Canada: Fintech Regulatory Developments: 2018 Year In Review

2018 proved to be another busy year for Fintech in Canada, with a number of notable and anticipated regulatory developments. We look back to summarize some of 2018's most notable Fintech-related developments in Canada, and developments to watch for in 2019.

What We Saw in 2018

Anti-Money Laundering Regulation Moves Forward

  • Department of Finance Releases Consultation Paper on Canada's Anti-Money Laundering and Anti-Terrorist Financing Regime: The Department of Finance Canada released a consultation paper (the "Consultation Paper") reviewing Canada's anti-money laundering and anti-terrorist financing regime on February 7, 2018. The Consultation Paper contemplates the potential extension of obligations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and its regulations to several new sectors and activities within financial services. The Consultation Paper also considers how to better achieve information sharing and puts forth certain administrative and technical measures intended to modernize and improve the anti-money laundering and anti-terrorist financing regime.
  • Draft Amending Regulations Issued under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, including in respect of virtual currencies and prepaid cards: On June 9, 2018, draft regulations (the "AML Regulations") were issued proposing a number of amendments to each of the existing regulations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the "PCMLTFA")\ The AML Regulations contain a number of long-awaited changes, including clarification on the applicability of the PCMLTFA and its regulations to virtual currency activities, prepaid cards and foreign money services businesses.
  • Financial Action Task Force Defines Virtual Assets and Calls for Further Regulation of Virtual Assets: On October 19, 2018, the intergovernmental Financial Action Task Force (the "FATF") announced amendments to the FATF Recommendations to clarify the application of the recommendations to financial activities involving virtual assets with respect to anti-money laundering and counter-financing of terrorism matters. The FATF is an intergovernmental policy-making body, of which Canada is a member, that sets standards and promotes the implementation of legal, regulatory, and operational measures to combat threats to the integrity of the international financial system. The amendments define the terms "virtual assets" and "virtual asset service providers", and modify Recommendation 15 (New Technologies) to mandate that all FATF member countries should ensure that virtual asset service providers are regulated for anti-money laundering and counter-financing of terrorism purposes.

Consumer Protection Sees Significant Developments

  • New Federal Financial Services Consumer Protection Framework: The Budget Implementation Act, 2018, No. 2 was introduced on October 29, 2018 and includes amendments to various financial services statutes that represent a major change in federal financial services consumer protection regulation, including most notably the introduction of the anticipated federal Financial Consumer Protection Framework (the "Framework") applicable to banks. Many of the provisions in the Framework apply not only to dealings with natural persons and personal banking, but also appear to apply to dealings with "persons" including commercial entities and to business transactions. Moreover, among other amendments, the bill introduced new provisions on whistleblowing and expanded the powers of the Financial Consumer Agency of Canada ("FCAC"). The framework follows a report on best practices in financial consumer protection released by the FCAC earlier in the year.
  • Provincial Developments:
    • Quebec Major Amendments to the Québec Consumer Protection Act (the "QCPA") were enacted by the Québec Legislature on November 15, 2017 and to the Regulation respecting the application of the Consumer Protection Act (the "Regulation") on July 3, 2018. Subject to a number of exceptions, such amendments to the QCPA and related Regulation are set to come into force on August 1, 2019 and include, in particular, additional requirements with respect to high-cost credit contracts and new provisions with respect to loyalty programs.
    • Ontario – The Ontario consumer protection regulations with respect to the expiry of reward points took effect in January 2018. In addition, the new Ontario financial services regulator, the Financial Services Regulatory Authority ("FSRA") continues the process of establishing itself over the course of the year.  In the meantime, the existing financial services regulator, the Financial Services Commission of Ontario ("FSCO"), released its Treating Financial Services Consumers Fairly Guideline (the "Guideline"). The Guideline takes a principle-based, proportional approach and applies to "Licensees" which, among others, include those licensed or registered by FSCO in the insurance, credit union/caisse populaire, loan and trust, and mortgage brokering industries. The Guideline identifies a number of expectations relating to the fair treatment of financial services consumers. 
    • Alberta - Alberta enacted the High-Cost Credit Regulation(the "Regulation"), coming into effect January 1, 2019.  The Regulation introduced various new requirements applicable to "high-cost credit businesses", including a requirement to obtain a "high-cost credit licence". 

