Fintech Regulations and Rules in Canada

As a country of early adopters, Canada has consistently demonstrated its prowess in both the traditional banking sector and the world of fintech. The World Economic Forum has frequently lauded Canada’s banking system as the world’s soundest, a testament to the country’s commitment to financial stability.

But Canada’s fintech story goes beyond just stability. Canadians have a reputation for being quick to embrace new technologies, from the early days of ATMs to the present era of digital banking, making it the perfect testbed for fintech innovation.

Looking back at 2021, the Canadian fintech landscape witnessed a record-breaking surge in investment, with CA $9.4 billion invested across 217 deals. In 2022, amid the global ‘VC Winter,’ Canada managed to maintain its fintech momentum with 169 fintech investments totalling CA $1.75 billion.

Names like Shopify, Wave, Freshbooks, Dapper Labs, Wealthsimple, Payfirma, Quandl, Cryptologic, and Mogo are Fintech companies with their roots firmly planted in Canadian soil.

How the Government Regulates Fintech Products

In Canada, fintech regulation involves cooperation between various authorities at the provincial, territorial, and federal levels, with each playing a specific role in overseeing different aspects of the fintech industry. Here are some authorities you must know:

Canadian Securities Administrators (CSA): These are the main regulators for fintech products related to capital markets, including cryptocurrencies. They oversee provincial and territorial regulations collectively. The CSA also added a new branch – the CSA Regulatory Sandbox, which specifically helps fintech companies in Canada by providing a quicker and more flexible way to test their innovative financial products and services. It allows them to temporarily try out their ideas in the Canadian market without going through the usual lengthy regulatory process.
Investment Industry Regulatory Organization of Canada (IIROC): This organization supervises securities dealers and has recently restructured into the New Self-Regulatory Organization of Canada (New SRO) starting from January 1, 2023.
Office of the Superintendent of Financial Institutions (OSFI): At the federal level, OSFI is responsible for regulating banks, insurance companies, and trust and loan companies. They emphasize the importance of robust technology systems in these institutions.
Canada Revenue Agency (CRA): The CRA and provincial counterparts issue policies and guidance related to fintech.
Financial Transactions and Reports Analysis Centre of Canada (FINTRAC): This federal authority regulates certain fintech services, focusing on ‘money services businesses’ (MSBs) dealing in traditional and virtual currencies to prevent money laundering.
Bank of Canada (BoC): Canada’s central bank closely watches fintech and blockchain technologies. They oversee the new retail payments regime under the Retail Payments Activities Act (RPAA) and are exploring the creation of a digital currency due to the shift away from cash.
Municipal Governments: Some local governments also manage fintech initiatives at the community level.

Fintech Sub-Sectors and Their Government Regulations

Fintech businesses in Canada may require licenses depending on their activity, and they may also further need compliance with regulatory obligations such as KYC, financial reporting, and cybersecurity.

Different regulatory requirements apply to various fintech activities, such as lending, factoring, invoice discounting, secondary market loan trading, yield-generating products, deposits, and trust company-type services. Here are some examples of popular fintech sub-sectors with Canadian regulations:

Consumer Lending Regulation

Consumer lending is regulated in Canada but not as strictly as in some other countries. Regulations vary based on the entity providing consumer credit:

Banks and financial institutions have disclosure obligations for mortgages, credit cards, and certain types of credit.
Criminal Code provisions prevent the effective annual interest rate from exceeding 60% per year for all types of loans, without distinguishing between commercial and consumer contracts.

Provincially, payday lenders and certain consumer lenders require licensing or registration in most provinces. Some provinces are implementing high-cost credit legislation, which can also impose licensing requirements.

Secondary Market Loan Trading

The regulation of secondary market loan trading depends on whether the loan instruments are considered securities. Loans acquired in the secondary market are more likely to be treated as securities than original loans.

Other Non-Financial Regulations Applicable to Fintech Startups in Canada

Apart from financial regulations, fintech businesses that provide banking, consumer credit and insurance services, or capital-raising services, will also find themselves subject to more general business regulations, such as privacy laws (PIPEDA or Canada’s Anti-Spam Legislation), anti-money laundering laws, and consumer protection laws.

In June 2022, the government introduced the Digital Charter Implementation Act, 2022 (Bill C-27), which could change privacy and data protection laws in Canada. If passed, it would replace part of PIPEDA with the Consumer Privacy Protection Act (CPPA) and introduce regulations for artificial intelligence systems through the Artificial Intelligence Data Act (AIDA).

Highlights of the Canadian Fintech Market

Canada is an attractive destination for fintech startups. There are many notable trends that support the growth of fintech including open banking initiatives, payments technology advancements, and cryptocurrency developments.

Open banking, guided by the Advisory Committee on Open Banking, is making strides in Canada. The final report from the committee issued recommendations, emphasizing consumer education, protection, and a positive user experience.
The pandemic accelerated the adoption of digital and contactless payments, with Canadians favouring these methods over traditional ones. 90% of consumer payment value is through non-cash methods, and the mobile payments sector in Canada is projected to grow at a compound annual growth rate of 9.1%, reaching approximately CA $15,885,594.5 million by 2025.
The cryptocurrency sector has also been dynamic, with innovative products and services emerging. Regulatory cooperation has enabled this growth, leading to the introduction of blockchain ETFs, crypto trading platforms, initial coin offerings (ICOs), peer-to-peer lending platforms, and crypto-asset investment funds. Canada also happens to be home to the world’s first Bitcoin ETF (Purpose Bitcoin ETF) which has become a benchmark for many across global markets.

Government Services to Help Fintech Companies Grow in Canada

Canada offers various incentives to boost investment in small and medium-sized enterprises (SMEs) in fintech. Some of these incentives include:

CSA Regulatory Sandbox helps fintech companies in Canada to temporarily try out their ideas in the Canadian market without going through the usual lengthy regulatory process.
The Scientific Research and Experimental Development Program (SRED), provides tax incentives for R&D to both Canadian and non-Canadian companies.
The Industrial Research Assistance Program (IRAP) by the National Research Council of Canada, offers financial support, advisory services, and connections to industry experts.
Funding for tech companies through the Digital Technology Cluster stream under the Global Innovation Clusters program.
The Canada Digital Adoption Program offers grants to SMEs for e-commerce initiatives and digital transformation.

Top Canadian Fintech Startups

The proof is in the pudding! Browse through 10 of the most promising and exciting Canadian fintech companies and the funding they’ve secured to transform into global fintech leaders:

Bitfarms, Montreal

Total funding: $251 million

Want to Start a Fintech Business in Canada?

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Fintech Regulations and Rules in Canada - TBDC (2024)