Technology, regulation and competition

Although technology increasingly is driving the financial services sector and may create powerful, new capabilities for the investment industry, regulation must stay grounded in the fundamental principles of fair and honest dealing.

From high-frequency trading to artificial intelligence-enabled marketing, fintech already has far surpassed human capabilities in several areas. As the financial services sector grows ever more dependent on tech, running up against regulation that remains grounded in the analog era is inevitable.

On the tech side of things, the natural inclination is to complain that regulation needlessly stifles innovation. But, as the Competition Bureau’s recent study into the emerging fintech market shows, regulation doesn’t pose a barrier to tech, per se. In fact, regulation is a barrier to commerce in general. And that’s a feature, not a bug.

For fintech and traditional financial services firms alike, regulation serves as sand in the gears. It slows down the sales process, constrains industry activity and creates paperwork that consumes firms’ resources. Yet, for much of the cost imposed by regulation, there’s a corresponding benefit in investor protection, market confidence and financial stability.

“Know your client” requirements and suitability rules aren’t just an obstacle for robo-advisors; they’re a hindrance to traditional firms. But those rules exist to ensure investors aren’t pushed into products that don’t meet their needs and are designed to prevent market failure and litigation.

As the bureau’s study shows, there are less defensible barriers to competition, including the slow and painful account-transfer process and the woeful financial literacy level of the average Canadian. These factors serve to entrench incumbents and deter competition, but without the corresponding public benefits that flow from sound regulation.

Regulators have to be open to novel business models, but they shouldn’t sacrifice the underlying principles of ensuring fair and honest dealing on the altar of tech-driven expediency. Technology may be able to transform how the financial services sector operates, but shouldn’t change why it exists in the first place.