Ottawa expected to give banks more leeway to invest in fintechs

The federal government is poised to open the door a crack for banks to invest in fintech firms that aren’t strictly in the business of financial services.

Sources suggest “targeted” legislative amendments aimed at modernizing the financial service framework, announced by the Liberal government in February’s federal budget, will include loosening of Bank Act provisions that largely limit Canada’s banks to providing financial services and investment counselling, and issuing credit cards.

Anxious to avoid disruption of their core business lines, big banks have been actively seeking out partnerships with start-up fintechs that have developed the technology backbone for loans, investing, and a variety of financial services applications.

But fintech firms don’t always stop at financial services, finding applications for their technology in non-financial business lines such as food delivery and inventory management. These non-financial services make it difficult, if not impossible, for Canada’s banks to partner or invest in the fintechs due to strict rules under the Bank Act.

Restrictions in place for decades, and in some cases more than a century, dictate that banks, except in very limited circumstances, “shall not deal in goods, wares or merchandise or engage in any trade or other business.”

Past relaxation of the rules has been minor, allowing for such activities as selling lottery and transit tickets.

But the 2018 federal budget holds out the promise of “priority amendments” that would “adapt the legislative framework and facilitate greater partnering in response to the emergence of financial technology (fintech).”

Sources told the Financial Post the changes would include allowing banks to invest in innovative technology that is applicable to financial products and services, but not limited to them.

While the reference to the anticipated legislative changes is deep in the budget, in an appended annex, and details were not revealed, there is an explicit promise of “greater flexibility for financial institutions to undertake and leverage broader fintech activities” to deliver financial services in new and innovative ways.

“This could represent one of the most significant changes to the federal financial institution statutes since 2001,” lawyers from Toronto-based law firm Torys LLP said in a note to clients this month.

However, two advisors to Canada’s big banks cautioned that it remains to be seen how wide the door will be opened for the large financial institutions, whose “No. 1 ask” of government has been for more flexibility when it comes to fintechs and technology innovation.

“Are you going to blow the doors off, or are they going to open the doors in a narrow, more restricted (way)?” said one advisor, who spoke on condition that he would not be named.

“That is the policy question that will be debated,” Stephen Clark, a partner at Fasken Martineau DuMoulin LLP, said, adding the government is likely to strike a balance between allowing the banks to invest in fintech and preserving the strong policy that banks are in the financial services business.

“The position I see coming is loosening up to permit downstream investment, but keeping a string on that investment in that it must relate to a financial service, or partnership arrangement that has financial overtones for the bank,” said Clark, who is also co-chair of the financial institutions practice at Faskens.

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