Toronto is punching well above its weight as an attractive destination for fintech activity, but Canada’s fragmented regulatory landscape complicates efforts to scale up innovation beyond the seed stage, according to a new report from the Toronto Financial Services Alliance (TFSA) published on Monday.
As a fintech hub, Canada’s largest city ticks off many of the conditions that provide fertile ground for innovation to take hold, according to the report, which Accenture LLP prepared on behalf of the TFSA.
Specifically, the Toronto-Kitchener-Waterloo corridor has access to a home-grown talent pool, a cluster of academic institutions working in the field and a concentration of financial services institutions that call Toronto home. (In a report from TFSA earlier this year, Toronto placed fifth among the world’s top fintech centres.)
Read: Toronto is on the of the world’s top fintech centres, report finds
Still, Toronto isn’t quite in the same league as Silicon Valley or New York in luring foreign capital to usher start-ups into the next level of financing, says Robert Vokes, managing director of financial services for Accenture in Canada, who spoke at a fintech symposium in Toronto on Monday organized by the Toronto Region Board of Trade.
Globally, the Toronto region commands a mere 1.5% in terms of fintech deals by value while Silicon Valley, New York and London each have a share of about 22%.
The report found that some 140 local fintech firms have been able to raise $500 million in equity financings in the past five years. In addition, the Toronto region has seen an explosion of growth in the fintech space, with more than half of those companies having been founded within this time.
However, securing funding for the next stage to accelerate development and build a global profile remains a hurdle for much of the nascent fintech industry, the report notes.
“The hard reality is that the Toronto region, at best, ranks among the middle of the pack in a race that is heating up,” Vokes says. “Three regions — Silicon Valley, New York and London — have a large lead. But the gap can be closed.”
For that to happen, he adds, there needs to be a more supportive tax policy and a cohesive, “policy-driven fintech strategy” across Canada that enables companies to meet their regulatory obligations. Currently, navigating that landscape can be prohibitively costly and time-consuming, he says.
Fintech startups have a willing partner in regulators, who see for themselves, a “dual mandate” to modernize the system in response to new market entrants while upholding investor protections.
The Ontario Securities Commission (OSC), for example, introduced LaunchPad in October 2016, its own “regulatory sandbox,” in an effort to give fintech companies space to experiment and bring ideas to market more quickly. Similarly, the Canadian Securities Administrators (CSA) followed suit with its own sandbox to test products and services.
Those efforts mirror the diverging, and at times, overlapping approach to regulating the industry and its developments.
“We’re all open to the idea [of embracing fintech]. We’re all creating these regulatory sandboxes,” Vokes says. “Now, I’ve got a proliferation of playgrounds, but there’s still no clarity about which one I want to play in and why.”
Although these regulatory sandboxes are still in their early stages, they may run into limits in propelling start-ups to maturity.
“What’s difficult about these programs is that they don’t prepare a fintech firm for what happens after the sandbox runs out,” says David Peters, managing director of Promontory Financial Group, who spoke at a separate panel, which discussed how regulators are responding to the ascendance of fintech.
Much work needs to be done on the part of regulators to help these companies “understand what’s going to be expected of them in the long run,” particularly as many “don’t come from a heavily regulated environment,” Peters adds.
Marsha Gerhart, vice president of member regulation with the Investment Industry Regulatory Organization of Canada (IIROC), also weighed in during the panel discussion on the role that regulators can play in addressing the challenges fintech start-ups face.
IIROC, for its part, has spent time putting out guidance for fintech companies to use as a basis for informing the way they design their operations, Gerhart says.
“There’s a perception that we’re not flexible, but one of the challenges we face is people come to us after the fact,” she says. “If we can come to a meeting of the minds on that, then industry participants will hopefully see a more flexible regulator, and we’ll be prepared to respond more quickly.”
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