Feds to consider expanded services from banks, fintechs

The Department of Finance Canada has committed to reviewing banking legislation to make it easier for both banks and financial technology (fintech) firms to offer clients expanded technology services while maintaining consumer protections and the prohibition against banks engaging in commercial activities unrelated to financial services.

“Clarifying the fintech business powers of financial institutions and removing obstacles to collaboration between fintechs and financial institutions can help to accelerate innovation, potentially making the sector more accessible and affordable to Canadians,” Finance Canada indicated in its second consultation paper released last week as part of its review of the federal financial services sector framework.

The review is part of the updating, which occurs every five years, of the Bank Act, the Insurance Companies Act, and the other statutes that govern federal financial services institutions. The sunset date on the current legislation is March 2019. The first consultation paper was published last year, and the deadline for comments on this second and final consultation paper is Sept. 29.

In the near term, Finance Canada will review ways it might:

> Update the rules around fintech activities banks are allowed to do. For example, current statutes use terms such as “portal” or “platform” to describe additional information processing activities a bank may do in-house with approval. These terms may be difficult to apply to emerging business models, Finance Canada says.

> help banks and fintech to colloborate in order to encourage the “cross-pollination” of ideas, and to foster growth and innovation. Finance is asking for comments on whether to provide banks with additional flexibility to make non-controlling investments in fintechs and the corresponding authority to make referrals, subject to consumer protection, prudential, and commercial activities limitation.

> Streamline the “entry and exit framework” for fintechs. This refers to the process by which a fintech firm can enter the financial services sector to serve an underserved market, or exit the sector if business plans change. Finance Canada is considering refinements to the current framework, including allowing the Office of the Superintendent of Financial Institutions (OSFI) to extend the period to issue an order to commence and carry on a business in certain circumstances.

Finance Canada said it would also consider ways to help fintechs, which are often smaller firms with fewer resources, understand and navigate the financial services sector framework. Finance Canada would co-ordinate with provincial and territorial authorities to further this goal.

Finally, Finance Canada indicated it would consider the merits of “open banking,” a framework under which consumers have the right to share their own banking information with other financial services providers.

Stakeholders, including fintechs, have told the government that open banking is key to encouraging innovation. The government would look at how other jurisdictions are implementing open banking and the potential benefits and risks for Canadians.

In addition to ways to help the fintech sector, the second consultation paper looked at improving consumer protection, including directing the Financial Consumer Agency of Canada to review the sales practices of banks “to assess whether sales targets and incentives are contributing to poor outcomes for consumers,” and to examine best practices in financial consumer protection in Canada.

At the same time, OSFI will be reviewing retail sales practices at domestic systemically important banks — the Big Six firms — with focus on “risk culture, the governance of sales practices and how banks manage the potential reputational risk inherent in sales activities.”

Finance Canada is considering providing federally regulated life insurers with additional investment powers in infrastructure to help the firms better match assets and liabilities and more actively participate in the financing of infrastructure as part of its goal of modernizing the financial framework.

“In adapting to a low-yield environment, life and health insurers are increasingly looking to alternative investments such as infrastructure,” Finance Canada says.

Finance Canada is looking at ways to provide these greater powers while still protecting policyholders and maintaining limitations on commercial investments.

Finance Canada is also considering whether to maintain or repeal the Cooperative Credit Associations Act, as no active institution is currently subject to it. In January, Concentra Financial Services Association, the sole retail institution remaining operating under the Act, restructured as a bank.

Read: Feds to review whether credit unions can use banking terms

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