Financial technologies, or fintechs, are a more user-friendly and fast way of doing an operation, at a lower cost. In particular, they facilitate the flow of virtual currencies, the insurance offer and crowdfunding. Apple Pay and Google Wallet now provide virtual wallets. Start-ups are tackling robot-advisers, a small revolution in financial planning.
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“The phenomenon is here to stay. It responds to a demand of traditional financial institutions as of a whole generation of consumers. It will therefore be necessary to provide answers in terms of legal framework, “observes Ivan Tchotourian, professor of business law at Laval University.
“There is no legal definition of what a financial technology is. Canadian regulators are at the stage of observation and analysis, “specifies Jean-Christophe Bernier, a researcher on the regulatory framework of fintechs at the Center for Economic Law Studies.
Legal risks present
The Autorite Marches financiers (AMF) and the Bank of Canada have both created working groups to think about how to adapt the traditional regulation, which is expensive to set up in small businesses, so as not to kill people.
“However, the legal risks are already present, because the technology is changing rapidly, notes Jean-Christophe Bernier. Financial institutions have accepted that financial technology trends are unavoidable to adopt. They invest or even join start-ups to take advantage of this new market. ”
This year alone, National Bank, through its US subsidiary, has invested $300 million in the US Lending Club, a company specializing in personal loans. The firm is currently under investigation for allegations of fraud. The Bank of Nova Scotia has offered an additional $125 million to Montreal’s Thinking Capital, which offers online financing to SMEs.
“The banks are asking for advice not to exceed their mandate and their legal compliance in the use of a fintech and, above all, to make a rigorous inspection of the start-ups they want to integrate,” explains Etienne Brassard, a lawyer specializing in banking law at Lavery.
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As far as financial technology companies are concerned, many regulatory bodies need to be analyzed in order not to develop a product that is impossible to reconcile with the current context.
“The technologies that allow for loans directly between individuals, for example, involve obligations in securities, the implementation of security and data protection conventions, and the assurance of the identity of the there is no money laundering, “adds Etienne Brassard.
“Many rules are based on a plastic card, and start-ups are sometimes within the limits of what currently exists,” says Nicolas Faucher, lawyer at Fasken Martineau.
Jean-Christophe Bernier believes that a regulatory apparatus is needed that allows for rapid supervision, be it fintechs or the next changes in the financial sector.
There are already solutions in more mature markets. The sandbox method, adopted in the United Kingdom and Singapore, allows fintech companies to live for a while in an almost unregulated environment. “As they develop a business model, we accompany them in the process of regulatory upgrading. Once they are strong, they leave the sandbox to enter the big leagues, with the rules that are required, “says Etienne Brassard.
“The demand may not be high enough here for such a support scenario, which would be expensive for the AMF, believes Jean-Christophe Bernier. France’s proportional approach, however, which adapts the regulatory burden to the situation of fintechs, is a model that has been proven here at another time, for small mutual insurance companies. “