Securities Law Regulators Continue their Focus on Cryptocurrency

  • OSC Issues Investor Alert Regarding Unregistered Cryptocurrency Ventures: On May 18, 2018, the Ontario Securities Commission (the "OSC") issued a warning about five unregistered firms targeting Ontario investors that encouraged them to trade or invest in cryptocurrencies. This investor alert followed an earlier notice issued by the British Columbia Securities Commission on May 17, 2018 warning residents of British Columbia to exercise "extreme caution" when considering whether to invest in cryptocurrency offerings. It also followed "Operation Cryptosweep", where the OSC joined forces with over 40 other provincial and U.S. regulators belonging to the North American Securities Administrators Association (NASAA) in warning investors about schemes involving cryptocurrency-related investment products.
  • Canadian Securities Administrators Provide Further Guidance on the Securities Law Implications of Token Offerings: On June 11, 2018, the Canadian Security Administrators (the "CSA") published CSA Staff Notice 46-308 – Securities Law Implications for Offerings of Tokens (the "2018 CSA Notice"), which provided additional guidance on token offerings, including those characterized in the industry as "utility tokens". The 2018 CSA Notice reminded market participants that the established tests for determining the existence of a "security" will apply when determining if a token is a "security" for securities law purposes. The CSA noted that both the technical aspects of the token and the economic realities of the offering as a whole will be considered when determining whether a token is a "security" for securities law purposes, with a focus on substance over form. The 2018 CSA Notice also provided examples of situations in which an offering of tokens may be subject to Canadian securities law.
  • Crypto-Asset Sector Disclosure: In its 2017-2018 Annual Report, the OSC reminded issuers in the crypto-asset space thatinvestors need to be provided with sufficient information to understand their business and disclosure must comply with National Policy 51-201 – Disclosure Standards.

The Payments Landscape Continues to Evolve in Canada

  • Department of Finance Canada Issues Consultation Paper on Review of Canadian Payments Act: On May 25, 2018, the Department of Finance Canada issued a consultation paper on the review of the Canadian Payments Act, seeking comments on various aspects of the Canadian Payments Act (the "CP Act"). This review is being undertaken in the context of (i) the 2015 amendments to the CP Act which amended Payments Canada's governance structure; (ii) the proposed retail payments oversight framework; and (iii) Payments Canada's current payment modernization project.
  • Payments Canada Continues Its Modernization Initiative: Payments Canada issued an update on its modernization delivery roadmap in December 2018, with updated timelines for Lynx (the new high-value payment system), the real-time rail and the retail batch payment system. Payments Canada also stated in this update that it has selected a prime vendor with respect to Lynx.

Open Banking Consultation Continues in the Midst of Global Developments

  • Open Banking Update: There were a number of global developments with respect to open banking in 2018, including the publication by the Open Banking Implementation Entity (OBIE) of Open Banking Standards 3.0 in the UK. Meanwhile in Canada, the consultation process continued to move forward, including with the launch of an Advisory Committee on Open Banking.  Early 2019 saw the launch of a consultation paper seeking the views of Canadians on the potential benefits and risks of an open banking system, with comments due January 11, 2019.

