Regulating the Fintech revolution

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The Lawyers Weekly | By Étienne Brassard and Guillaume Synnott | Sep 30, 2016

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The integration of the Internet and mobile devices into the consumer experience has radically changed the way goods and services are provided around the world. This digital transformation has now also emerged as a game-changer in the way that traditional day-to-day financial services are delivered, and the financial industry now has the opportunity, by using technology, to create new, personalized and cheaper digital solutions in the provision of financial services.

Financial technology, commonly referred to as “Fintech,” is a fast-paced, diverse industry encompassing a wide array of financial services. In addition to the now well-known crowdfunding, the industry also includes the development of new technological solutions that facilitate payments, billing and money transfers, automated investment advisers, known as robo-advisers, peer-to-peer lending by which online services match lenders directly with borrowers, insurance technology, known as Insurtech, which uses big data to provide extremely targeted and personalized insurance solutions, and regulation technology, known as Regtech, which provides technological regulatory compliance management solutions.

Faced with this new market reality, most traditional financial institutions have announced initiatives to foster internal technological innovations. The Fintech revolution is an opportunity for the financial industry to test new markets. For example, the National Bank of Canada recently announced that its American subsidiary, Credigy, would buy assets worth US$300 million from Lending Club, a leading peer-to-peer lending Fintech startup. CIBC and Scotiabank recently entered into a partnership with Montreal-based Thinking Capital, an online provider of loans to SMEs, by extending its credit facility to $125 million.

Millennials constitute a growing part of the world’s customer demographics, changing economical behaviours and expectations towards traditional financial institutions. This new generation of consumers demands accessibility, convenience, speed and above all, a highly personalized customer experience. In fact, according to PricewaterhouseCoopers’ 2016 Global FinTech Report, 75 per cent of financial institutions estimate that Fintech’s most significant impact will consist of an increased focus on the consumer. Financial institutions also expect to benefit from growing “big data” resources, as they hope to harness this analytical tool to develop customer-oriented products and better tailor financial advice to their clientele. Thus, as stated in PwC’s Global FinTech Report, 60 per cent of financial institutions claim to have put Fintech at the core of their business strategy, especially among senior management. However, regulatory uncertainty and over-regulation is still considered to be a threat to the growth of financial technology innovation by 86 per cent of financial services providers.

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In Canada, Fintech is not yet supervised by a single authority. Its multidisciplinary nature creates a challenge for regulators, as there is a need to protect investors and consumers, while allowing for development and innovation. As regulatory schemes often target the service provider rather than the services themselves, larger, more traditional financial institutions might have to comply with numerous regulations, whereas Fintech startups might be able to enter the market subject to fewer constraints. However, existing legislation applicable to financial service providers is relevant to the Fintech industry. The protection of personal information is governed by the federal Personal Information Protection and Electronic Documents Act, federal anti-spam legislation and their provincial counterparts. The federal Proceeds of Crime (Money Laundering) and Terrorist Financing Act provides for an anti-money laundering system. Securities and consumer protection laws are not uniform across Canada as each province makes its own laws on these matters, consistent with Canada’s constitutional regime. Currently, compliance with this complex legislative framework can constitute a hurdle, as the process can be confusing, expensive and time consuming.

Different initiatives have been put in place by stakeholders within the financial market as they hope to better understand Fintech’s potential and to promote its development. The Bank of Canada, the Canadian Securities Administrators and certain provincial securities commissions have acknowledged the need to analyze the issues created by technological innovation in order to assess their impact on financial regulations.

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country. NCFA Canada provides education, research, leadership, support and networking opportunities to over 1300+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada. Learn more at www.ncfacanada.org.

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