1What is the idea?
A common theme that emerged during the roundtables was that Canada’s “one-size-fits-all” approach to financial regulations works reasonably well for large financial companies, but unnecessarily inhibits the creation of innovative fintech companies. We believe Canada needs to create safe spaces for businesses to test financial innovations without incurring regulatory consequences that are inappropriate for the scale at which those companies are operating.
Recommendation: The Office of the Superintendent of Financial Institutions (OSFI) should spearhead an initiative to create and administer the financial regulatory sandbox where eligible small and emerging companies can operate in a well-defined space and for a limited duration while offering financial products and services to Canadian consumers.
This financial regulatory sandbox would be similar to the regulatory sandboxes developed by the Financial Conduct Authority (FCA) in the United Kingdom,46 the Australian government and the Monetary Authority of Singapore (MAS).47 These financial regulatory sandboxes allow businesses to test their ideas and reduce the cost of getting innovative ideas to market, yet ensure that consumers are still protected. The sandbox would encourage and support the design and delivery of new financial products and services that benefit consumers and businesses.48
The following criteria for choosing participating projects for the sandbox are developed from the frameworks developed by both the FCA49 and MAS50:
- Is the new solution novel or significantly different from existing offerings?
- Does the innovation offer an identifiable benefit to customers?
- Does the business have a genuine need for testing within the sandbox framework?
- Has the business invested appropriate resources in developing the new solutions, understanding the applicable regulations and mitigating the risks?
- Does the business have the intention and ability to deploy the solution in Canada on a broader scale?
2Who will be responsible for administering the idea?
Because of Canada’s complicated financial regulatory structure, federal and provincial regulators will have to work together to create and administer the financial regulatory sandbox.
3What mechanisms for accountability or measurement can be put in place for the idea?
The projects will be monitored throughout their time in the financial sandbox. While specific regulatory requirements will be relaxed in the financial sandbox, the regulators will work with innovators to ensure that appropriate safeguards are built into their new products and services before these reach a mass market. Firms participating in the sandbox will have to report on agreed milestones, findings and risk management.
4What failures is the idea trying to solve?
Regulatory Failure: Typical financial regulations are designed, in part, to limit systemic risk. However, these regulations can also limit innovation. Thus, the overarching goal of the financial regulatory sandbox will be to ensure that regulations intended to protect Canadians from massive failures in the financial industry are not applied to smaller companies in a way that will needlessly stifle innovation.
Inequality of Opportunity: The financial regulatory sandbox will increase the economic inclusion of low-income households and under-serviced communities in Canada by providing them with financial products and services that the big banks may not consider valuable enough to create.
Market Power: Competition will be increased in a sector that is currently dominated by a few large players.
5What are the potential benefits of the idea and what are the costs?
Benefits: Fintech focuses on creating technological innovation to make financial markets and systems more efficient and consumer focused. By reducing barriers, companies can create financial innovations that are smaller and can benefit communities, such as First Nations, the working poor and new Canadians, who often lack access to affordable financial tools.
Costs and Risks: There is an increased potential for fraud as well as failure of new products and services. Also, there is the potential risk, identified at the roundtables, that the financial regulatory sandbox will create a wall for firm growth. Firms may limit their growth so they can continue to operate without regulations, or potential funders may be reluctant to invest in companies if they are uncertain those companies will be able to exit the sandbox. Or as one roundtable participant described it, “We need to ensure the sandbox does not create walls to growth.”
6Will the idea increase economic inclusion and/or enhance autonomy? If so, how?
Economic Inclusion: By creating sandboxes and giving businesses a safe space to test innovative ideas without incurring all of the regulatory consequences, we can ensure that regulations are not stopping companies from taking advantage of economic opportunities because they lack the resources to meet regulatory requirements designed for large financial firms. The reduced set of requirements benefits small businesses that do not have the resources to navigate the financial regulatory environment. Furthermore, we expect many fintech start-ups will focus on providing enhanced access to lower-cost services, which disproportionately benefits Canadians of limited means.
Autonomy: Financial start-ups that make it easier for low-income individuals to obtain capital give them more options to start businesses, invest in skills training and fully participate in a modern economy.
46 Financial Conduct Authority, Regulatory sandbox (2015).
47 Monetary Authority of Singapore, MAS Proposes a “Regulatory Sandbox” for FinTech Experiments (2016).
48 Government of Australia, Backing Australian FinTech (2016).
49 Financial Conduct Authority, Regulatory sandbox (2015).
50 Monetary Authority of Singapore, MAS Proposes a “Regulatory Sandbox” for FinTech Experiments (2016).