Faced with an array of looming threats — from fintech disruption to an aging advisor force — regulators must develop a high-tech, rapid response capability, says a new report from the Ontario Securities Commission’s Investor Advisory Panel (IAP).
The independent IAP published a report detailing the results of its “Horizon Project,” which represents an effort to anticipate emerging challenges and opportunities for the investment industry, investors and regulators.
Among other things, it examines the threat of Big Tech (Google, Apple, Facebook etc.) entering the retail investment business; a looming shortage of and lack of diversity among advisors; increasing technological complexity; and slow, reactive regulators.
“Financial service regulation is expected to be deliberative, careful and therefore slow. It is not equipped to respond to rapid, disruptive change; and regulatory bodies typically are designed and operate to prevent risk, not capture opportunity,” the report said.
As a result, investors are in danger of being blindsided by novel risks, while innovation could be stifled.
Ultimately, the IAP warns that financial regulators are at risk of “Uberization” — consumers gravitating to unregulated, low-cost alternatives over a staid, highly regulated industry.
“Uber’s ability to use its technology advantage to achieve high customer adoption and loyalty allowed it to bully policy-makers and achieve outcomes compatible with its business model while skirting most labour and safety standards,” it said. “As a result, the regulatory regime found itself bypassed and rendered largely irrelevant to what was actually happening on the ground.”
The report suggests that Canadian financial regulators are at risk of a similar outcome, given their slow-moving approach to reform and tendency to bend to the demands of entrenched industry interests.
“In our view, the only way Canadian financial regulation can avoid this dystopian fate is by regulatory agencies coming together, formally or informally, to develop rapid response capability for dealing with disruptive change,” it said.
To that end, it calls for a holistic approach to reinventing regulation that covers all financial sectors and jurisdictions, with a particular emphasis on developing the technical expertise needed to properly oversee the design and structure of emerging fintech systems and products.
“No doubt, this will be expensive, but it is necessary,” the report said.
“We believe that the OSC, as a key financial regulator, should be in the forefront of efforts to overcome the structural impediments, secure the funding and rally the political resolve needed to bring about comprehensive, system-wide rapid-reaction capability in response to disruptive change,” it said.
In the meantime, the IAP called on the OSC to unilaterally address these same challenges by speeding up its own policy-making; tackling existing issues such as “greenwashing,” data integrity and inherent bias in financial products and services; and taking steps to ensure access to quality advice.
“We know the OSC’s resources are stretched and its ‘to do’ list already is long. We are not eager to add yet more problematic items to the list; but we believe these challenges are going to turn up anyway, quite soon, and the greatest harm will come if Canada’s regulatory system is unprepared when they do,” it said.