Barry Campbell is president of Campbell Strategies and a former member of Parliament and parliamentary secretary to the minister of finance of Canada.
The speed and scope of change in the financial-services sector is unprecedented. Regulators are trying to wrap their minds around what’s happening. The future of cash, the need for bank intermediaries, the role of paper currencies, and fundamental notions of data privacy and bookkeeping are all in play.
In the competition for customers, the tension between new players and old is not unusual. New kids on the block have tried and failed over the decades to break into the banking oligopoly. But the new players this time don’t want to be on every block, just on every device. And consumers expect choice, flexibility and the world of financial services at their fingertips. They want a physical bank when they want it, and all the services of bank, wealth manager, investment adviser and stock broker on their device when they don’t. It’s enough to make a banker’s head spin.
Individuals seem prepared to allow their financial data to be sliced and diced so they can be offered the very best rates and financial products. Focused on the convenience provided by their smartphones and laptops, consumers are often unaware or unconcerned when their financial data is being exchanged and shared, analyzed and sold back to them. And it’s often hard to tell whether an online pitch is a legitimate business or a scam.
Ironically, the same individuals who demand more control over their financial data – who want to be able to share it with third parties – are the first to demand data privacy and protection against loss when something goes wrong. They won’t be able to have it both ways no matter how hard regulators work to get things right.
For those charged with safeguarding the financial system, they encounter a minefield of jurisdictions competing to retain and attract high-paying jobs in financial services and tech. The race to be the most welcoming place for fintech can tilt the balance away from the things that regulators typically worry about: safety and soundness, consumer protection and privacy. Regulators are trying to find the right mix that protects the financial system without unduly stifling innovation.
Beyond these concerns, balancing access to innovative products with privacy is no small task. When is an investment in a fintech an “offering” that needs to be registered to protect investors? How should we regulate cryptocurrency exchanges and online trading platforms? While they ponder these questions, securities regulators within Canada and abroad are also competing with each other to create the most hospitable environments for fintech startups.
In a kinder, gentler time, the review of “framework legislation” governing the financial sector was a decennial exercise, then it became a five-year review. Pushed still more by the pace of change, this review has become a rolling one, the financial services equivalent of a world without end.
Consultations are under way or recently concluded, and regulatory and legislative changes are in the works concerning payments: to seek to modernize payments systems and the governance and membership in Payments Canada; to examine “open banking” (the financial-sector version of "open borders” with many of the same concerns); to address cryptocurrency in the context of anti-money laundering and anti-terrorism financing; to develop a national data strategy to balance innovation and privacy; to enhance consumer protection (there are federal and provincial initiatives here); and to study the implications of cannabis legalization on the privacy of data in credit-card transactions.
Securities regulators are looking at how to characterize initial coin offerings (ICOs) and central banks are studying cryptocurrencies. The implications of blockchain technology to enhance and supplant traditional bookkeeping, which has underpinned the world’s economy for centuries, is giving professional standards-setting bodies nightmares.
In an unexpected twist, usually somnambulant central bankers are looking warily at cryptocurrencies and studying whether an "official” cryptocurrency will be needed to preserve their control over monetary policy. While there is no real risk that fiat currencies – the money in your pocket created by government fiat – will be replaced any time soon, central bankers don’t have to be able to read code to see the writing on the wall.
The financial-services sector is on the front lines in the broader battle being waged over privacy and data: who owns it, who gets to control it, what is it worth and where is it stored (as if that matters any more). Netflix and Amazon are watching.
Those of us who advise market leaders in the financial sector are monitoring all the moving parts. It may look like the old childhood game of “whack-a-mole,” but it’s really three-dimensional chess.
This may be most evident in mortgage lending where regulations have been piled on regulations with the worthy goal of restricting access to the easy money that is driving up home prices. The result may be to push borrowers to darker corners in search of funds, thus requiring ever more regulation. And that will require a degree of federal-provincial co-operation that has often been elusive.
One hopes there is a wizard behind the curtain who knows how all the parts fit together, and that the whole regulatory superstructure is not becoming some impossible contraption of spinning wheels and trap doors folding in on itself. It better not be, or your money won’t be worth the paper it’s printed on.