From a niche industry trend, financial technology (“Fintech”) has become a major disruptive force in the global financial landscape over the past 10 years. The concept of Fintech refers to new technologies that aim to enhance the delivery and use of financial services at a reduced cost while expanding the range of services offered and meeting the needs of a more diverse customer base[1]. Today, Fintech encompasses multi-billion dollar companies that were initially associated with small start-up ventures. At the same time, the number of Fintech users around the world growing exponentially, particularly in the digital payments space, where global users are expected to surpass 3.5 billion by the end of 2024, could be seen as an opportunity for non-traditional lenders to penetrate the market[2].
In recent years, Fintech has gained more and more importance within the Canadian financial sector. Relying on artificial intelligence, Fintech businesses offering lending services (“Fintech Lenders”) have ensured financial inclusion by offering cheaper, faster and more accessible services to underbanked segments of the society. While the benefits to consumers are undeniable, there are several legal requirements on the provincial, territorial and federal levels to keep in mind when operating a Fintech Lender in Canada, some examples of which will be covered below.
In fact, Canadian Fintech Lenders must comply with the regulations of the Financial Consumer Agency of Canada (“FCAC”), which oversees federally regulated financial entities’ compliance with consumer protection laws and raises consumers’ awareness in order to better navigate in the constantly evolving financial sector.
With the emergence of consumer-driven banking, also known as open banking, consumers are gaining control over their data and are able to share it more swiftly. The enactment of the Consumer-Driven Banking Act (the “Act”), on June 20, 2024, aims to ensure that consumers and small businesses are able to share their data in a safe and secure manner[3]. In other words, once a customer or small business decides to use an application offering financial services and therefore consents to the sharing of its financial data, the Act sets out a framework ensuring that such a transfer of data is made safely and securely. The framework defines the types of data to be transferred, identifies the eligible participants of such an exchange and establishes certain technical standards for the flow of data between Canadians and the tools they decide to utilize[4]. Furthermore, the Act has expanded the FCAC’s powers to oversee the financial entities’ compliance with such requirements[5]. While the emergence of open banking presents an opportunity for Fintech Lenders to play an increasing role in the financial sector, such Fintech Lenders would need to comply with the Act’s newly adopted framework.
Canadian Fintech Lenders must also comply with federal anti-money laundering and anti-terrorist financing (AML/ATF) regulations. For example, a Canadian Fintech Lender could be deemed a money services business, in which case it would need to register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) in compliance with the Proceeds of Crime (Money Laundering) and Terrorist Financing Act[6]. Such Fintech Lenders would then need to establish, among other things, precise know-your-client, reporting and recordkeeping mechanisms. With the continuous emergence of new threats related to the use of new technologies, the Canadian anti-money laundering and anti-terrorist financing regime keeps evolving in order to ensure the integrity of the financial system[7].
The Personal Information Protection and Electronic Documents Act (PIPEDA) also imposes some requirements on Fintechs in relation to the collection of personal information. Effectively, Fintech Lenders would need to ensure not only to obtain valid consents and safeguard data adequately, but also to limit the data collection to the appropriate scope required by law[8].
Moreover, Fintech Lenders should be mindful about the varying interest rates requirements. In fact, as mentioned in our May 23, 2023 communiqué, in order to protect the most vulnerable segments of the society from predatory lending, the Canadian government has lowered the criminal interest rate, under section 347 of the Criminal Code, from an annual percentage rate of roughly 48% to an annual percentage rate of 35%. Since the change is expected to come into effect on January 1, 2025, to remain compliant, Fintech Lenders have until the end of this year to make any necessary adjustments to their practices[9].
On the other hand, depending on the location and the nature of services they offer, Fintech Lenders may be required to comply with various provincial or territorial regulations governing financing practices, as well as consumer protection legislation.
The sector continues to mature and evolve, pointing to a future of continued innovation and adaptation to changing economic conditions. Staying on top of legal developments is therefore key. Should you have any questions regarding this topic, do not hesitate to contact a member of Miller Thomson’s Financial Services group.
[1] https://www.investopedia.com/terms/f/fintech.asp
https://www.fundthrough.com/alternative-finance-guide/
[2] https://www.statista.com/topics/2404/fintech/#statisticChapter
[3] https://www.parl.ca/documentviewer/en/44-1/bill/C-69/royal-assent
[4] https://www.canada.ca/en/department-finance/programs/financial-sector-policy/open-banking-implementation/budget-2024-canadas-framework-for-consumer-driven-banking.html
[5] https://www.canada.ca/en/department-finance/programs/financial-sector-policy/open-banking-implementation/budget-2024-canadas-framework-for-consumer-driven-banking.html
[6] https://fintrac-canafe.canada.ca/fintrac-canafe/1-eng
[7] https://www.gazette.gc.ca/rp-pr/p1/2024/2024-07-06/html/reg3-eng.html
[8] https://www.priv.gc.ca/en/opc-actions-and-decisions/investigations/investigations-into-businesses/ser/2017/er_01_170725/
[9] https://www.gazette.gc.ca/rp-pr/p2/2024/2024-06-19/html/sor-dors114-eng.html
