Canada’s fledgling financial technology (fintech) industry needs opportunities to experiment without too much regulatory intervention, according to a report released jointly by the Vancouver-based Digital Finance Institute (DFI) and nationwide law firm McCarthy Tétrault LLP (MT). That report recommends adopting a concept pioneered in the U.K. that allows such experimentation.
The DFI/MT report, which examines the state of fintech in Canada and around the world, suggests that fintech is a large, untapped opportunity. Despite the proliferation of robo-advisors, which have found a way to fit into the existing, highly regulated financial services sector, regulation often is a fundamental barrier to innovation.
High costs, from capital requirements to stringent conduct standards, create compliance burdens that can make entering the traditional financial services sector difficult – and, in cases in which the product or the business model are completely unproven, those costs can be prohibitive.
A solution that financial services regulators in other parts of the world are embracing is the idea of a “regulatory sandbox” that gives companies the freedom to experiment by allowing them to launch novel products and services without subjecting those companies to the full slate of existing regulatory requirements.
For example, the U.K.’s Financial Conduct Authority launched its sandbox earlier this year, and the idea has been adopted in Australia, Singapore and, most recently, Hong Kong. Iran has its own version of this approach as well, the report states, even if that country doesn’t use the term “sandbox”; Iran’s startups are subject to less stringent rules and may get relief in areas such as taxes and military service requirements.
The DFI/MT report recommends that policy-makers in Canada consider following suit, noting: “There is strong evidence to suggest that regulatory sandboxes were critical in the development of leading fintech ecosystems, such as [those in] the U.K. and Singapore.”
Moreover, there’s strong support for the sandbox concept within the existing fintech community in Canada, the DFI/MT report states.
In fact, there are several arguments in favour of the idea. A regulatory sandbox would reduce regulatory uncertainty for firms that are developing innovations and allow companies to experiment within parameters designed to limit risk to consumers and the financial system overall. The expectation is that if innovations prove successful in the sandbox, they will make their way to market eventually.
“As fintech becomes larger and better financed, it is released into the full regulatory system and then required to comply fully with financial regulation,” the DFI/MT report notes. “Financial [services] institutions may be better able to explore partnerships and innovative solutions, thereby increasing the ability to innovate.”
Bringing the sandbox concept to Canada is an idea that is getting more attention. Earlier this year, Quebec’s Autorité des marchés financiers (AMF) established an internal fintech working group charged with analyzing the state of tech-driven innovation in the financial services sector and identifying any emerging regulatory issues. And in mid-September, the AMF announced the creation of a new advisory committee that will work closely with the regulator’s internal group, providing insight and perspective from within the sector.
Moreover, the federal Competition Bureau launched a study into the fintech industry earlier this year that aims to assess the competitive environment for emerging, high-tech innovation in the financial services sector.
According to the Competition Bureau’s terms of reference, the study was provoked by a concern that Canada may be “lagging other countries” in the adoption of fintech – which is significant, given the importance of the financial services sector in Canada, both to the economy and in the day-to-day lives of Canadians.
One of the ultimate goals of the Competition Bureau’s study is to provide the bureau with the ability to advise regulators in the financial services sector and other authorities “on how to ensure that regulation does not unnecessarily impede innovation and competition in the sector.”
The bureau’s study may provide some impetus for increased regulatory experimentation. The results of that research and any recommendations are scheduled to be published next spring.
In the meantime, regulatory change isn’t the only measure recommended in the DFI/MT report. It also suggests that there’s a need for a national strategy to support the fintech industry in Canada, including funding workspace in accelerators for fintechs; investing in the industry, by financing companies and by supporting the development of human capital; and by championing a higher profile for Canada’s fintech.
“As a supplement to the current funding, programs and other resources for technology innovation, tailored support from Canadian governments would provide a boost for Canadian fintech,” the DFI/MT report states. “A national initiative in support for innovation in fintech and ancillary fintech, similar to that undertaken in the U.K. and Australia, will also be an important component of Canada’s fintech success.”
For fintech firms, the DFI/MT report recommends that they do their part by participating in industry events and building relationships with international players that will enable domestic companies to scale up in the future and may facilitate access to international markets.
The DFI/MT report also suggests that private-sector players can help the cause by mentoring and networking with fintech entrepreneurs, and through partnerships with fintech firms. Academia also has a role to play by engaging in research and development that will help support the fintech industry.
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