Industry, regulation, and lawyering
Every time you are using your phone to pay, check a bank statement online or transfer money through an app, you are using FinTech. Short for “financial technology”, FinTech includes any innovation and automation in the use of financial services.
The technology helps business owners, companies, and consumers to better manage their finances by utilizing specialized software and tools for computers and, increasingly, smartphones. Now a pillar of economic innovation, FinTech initially emerged as support for bankers and traders in back office tasks. Since, it has reached the consumer market and has been reshaping not only the way we pay, invest (digitally), and manage our assets, but every facet of our financial lives. These approaches to FinTech extend from cashless payments to crowdfunding platforms, robo-advisers to virtual currencies. This has become a large driving force within major economies with 1 out of 3 people from such countries reporting to use FinTech services in the last six months. Financial technology has also increasingly been filling a void for people around the world who don’t have access to traditional banking services. In emerging markets, the lack of credit card infrastructure has prompted dramatic shifts in payment automation, with China leading the way with QR code technology and integration of payment services into social networks.
With the global financial landscape changing, new risks arise, demanding fresh regulatory frameworks. However, both regulation and law have been written in response to outmoded industry practices and their shortcomings along the way. Because of technology’s speedy development, regulators have to shift towards a principle-based approach to supervising financial services. The current financial sector regulatory framework is patchy and generally structured around who you are (entity-based), and not what you do (function-based). Consumers need to be protected in identical measures regardless of which platform they choose to utilize, meaning that an entity-based framework is no longer sustainable. Change urges consistency of regulation throughout all platforms. Entities performing the same function should carry the same regulatory burden.
Flexibility is key in keeping up with these advancements. New oversight regimes now have to take into account specific risks associated with processing payments on platforms which facilitate instant real-time transfers. In 2018, the Department of Finance Canada highlighted important oversight principles requiring payment service providers holding customer funds overnight (or longer) to place those funds in a trust account with an institution protected by a deposit insurance regime. In this way, consumers can be assured of their funds’ safety, regardless through which means they make the payment.
FinTech has seen a great geographical expansion, with a PwC 2017 Global FinTech Report showing that 62% of Canadian financial institutions were actively involved in partnerships with FinTechs. 88% saying they are committed to increasing the number of partnerships in the future. In order to facilitate this expansion, it is proposed that federal and provincial governments should achieve clarity and cooperation in their regulatory strategy. Currently, Toronto plays host to more than 40 FinTech companies with these numbers set to rapidly increase in the coming years.
FinTech firms act as disruptors, aiming to revitalize entrenched business models, targeting the traditional finance sector with new technological solutions. As such, they bring their own challenges for Canada’s lawyers. In particular, as technology continues to automate routine tasks, lawyers will no longer be relied upon as heavily to draft contracts and review documents, but instead will be called upon to manage risks with greater sophistication and efficacy than ever before. Technology could emancipate lawyers from many of the widely detested, routine, and mind-numbing tasks that are within the industry. It enables lawyers to focus their time on new and creative avenues to tackle interesting problems. An in-depth understanding of the technological environment is a prerequisite for all lawyers, as the role of a lawyer is increasingly becoming more of a strategic advisor and supervisor. FinTech offers a unique lens for improving customer experiences and allowing cross-sector innovations to continue to thrive, presenting a lucrative field for lawyers.