Prudential Regulation Developments

  • Federal Budget Bill: The Budget Implementation Act, 2018, No. 1 was introduced on March 27, 2018 and included amendments to various financial services statutes, pursuant to the 2018 federal budget. The bill included amendments providing greater flexibility for financial institutions to undertake Fintech activities. In addition, the bill included a number of amendments relating to the prohibition on the use of bank terminology ("bank", "banking", etc.) by non-banks under the Bank Act, including permitting limited use of such terminology by certain prudentially regulated entities (such as credit unions) and providing the Office of the Superintendent of Financial Institutions ("OSFI") with greater enforcement powers.
  • Quebec Bill 141: The Quebec National Assembly adopted An Act mainly to improve the regulation of the financial sector, the protection of deposits of money and the operation of financial institutions ("Bill 141") on June 13, 2018. Subject to a number of exceptions, the provisions of Bill 141 came into force on July 13, 2018. Bill 141 replaces or substantially amends more than a dozen laws governing the Quebec financial sector. Most notably, it allows firms to offer certain financial products and services by technological means to facilitate distribution. For example, under the new regulatory framework of the Act respecting the distribution of financial products and services (Québec), as of June 13, 2019, insurers will be allowed to distribute certain insurance products without the intervention of a representative under the condition that they (a) have an insurance representative, approved by the Québec Autorité des marchés financiers ("AMF"), available and ready to interact in a timely manner with users who express a need for assistance, (b) inform customers of the existence and availability of this representative, and (c) ensure that the client obtains all the information necessary to make informed decisions and fulfill his obligations under the insurance contract. In addition, on October 10, 2018, the AMF published a draft regulation for the sale of insurance by internet, the Regulation respecting Alternative Distribution Methods.

What to Watch for in 2019

  • Federal Developments
    • Given the significant changes put forward on the consumer protection, AML and prudential regulation front, we would expect financial services providers (and in particular banks) to be fairly occupied in 2019 with updating their compliance policies and processes to ensure compliance with the new requirements.
    • With greater enforcement powers granted to OSFI with respect to the use of bank terminology and to the FCAC with the Framework, we would expect to see a shift towards more active enforcement starting in 2019.
    • On the AML front, both the final versions of the AML Regulations and further FATF guidance with respect to cryptocurrency are expected in 2019, bringing further clarity to AML requirements in the space.
    • We would expect further developments in 2019 affecting the payments landscape, including the continuation of the modernization journey of Payments Canada and the national retail payments framework.
    • We expect open banking consultations to continue in 2019. The Advisory Committee on Open Banking will assess the merits of open banking based on feedback from the consultation, and thereafter address implementation considerations as a second phase in 2019.
  • Provincial Developments
    • We anticipate Canadian securities regulators will continue to announce enforcement actions against entities engaging in initial coin offerings or initial token offerings ("ICOs" and "ITOs", respectively) that contravene Canadian securities laws. Likewise, we expect Canadian securities regulators to monitor exchanges trading in cryptocurrencies to ensure they are properly registered in accordance with Canadian securities laws.
    • Though ICOs and ITOs may be on the decline, we anticipate that tokens that fully comply with Canadian securities laws will be issued, including those in which the issuer has obtained one or more exemptions from compliance with Canadian securities laws from securities regulators. In addition, new types of tokens, such as stablecoins and other asset-based tokens that peg their value against perceived stable assets like fiat currencies, precious metals or real estate, should continue to grow in popularity.
    • The use of smart contracts will likely increase, particularly in the legal industry. Our firm and OpenLaw have developed a smart contract powered loan agreement on the Ethereum blockchain and other smart contract uses for the legal industry are being tested.
    • Other provinces may follow the lead of Manitoba, Alberta and Quebec in considering the need to further regulate high-cost lenders operating in their provinces.
    • In Ontario, the new financial services regulator, FSRA, is targeting its launch for 2019. This regulator will have a broader, more flexible mandate than FSCO and therefore could be expected to take a more proactive interest in Fintech activities.
    • As noted above, in Québec, as of June 13, 2019, insurers will be allowed to distribute certain insurance products without the intervention of a representative under certain conditions. A number of major amendments to the QCPA (as described above) are also set to come into force on August 1, 2019. In addition, we may see other targeted regulatory efforts in Québec in 2019.

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