Canadians have been using their smartphones to do their banking for some time now, but the convenience of being online has opened up a whole new world of possibilities for financial services products. Online companies are leading the way by encouraging Canadians to borrow, invest and get financial advice with the touch of a screen wherever and whenever they want. These relative newcomers in financial technologies (FinTech) are not just intriguing consumers; they are challenging established financial institutions and regulators while attracting investors.
On February 21, 2017, the Competition Bureau* will host a one‑day workshop to examine the intersection of competition, innovation, and regulation in Canada’s financial services sector.
The workshop will focus on the competitive forces at play and possible impediments to the growth of FinTech in Canada. It will also serve as a forum for market players, regulatory authorities, policy makers, and other stakeholders to engage directly in a discussion about how best to ensure that our FinTech sector delivers competitive benefits balanced with necessary consumer protections.
This primer positions the workshop in the context of the Bureau’s FinTech market study, provides background information on the study, summarizes themes that have been identified to date, and highlights key questions that will help guide the workshop discussion.
*The Competition Bureau, as an independent law enforcement agency, ensures that Canadian businesses and consumers prosper in a competitive and innovative marketplace.
The Bureau enforces and administers the Competition Act, the Consumer Packaging and Labelling Act (except as it relates to food), the Textile Labelling Act and the Precious Metals Marking Act. As part of its mandate, the Bureau participates in a wide range of activities to promote and advocate the benefits of a competitive marketplace. More competition generally leads to lower prices for consumers, as well as increased choice and innovation.
Among the tools that the Bureau uses to advocate for competition are market studies. Market studies allow the Bureau to study an industry in depth, and understand the competitive dynamics in that industry. Market studies are a useful tool for diverse stakeholders, including policy makers, industry participants, and consumers.
Objective and scope of study
The financial services sector is an important pillar of the Canadian economy. While financial institutions in Canada have introduced innovative products and services over the past two decades, FinTech affords the opportunity to further increase competition and spur even greater innovation for the benefit of Canadian consumers and businesses. To realize the competitive benefits that FinTech innovation can offer, it is important that the Canadian financial sector policy and regulatory frameworks keep pace.
The Bureau’s FinTech market study is examining Canada’s competitive landscape for new technology‑led innovation and emerging services in the Canadian financial services sector. The main goal of the study is to provide the Bureau with the necessary market information so that it can provide advice to regulators and the relevant authorities on how best to ensure that regulation does not unnecessarily impede competition and innovation. The Bureau will use what it learns through the study to identify regulations where reform may be necessary to promote a competitive and innovative marketplace.
The study focuses on technology‑led innovations that affect the way that Canadian consumers and small and medium businesses commonly seek out and use financial products and services in the following three categories:
Lending: peer‑to‑peer and small/medium business lending, including crowdfunding
Payments and payment systems: the use of technology to pay for goods and services (e‑wallets and mobile wallets, for example) and the systems that enable payments between institutions (clearing and settlement)
Financial advice: online‑based financial advisory services ("robo‑advisors" and online investment dealing, for example)
The following five themes, which we intend to explore with workshop participants, have emerged.
1. Regulation is necessary
Regulation helps create certainty for investors, consumers and new entrants alike. It is viewed as a way to build credibility, trust and overcome reputational barriers in this industry.
Regulation seeks to promote important public policy goals, such as the protection of personal information and the prevention of financial crime, and to respond to unacceptable levels of risk exposure for consumers and market participants or potential market failures.
2. Regulations are complex, fragmented and voluminous
The regulatory framework for financial services is fragmented, complex, and voluminous. Jurisdiction for regulating financial services can occur at the provincial or federal level, or both. With the myriad of potentially applicable regulations relating to areas such as privacy, securities, consumer protection, and proceeds of crime — and with many different regulators overseeing these frameworks — it can be a confusing and difficult landscape for a start‑up.
The result is that some FinTech businesses are not fully aware of which regulations apply to their business. Small and medium firms may also lack the resources to retain the legal or regulatory experts to advise them on how to navigate the regulatory landscape, and may choose not to enter the market or to compete at all.
