Canada’s securities regulators typically aren’t known for being at the forefront of change, but many of the compliance officers (COs) and company executives surveyed for this year’s Regulators’ Report Card acknowledged regulators’ recent efforts to facilitate the introduction of new technologies in the investment industry.
For the first time, survey participants were asked to rate “the regulator’s effectiveness in facilitating or supporting industry innovation” – particularly as it relates to technology. In response, many COs and company executives gave the B.C. Securities Commission (BCSC) and the Ontario Securities Commission (OSC) the highest ratings in this new category – 7.3 and 6.9, respectively – because those regulators support fintech.
“[The BCSC and the OSC are] improving, innovating, pushing the edge,” says a CO at a national, full-service dealer in Ontario. “If there’s a certain thing moving so fast [those regulators] can’t deal [with it], they put it in a ‘sandbox’ and let those [fintech] entities evolve without having to lasso and tie them up with knee-jerk regulations.”
Specifically, the provincial securities commissions that are members of the Canadian Securities Administrators launched a joint regulatory sandbox in February 2017 that fintech startups can use to test new business models and services while getting temporary regulatory relief.
Says a CO at an investment-management firm in British Columbia: “The sandbox is a good initiative.”
The OSC was the first regulator to take action in this area when, in October 2016, it introduced the OSC LaunchPad, a fintech innovation hub and regulatory sandbox to help fintech firms navigate Ontario’s securities regulations and obtain regulatory relief.
“The [OSC] is doing a tremendous job in fostering innovation in fintech,” says a CO at an Ontario-based asset-management firm. “The OSC LaunchPad is great.”
Notably, the OSC LaunchPad has received more than 125 requests for support from several potential fintech businesses and services, including crowdfunding platforms and bitcoin investment funds, since its launch. Staff at the OSC LaunchPad, now in its second year, anticipate more activity related to cryptocurrencies and blockchain technology. In fact, the OSC has a dedicated team focused on the growth of cryptocurrencies.
Of course, not all survey participants were pleased with the direction taken by regulators regarding innovation. In fact, some COs and company executives believe that regulators are too lenient in their approach with fintech startups.
“None of the regulators should give fintech an advantage over [a company] that’s already in the marketplace,” says a chief CO (CCO) at a financial advisory firm in B.C. “[Fintech startups] shouldn’t be able to bypass [“know your client” (KYC)] rules. If [regulators] were doing that for the banks, we’d all be freaking out; but because its fintech, it’s OK?”
The self-regulatory organizations (SROs) were not immune from criticism regarding their approach to fintech. The Investment Industry Regulatory Organization of Canada (IIROC), for example, received a rating of 6.2 in the innovation category. Many COs and company executives noted that although the SRO is willing to discuss new ideas with members, it can be slow to adapt.
“[IIROC] still has a bit to learn. It doesn’t move as fast as the markets and technology, [but] at least it’s paying attention to it,” says an executive at a securities dealer in Ontario. “Is IIROC moving along at pace? Not really, but its head is not in the sand.”
IIROC, for its part, plans to pay close attention to new innovations in the financial services sector in the coming year. One of the SRO’s priorities for 2018 is to ensure that its requirements accommodate new advice and service models, which means ensuring core requirements, such as KYC and suitability, are scalable for the level and nature of advice provided and neutral in how that service is provided.
Similarly, the Mutual Fund Dealers Association of Canada (MFDA) is helping its members update their businesses’ technology. Indeed, MFDA staff meet regularly with member firms that intend to adopt new technology to improve their operations. Those improvements might entail the use of electronic signatures, as well as “onboarding” clients and storing information electronically.
“[The MFDA] recognizes that there’s more than paper-based solutions to getting this business done,” says a CCO at a mutual fund dealer in Ontario.
Despite these efforts, though, most survey participants were not convinced the MFDA is doing enough to foster and support innovation in the industry. In fact, the MFDA received the lowest rating in the innovation category (5.2) – albeit a ranking only slightly lower than the 5.3 given to the Autorité des marchés financiers.
“The [MFDA] really doesn’t seem to like innovation,” says a company executive with a full-service dealer in Ontario. “[The regulator] is cautious – and justifiably so.”