How Does Fintech Regulation Work In Canada?

Banks, trust and loan businesses, insurance companies, credit unions, securities dealers, financing and leasing firms, pension fund managers, mutual fund firms, and independent insurance agents and brokers make up Canada’s financial services industry, which is among the strongest in the world. 

The banking industry is dominated by Canada’s six major financial institutions. There has been a significant rise in the percentage of banking assets held by the nation’s largest banks since the 2008 financial crisis. 

Financial co-operatives in Canada are key community-focused competitors with a member-based model (for example, credit unions, housing co-operatives). At the provincial level, these organizations are often controlled.

The commercial capabilities of trust and lending businesses in Canada are quite comparable to those of Canadian banks. 58 Canadian trust and lending firms are governed by federal law. Of them, trust corporations owned by big Canadian banks account for around half. There are a number of trust businesses that only specialize in fiduciary work. 

Canadian housing financing is provided by several lenders and  mortgage insurance  companies. Non-prudently regulated lenders include banks and other financial institutions, such as mortgage lenders (that is, regulated for safety and soundness). 

As two of Canada’s most important stock exchanges, the Toronto Stock Exchange and the TSX Venture Exchange both rank among the world’s top 10 public equities markets. In addition, CSE (Canadian Securities Exchange) and NEO Exchange (Nasdaq) have gained momentum in listing smaller equity securities of small and early-stage issuers. Aside from the stock market, which is one of the most prominent financial marketplaces in the world, the Forex market is also supervised by several regulatory authorities. Despite the fact that the Forex market is decentralized, several Commonwealth nations, including Canada, control the brokers in the specified business in order to avoid the practice of money laundering, corruption, and so on.

In the case of the Forex market,  Canadian Forex brokers  are regulated by IIROC, which also oversees and regulates investment dealers, as well as regulating the debt and stock markets of Canada. About 175 investment dealers operate in Canada, including subsidiaries of the country’s main banks, as well as privately held companies. 

Furthermore, apart from financial institutions, Canada’s financial sector also includes non-financial institutions that serve vital roles and promote competition but are not regulated. The financial leasing,  payday loan,  payment service, and money services industries are examples of organizations that concentrate on a specific product or service line (MSBs). Services including technology, mid-and back-office support, and accounting are provided by third parties to regulated financial sector organizations.

Long-term capital for regulated financial institutions comes mostly from pension funds, insurance firms, and other institutional investors. Federal regulations apply to 63 life insurance firms and 149 property and casualty (insurance) firms. About 15% of Canada’s financial system’s total assets are held by the pension fund industry.

Regulation Of Fintech In Canada

Canadian financial institutions are overseen and regulated by the Office of the Superintendent of Financial Institutions (OSFI), which has emphasized the need for robust technological infrastructures. Financial technology has also been addressed by the Canada Revenue Agency and its provincial equivalents. Federal AML regulator FinTRAC is also responsible for regulating some fintech goods and services, such as those provided by money services companies’ (MSB) that trade in fiat and/or virtual currencies. Bank of Canada (BoC), Canada’s central bank, has been assigned to oversee a new retail payment system under the RPAA, which is based on distributed ledger technology (DLT). There are a number of additional municipal administrations administering other fintech projects at the local level. 

Under relevant provincial securities and derivatives regulations, fintech enterprises may be subject to different provincial licensing requirements if they participate in activities or support transactions in securities and derivatives. Additionally, these laws apply to the trading of crypto-assets that are regulated as securities and those that aren’t, but if the way these assets are exchanged and kept constitutes “crypto contracts,” these assets are considered as “securities” under these rules. As a result of the new regulations, anyone who trades or advises in securities for a “business purpose” is required to register as a dealer and adviser, as well as adhere to a number of other requirements. Depending on the circumstances, investment fund manager registration requirements may also be applicable. ICOs and initial token offerings may also be subject to prospectus or product qualifying requirements or associated exemptions, depending on the nature of the business.

Compliance with KYC and KYP standards, suitability, insurance, financial and customer reporting, custody requirements, and cybersecurity risk management procedures are only some of the regulations that must be followed in order to comply with these laws.  

Both domestic and international MSBs must also register with FINTRAC and adhere to reporting, record keeping, KYC, and compliance standards. Foreign exchange and currency trading enterprises are included in MSBs. Quebec’s MSB law may also necessitate MSB registration. 

Consumer lending in Canada is not as heavily regulated as in other countries. An entity that provides consumer credit is subject to federal regulation only if it meets certain criteria. For mortgages, credit cards, and other forms of credit, banks and other financial organizations are required to disclose the cost of borrowing. An effective yearly interest rate for an advance of credit cannot exceed 60 percent per year under criminal interest rate restrictions in the Criminal Code (RSC 1985, paragraph C-46). In this aspect, there is no differentiation between business and consumer contracts, save for certain low-value (payday) loans.

In most jurisdictions, payday lenders are required to be licensed. Several provinces have enacted or are in the process of enacting laws requiring a license or registration for high-cost credit providers.

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