, and make sure that we’re being responsive to those challenges. From my perspective, it’s really about how do we modernize regulation to support fintech innovation.”

As the fintech community in Canada has developed over the past couple of years, it has become increasingly aware of the need to engage with regulators, so that entrepreneurs can get their businesses off the ground without going offside in compliance.

“If we’re an afterthought, it becomes very costly [for fintechs],” says Chaukos. “We need to be there early on, because trying to build in any kinds of controls or regulatory protections into an electronic platform after it’s been developed [is difficult.] It’s too late at that point, and it’s going to be a huge cost to that business.”

For many consumer-facing fintechs, the aim is to make the experience of saving, investing or borrowing smoother and seamless – with much less “friction” between the client and the service provider – than consumers are used to experiencing at traditional financial services institutions.

The OSC LaunchPad is making sure it gets direct input from the fintech industry. Says Chami Akmeemana, a veteran entrepreneur who is working as fintech advisor to OSC LaunchPad to help get the initiative launched: “The birth of a fintech involves looking at the world and how we would change it. The regulator doesn’t really come to mind,” he says. “[Fintechs] look at what doesn’t work properly, what we could disrupt – that’s the thought process.”

Of course, much of the friction that fintechs aim to eliminate in financial services is grounded in regulatory obligations. Those obligations generally exist for a good reason: to provide some level of consumer protection and to address the vast imbalance in knowledge and resources between financial services firms and the average retail client. The challenge for fintechs is in removing the unnecessary friction without losing regulatory protection. That’s where OSC LaunchPad comes in.

Chaukos says that OSC LaunchPad aims to help fintech firms build their platforms and build in the necessary regulatory protections without creating unnecessary barriers.

“We’re already seeing [founders of] firms coming in and saying, ‘I can’t comply with this requirement,” she notes. “And that’s fair because those regulations were built at a time when financial services was a face-to-face relationship and everything was paper-based.”

So, the OSC’s new unit aims to work with fintech firms and fintech divisions of larger financial services companies to ensure that they are meeting the underlying objectives of regulation, yet allowing room for innovation.

“We, as regulators, have to assess what [fintechs] are doing and become comfortable with what they’re doing and that they’ve met regulatory requirements. And, at the same time, where we can stay out of the way, we probably should stay out of the way,” Chaukos says.

For example, among the things that the OSC has to come to terms with is new approaches to identity verification and new sources of data that firms use to assess risk and credibility.

“One of the things we’re learning is that these online platforms are able to collect data from many different touchpoints, which adds to credibility and transparency. And that’s helping them, even in terms of how they’re doing [KYC] in an online environment,” notes Chaukos.

At the same time, fintechs often aren’t well versed in regulation. Navigating the regulatory framework in Canada is hard enough for traditional financial services firms, particularly small firms, let alone fintech startups that are grounded in tech, not necessarily finance or securities regulation. On that front, the fintech community has been seeking support from the regulators. In a report published earlier this year by the Vancouver-based Digital Finance Institute and Toronto-based McCarthy Tétrault LLP, the fintech industry called for Canadian policy-makers to consider setting up a regulatory sandbox to help nurture the domestic fintech industry.

That’s also part of the task for OSC LaunchPad, which will entertain ways to allow fintechs to experiment within the existing regulatory environment. Eventually, the OSC LaunchPad’s work on this new frontier should filter back to the traditional brokerage industry. So, once the OSC gets comfortable with a new way of meeting regulatory obligations, Chaukos suggests, this newfound flexibility would be available to any firm that can take advantage of it.

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