Regulator balances consumer protection with fintech innovation
Maureen Jensen takes on challenge in era of technological disruption
Maureen Jensen has never been one to shy away from the heavy lifting required to adapt to technological change.
The chair and chief executive of the Ontario Securities Commission remembers hauling large computers into remote mining bush camps early in her career as a geologist in the mid-1980s.
“Laptops … were luggable, not portable” in those days, Jensen said in a recent interview. But they could store thousands of points of data in one place on a spreadsheet, which was a vast improvement when it came to determining the characteristics of a deposit. Before that, “people were still doing ore reserves by hand,” she said.
Head of the country’s largest capital markets regulator since last February, Jensen is now committed to heavy lifting in a metaphorical sense as she takes on the challenge of regulating in an era of technological disruption in the banking and brokerage industry.
“Financial services is in the midst of a huge transformation … Not only is it global, technology is changing how it’s being delivered,” she said.
Technological advancements and easily accessible online data have spawned dozens of new companies that offer everything from payment systems and personal and business loans to trading and investing services. These fintech firms, as they are called, do not resemble traditional banks and brokerages and do not fit neatly into existing regulations.
As a result, market watchdogs around the world have been considering if and how to regulate them, and whether rules can be made to protect consumers and the financial system without stifling innovation.
“As the regulator here in Ontario, we’re … facing the same challenges,” Jensen said. “Our regulations have been really focused over the last many years on the local delivery and the face-to-face delivery of financial services, and that is being changed by technology.”
The challenges seem formidable. But, as was the case when she was hauling cumbersome computers into the bush, or embracing new technology to help build a consolidated surveillance system for Canada’s financial markets a couple of decades later at the Investment Industry Regulatory Organization of Canada, Jensen also sees opportunity.
Her vision is to overhaul the regulatory system to make it easier for both upstarts and incumbents to cross borders and move ahead with innovations, provided they are able to demonstrate that investor protection is in place.
To that end, the OSC created LaunchPad, an innovation hub that allows firms with new business models to get off the ground with time-limited exemptions from regulation and close supervision.
The hub is the first of its kind for a Canadian regulator, though Jensen said the OSC is working with counterparts in other provinces under the umbrella of the Canadian Securities Administrators to make it easier for firms to lay the regulator groundwork to operate their businesses across the country.
The goal, she said, is to avoid creating a more complex system. The answer her team has come up with is to boil the requirements down to their original principles and then look at the various business models to determine if basics such as investor protection and knowing your client can be satisfied — even in cases where company representatives never meet the client in person.
It’s up to the companies, whether a fintech or an incumbent, to show the regulator exactly how they’re going to do that, Jensen said.
“Sometimes it’s through online forms, (or) it’s through risk identification,” she said.
“They’ll use behavioural economics, (and) they start understanding their clients more than they have in the past.”
The OSC is also looking at international collaboration, Jensen said, because it makes little sense to force large global companies to conform to a strictly Canadian model of regulation when principles such as investor protection and financial stability are so common across borders.
In November, the OSC forged a memorandum of understanding with regulators in Australia to cooperate on an approach to fintech firms, and is negotiating a similar agreement with the Financial Conduct Authority, the primary market watchdog in the United Kingdom.
“It’s really important for us to realize we can’t pull up the borders anymore. This whole business is global,” Jensen said.
Regulators around the world appear to be reaching the conclusion that some rules are necessary for firms that operate in the fintech space and don’t fall under traditional regulations.
For example, the U.S. Office of the Comptroller of the Currency in December unveiled plans to grant special limited purpose national bank charters to any firm that lends, facilitates payments or takes deposits online — with the expectation that they meet regulatory baseline compliance, capital and liquidity expectations.
Canada has seen few, if any, blowups in the fintech sub-sector, but regulation is being imposed in some jurisdictions due to concerns that the pursuit of growth and innovation has outstripped controls.
In May, fast-growing San Francisco-based LendingClub Corp. was dealt a setback when its founder and chief executive Renaud Laplanche resigned following an internal review that revealed issues with the fintech firm’s “data integrity and contract approval monitoring and review processes.”
Jensen said the OSC is in the midst of tapping expertise from across the financial services and technology spectrum to better understand what regulators in Canada could be dealing with in the months and years ahead.
There’s no shortage of experts willing to step up, she said, noting that more than 100 applications were received for the 10 spots on the regulator’s inaugural 10-member Fintech Advisory Committee.
The OSC also hosted a weekendlong “hackathon” in late November called RegHackTO, which attracted 29 teams of coders, designers, consultants and entrepreneurs who pitched innovations designed to streamline regulation.
Among the 130 participants was a group of teens just out of high school who pitched a mobile app that would make use of the regulator’s large database, combined with existing social media networking tools, to give investors a better way to assess the performance and regulatory history of investment advisers.
“It’s not just the financial sector that’s being challenged, but also the regulators,” said Jensen, who viewed the pitch as confirmation that market watchdogs can and must do more to adapt to technological change. “It’s really important that we as regulators realize that we have to modernize and be forward-looking just like the businesses do.”
Ever the early adopter, Jensen does not see fintech and innovation as threats.
“You have to keep on innovating internally. If you don’t do that, you get stuck,” she said.