Lessons for Canada from Global Leaders in Regulation

Regulation | Dec 9, 2024

Image: Role of Regulation in Supporting Scaling Up (Regulatory Horizons Council)

Closing Canada's Gap:  Smart Regulatory Lessons that Drive Innovation

Regulation isn’t just about control, it can also be a catalyst for innovation and growth.  A regulatory innovation mandate and well designed regulatory approach and rules can provide businesses with confidence to innovate while protecting consumers.  This article looks at the lessons in a report by the UK's Regulatory Horizons Council called "Closing the Gap:  Getting From Principles to Practices for Innovation Friendly Regulation" (96 page PDF, Jun 2022), and a report by the Institute of Regulation, "The Role of Regulation in Supporting Scaling-Up" (47 page PDF, Jan 2024), and highlights Canada's open banking progress and actionable steps to help Canada close its innovation gap.

Eight Principles of an Innovation Friendly Regulatory Culture

The UK has been recognized as a high/gold standard of fintech regulation for many years.  In fact, they've held that position for as long as we've been running NCFA Canada's association.

See:  Overcoming Barriers to Growth in Financial Regulation

Here are 8 recommendations for effective and innovation friendly regulatory culture.

1.  Proportional Regulation

Regulations should protect people and markets without shutting down opportunities. If the rules are too strict, businesses can’t innovate and is stifled. Proportional regulation can give businesses room to grow.  Canada’s careful approach prioritizes consumer safety but often leaves companies without the flexibility they need to grow and adapt.

2.  Public Engagement

People trust regulations when they feel included in the process and when the benefits and risks are clearly explained. Canada has done well involving industry experts in shaping open banking policies but most Canadians still don’t fully understand what open banking is or why it matters.

3.  Support for Commercial Viability

New and emerging technologies like open banking need financial support/incentives, such as tax breaks or grants, and fewer barriers to entering the market.  Right now, Canada doesn’t do enough to provide these resources, leaving fintech companies struggling to compete.

See:  Balancing Fintech Innovation and Regulation

4.  Experimentation via Sandboxes

Sandboxes are controlled spaces where companies can test innovative ideas under relaxed rules to help spark innovation without exposing people or the economy to unnecessary risks. Canada has started using sandboxes which is good news but they could be better tailored for open banking and other industries.

5.  Timely Regulation

Speed matters when it comes to innovation. Delays give other countries the opportunity to forge ahead and usually they do. With Canada aiming to fully implement open banking by 2025-2026, it risks falling further behind leaders like the UK and Australia who have already embraced it many years ago.

6.  Openness and Collaboration

Teaming up across key sectors and geographical borders can improve efficiencies and help countries stay competitive. Canada has made progress in this area but it could do more to align with international standards and collaborate on a global scale.

7.  Staying Flexible and Adaptive (Agile)

In fast evolving sectors like artificial intelligence and financial technology, regulations need to be nimble to keep pace with new developments.  Unfortunately, Canada’s regulatory processes often fail to keep up with tech advancements, making it harder for companies to innovate, grow, and compete and scale in cutting-edge industries.

8.  Creating Consistency Across Canada

When federal and provincial regulations don’t align, businesses face confusion and extra hurdles. Streamlining these rules across the country would make it easier for companies to understand and comply.  Canada’s fragmented regulatory environment is a barrier to progress.

See:  Reversing Canada’s Digital Economy Productivity Decline

For example, provinces like Quebec have unique privacy rules (i.e., Bill 64), which may not align with federal privacy legislation like the Personal Information Protection and Electronic Documents Act (PIPEDA). For open banking this could mean there are different standards for data sharing practices across the country.

Scoring Canada’s Open Banking Progress

We asked ChatGPT for some help in ranking Canada's Open Banking Progress across the 8 principles of an innovation friendly regulatory culture to get some perspective on how Canada is measuring up against these principles:

Total Score: 51/90 (we would label this as slow progress)

While it may seem obvious to open banking stakeholders who have been along for Canada's open banking journey.  To date it's been 6 years since the government of Canada announced their intent to implement 'consumer-driven banking' and yet fintechs, investors, innovation stakeholders have seen very slow progress compared to other jurisdictions.

Image: Freepik/rawpixel.com

Do Regulators Have Similar Mandates?

In effort to reveal some of the differences that may exist between the capacity and support that regulators afford for new tech innovations, here's some interesting research conducted on jurisdictional comparisons of competition and growth mandates in Canada, the U.S., UK, and a number of other countries.

So what might be the difference when it comes to supporting innovation between Canadian regulators and the UK?

The Canadian Securities Administrators (CSA) supports financial innovation through the CSA Financial Innovation Hub (FinHub) and its Regulatory Sandbox.  While these initiatives show some commitment to innovation, they are not part of a formal mandate to proactively prioritize or drive innovation across regulatory frameworks.  Provincial regulators like the Ontario Securities Commission (OSC) recently expanded their mandate to promote competition and capital formation which definitely can help certain sectors and players.

The FCA differentiates itself with its proactive and competition-focused mandate and by its globally supported and recognized innovation programs.  While Canadian regulators are making strides in nurturing competition and capital formation, it lacks the centralized structure, agility, and proactive focus on innovation that make the FCA a global leader. Addressing these differences with a unified innovation mandate and improved coordination could seriously elevate Canada’s regulatory effectiveness and competitiveness.

Closing the Innovation Gap

Canada doesn’t need to reinvent the wheel.  It just needs to act with urgency (it already has purpose)!  The insights from the UK’s Regulatory Horizons Council and Australia’s Consumer Data Right framework offer a clear path forward. Canadian regulators should work to reduce the regulatory burden and align regulations across provinces and federal agencies (where applicable), and accelerate the pace of regulatory implementations. Sandboxes need to expand, public education must improve, and incentives for fintechs should be front and center.  For more insights, check out:  Innovative Approaches to Smarter Regulation

The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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