Rise of fintech includes many future risks, FSB says

Maureen Jensen outlined the Ontario Securities Commission’s (OSC) plan to embrace financial technology (fintech), revealed some early results from its groundbreaking whistleblower program and made the case for fundamental reform to the client/financial advisor relationship in her first major speech as head of the OSC at the Toronto Region Board of Trade on Tuesday.

Jensen, who was appointed chairwoman and CEO of the OSC earlier this year, outlined her vision for the future of regulatory policy. In particular, she signalled that the regulator is planning to join the global trend toward regulatory experimentation with a program to help fintechs get off the ground.

Specifically, the OSC will launch Canada’s first innovation hub at a securities regulator, known as OSC LaunchPad, Jensen announced.

“This pilot project that will be unveiled in a few weeks with a team dedicated to working directly with fintech companies to help them navigate our regulatory framework,” she said, acknowledging that emerging fintech business models and platforms “don’t fit neatly into our regulatory framework.”

The OSC has already worked with 40 firms that are developing innovative businesses, including online advising, peer-to-peer lending, crowdfunding platforms and angel investor organizations, Jensen said.

“With LaunchPad, we will work to tailor regulation and oversight to their unique business models, as long as investor protections are in place,” she said, adding that this initiative will also inform its registration and compliance expectations for all firms.

But it’s not just fintechs that may be getting a break from regulators; Jensen also announced that the OSC, along with the Canadian Securities Administrators (CSA), are “looking to streamline disclosure requirements, eliminate duplication and improve the public offering process.”

Jensen noted that the CSA is planning to publish a staff notice in early 2017 describing its efforts in this area.

On the enforcement front, Jensen also revealed that the OSC’s paid whistleblower program has already received more than 30 tips from prospective whistleblowers. The initiative, which was officially launched in the summer, promises to pay up to $5 million for information that leads to major enforcement action.

“I am encouraged by these early results,” Jensen said. “New enforcement tools like this will help us resolve cases more quickly and effectively.”

However, gender diversity is an area in which Jensen is less pleased. She indicated that the OSC will release the results of its latest review of issuer disclosure on Wednesday. This marks the first time these results have been released since the regulator adopted new “comply or explain” requirements on gender in corporate boardrooms and executive suites.

Although there has been some progress, the review revealed “some results that are confounding,” Jensen said. “This year, the OSC looked at board vacancies and how they are being filled. The results here were disappointing,” as women filled just 15% of board vacancies during the past year. “Without an improvement here, we will never reach 30% female board representation.”

Finally, Jensen addressed the CSA’s efforts to improve the regulation of client/advisor relationships, including the series of reform the CSA proposed earlier this year, including see the introduction of a best interest standard, and forthcoming proposals to ban embedded mutual fund fees.

“The research is telling us that the current models are not serving investors in the way they deserve. I acknowledge that the proposals represent significant changes to the industry. They are game-changers. But they are long overdue,” she said.

Indeed, Jensen stressed that “the status quo is not an option.” Specifically, she argued that “introducing a best interest standard is the right thing to do,” and suggested that it will ultimately benefit both investors and the industry.

On the issue of embedded mutual fund fees, Jensen said that “the current compensation model consists of fees set by the fund manager to incent sales. This does not put the investor’s interest first, and that’s a fundamental flaw that needs to be addressed.”

Jensen also stressed that disclosure alone will not be enough to address this fundamental conflict. Although banning embedded fees is one route to alleviating this conflict, Jensen also said that it is open to other options for eliminating it.

“Our motivation for both the best interest and embedded fee initiatives is simple: doing the right thing for investors,” she said. “That said, we are challenging long-held business models. Working through the issues will not be easy.”

Indeed, she stressed that “advisors must be compensated for the advice they give and the services they provide — it’s the how that needs to be explored.”

In the meantime, Jensen also praised the investment industry for adopting changes to enhance transparency and reduce conflicts in recent months, including the introduction of platform-traded funds, the growth of online advice and the use of D-series funds.

Jensen singled out Winnipeg-based Investors Group Inc. for its recent decision to scrap deferred sales charges: “This is the kind of leadership we are talking about. This change will deliver positive outcomes for their clients and they have mapped a path that also benefits their advisors. Industry is a fundamental part of getting this right, and if we continue to work together, we can arrive at solutions that will ultimately benefit investors and the Canadian marketplace.”

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