Government Disruption of Fintech

The Canadian government is proposing an oversight framework that could result in significant disruption to the innovation taking place in Canadian financial technology. The public is invited to comment on the proposed “New Retail Payments Oversight Framework” by October 6, 2017.

There has been a sea change in the way Canadians pay for goods and services. The government cites statistics showing that the number of cash and cheque transactions has fallen precipitously by 30 and 35% respectively between 2008-2015. Meanwhile the use of credit cards, debit cards, and e-wallet and person-to-person transactions has increased exponentially.

Much of this growth appears has been fueled by innovation in payments technology. Consumers may cheer for the choices that they now have. However, this innovation has shifted power away from a small group of financial institutions that dominated the Canadian payments systems. This old guard provided stability to the payments system through well-ordered, self-regulation and close working relationships with the Department of Finance, the Bank of Canada and the Office of the Superintendent of Financial Institutions. These institutions were effectively gatekeepers.

The government is clearly concerned about the erosion of effective oversight and has proposed a regulatory framework with long tentacles to combat perceived vulnerabilities in the electronic retail payments system. The government proposes to capture any payment service providers who perform any one of the following:

  • Provide and Maintain a Payment Account (providing and maintaining individual or group user accounts for the purposes of making electronic funds transfers)
  • Payment Initiation (enabling a user to initiate an electronic payment request)
  • Authorization and Transmission (allows for payment messages to be transmitted and/or facilitates the authorization of the payment)
  • Holding of Funds (maintaining funds in an account until withdrawn or transferred to third parties)
    Clearing and Settlement (exchanging and processing payment items for settlement between institutions)

If the government proceeds with proposed regulation, these providers would have to:

  • Register with a regulatory authority
  • Maintain trust accounts for funds that are not settled the same day
  • Create and maintain records that allow for the identification of funds held in trust and the beneficiaries
  • Comply with security and operational standards and business continuity planning to maintain the confidentiality and the integrity of the system
  • Conduct self-assessments or obtain independent assessments of their compliance with security and operational standards
  • Make consumer protection disclosures and provide dispute resolution processes
  • Provide consumers with indemnities for unauthorized transaction

Find full details on the proposed Oversight Framework and how to comment here.