Existing systems favour the status quo of large, stable financial institutions
Canada’s financial strength and stability can also prove to be a liability when it comes to integrating disruptive tech into the system, according to University of Calgary law professor Ryan Clements.
In a recent contribution for the Financial Post, Clements said that understandably, current Canadian policies favour the status quo of large, stable financial institutions.
However, ensuring the best possible long-term prospects would entail major steps that bring about significant risk.
“Maintaining financial system stability is important, but unless Canada can increase competition in its financial services sector it runs a real risk of falling further behind in the fintech world. Keeping up will require more experimentation in regulation,” Clements wrote.
“There is undeniable interest in fostering fintech, and helpful steps have been taken, the Canadian Securities Administrators’ (CSA) fintech ‘regulatory sandbox’ being a notable example,” he added. “But our lawmakers are cautious, slow to adapt, and reluctant to experiment, and we don’t have the vibrant startup funding ecosystem the U.S. does.”
And despite the U.S. being more prone to the worst effects of regulatory fragmentation, “the U.S. has at least a slight edge in competition, which may pay off over time, given that country’s historically more aggressive approach to legislative change.”
To be fair to the current system, disruptive technologies are inherently unstable, Clements admitted.
“Fintech can expose customer data, increase systemic risk, create moral hazard in peer-to-peer lending, and drive investor herds with robo-advisers. Money laundering is also a higher risk in virtual currency,” he stated, but emphasized that “while fintech regulation is clearly needed, too much of it may restrict consumer-friendly innovation.”
Canada can look at the U.S. Office of the Comptroller of the Currency, which last year launched a “fintech national banking charter,” as an example of how to proceed.
Said charter has indicated that “the U.S. is open for business and willing to experiment with non-traditional banking to increase innovation and benefit consumers,” something that is long overdue for Canada, Clements argued.
“Canada lacks a special purpose vehicle like the OCC’s. Despite numerous government consultations, fintech-related legislative changes have been rare and slow-moving, and some proposed rules — like the CSA / IIROC framework for crypto-asset trading platforms — may increase regulatory costs rather than reduce entry barriers.”