3. Regulations need to be dynamic
Some regulations are not technology neutral and this may cause potential impediments to the use of new technologies or the entry of new business models. When regulations lag innovation, new entrants may be disadvantaged if they do not fall within the institutional scope of existing regulation or if they offer a product or service not contemplated or defined by the regulation. Incumbents can also be disadvantaged in competing with FinTech businesses where regulation restrains their ability to participate in the "unregulated" areas.
Regulations that are technology neutral, principles‑based and function‑based could help reduce some of these challenges.
4. Some barriers are non‑regulatory, or are an indirect result of regulation
Some incumbent financial institutions have been in business for more than a century, have performed well, and have established significant customer trust. Most FinTech businesses, by contrast, are new, and earning customers’ trust is not easily done.
Many Canadians still appreciate the convenience of a branch network, and the "one‑stop shop" that many incumbent financial institutions provide. This can make it difficult to encourage customers to fully explore their options. In some instances, where customers are willing to switch institutions and/or "take a chance" on a FinTech, the amount of time needed to research, find and switch to a FinTech may discourage customers from seeking out competitive alternatives.
Investors may also be hesitant to provide necessary early stage capital to FinTech businesses, preferring instead to wait for regulatory certainty before investing in a start‑up. Regulatory certainty could therefore help FinTech businesses attract investments and bring innovative products to market more quickly.
5. Regulators at all levels are actively engaged
Regulatory authorities are paying attention to changes in the FinTech landscape and a number have taken steps to update their frameworks to support innovation while managing the associated risks.
For example, the Ontario Securities Commission’s LaunchPad engages with FinTech businesses, provides the opportunity for support in navigating the regulatory requirements to operate in the industry, and strives to keep regulation in step with digital innovation. Similarly, several securities regulators have introduced crowdfunding regulations to enable these types of investments to be accessed by retail investors.
At a federal level, the Department of Finance Canada recently completed consultations on its banking regulation review, where they asked important questions about FinTech, innovation, and competition.
Globally, a number of authorities, including the United Kingdom’s Financial Conduct Authority and the Monetary Authority of Singapore, are moving toward a regulatory approach that allows FinTech businesses to enter the market in a limited way for the purpose of testing their products and services in the marketplace*.
* This approach to regulation, commonly referred to as a "sandbox", is a way for FinTech businesses to engage in regulated activity before being given full authorisation to do so. Participation in a regulatory sandbox is typically short‑term, and businesses will be expected to comply with regulations fully when they exit the sandbox. Additionally, the sandbox approach provides the regulator with an opportunity to understand the FinTech business model, and adapt regulations or provide a waiver, as appropriate.
The workshop will be an important opportunity for the Bureau to engage with FinTech stakeholders and to deepen our understanding of this evolving marketplace.
Guided by the issues and themes observed so far, the Bureau has identified key questions to help guide the workshop discussions:
What is the impact of technology‑led innovation on the competitive landscape?
- Can we expect consolidation among FinTech businesses, or among incumbent institutions and FinTech businesses? What will be the impact of partnerships between FinTech entrants and incumbent institutions?
- Can incumbent institutions keep up with FinTech innovation?
What are the barriers to entry, expansion, or adoption in this sector?
- Are FinTech businesses finding the answers that they are seeking from regulators?
- Can FinTech businesses access the basic services that they need from incumbent institutions to compete in the marketplace?
- Does the "excitement" around FinTech translate into consumers adopting the products and services? What is stopping them?
What are the key risks or market failures that require regulation in this sector?
- What are the greatest risks for:
- financial institutions;
- FinTech businesses; and
- How can these risks be addressed while ensuring that the benefits of competition are not lost?
What should be considered when developing or amending regulations to ensure that competition is not unnecessarily restricted?
- Are there specific regulations that create impediments to FinTech entry?
- Is a different approach to regulation needed to keep pace with innovation?
What lessons have we learned from other jurisdictions’ approach to FinTech innovation?
The Bureau looks forward to hearing your thoughts on these and other FinTech‑related issues at the workshop on February 21st.
Following the workshop, the Bureau will publish a summary document that outlines key takeaways from the panel discussions. In late 2017, the Bureau intends to publish its full market study report.