Every lawyer must manage client expectations, but nowhere more than in the fast-moving world of financial technology. One company, a fintech business, met with Kashif Zaman with a list of things it wanted to accomplish.
Every lawyer must manage client expectations, but nowhere more than in the fast-moving world of financial technology. One company, a fintech business, met with Kashif Zaman with a list of things it wanted to accomplish.
“I said ‘you can do them, but for some of them, you need to be a bank,’” recalls Zaman, a partner in the financial services group at Osler Hoskin & Harcourt LLP.
“OK,” said the young, hungry and entirely unfazed client. “How do I become a bank?”
This type of conversation plays out more often in legal offices than one might think. Fintech firms are disruptors. Typically for startups, their business is built on revamping entrenched business models, targeting the traditional finance sector with new technology solutions. They bring their own challenges for Canada’s lawyers.
Fintech is a potentially lucrative industry for lawyers who understand the nuances of the business. Thomson Reuters analyzed PitchBook, the data source on investment activity used by the U.S. National Venture Capital Association, and found a 35-per-cent increase in Canadian fintech investments during 2016, reaching $137.7 million. Five years ago, Canadian investments in the sector reached just $21.8 million. Many such firms may be small fish now, but which of them will become the next PayPal?
Those that do will need legal advice to help them get there. The financial sector is perhaps one of the most heavily regulated in the country, as Mogo knows all too well. The Vancouver-based online lending company completed its initial public offering on the Toronto stock exchange for $50 million in June 2015. Its journey has taken it through many regulatory hurdles, explains the fintech company’s chief administrative and legal officer, Lisa Skakun.
“Even though we’re not a traditional bank in that deposit-taking world, we are regulated,” she says, pointing out that lending companies fall within consumer protection regulation and that its marketing activities subject it to the Competition Act. As Mogo just launched into the mortgage brokering business, it also incurs regulation related to this industry at the provincial level.
Anti-money-laundering and know-your-client technologies — collectively called “regtech” — jostle alongside technologies covering payments, investing, cryptocurrencies and even insurance in their bid to disrupt financial services companies. Robo-advisers tackling wealth management must navigate securities laws.
“The primary challenge to fintech firms is the gap between what the laws permitted before the technology existed and the solutions new technology can bring that weren’t previously possible,” says Michael Holder, associate general counsel and chief compliance officer of Toronto-based robo-advisor firm Wealthsimple. “The pace of technology is faster than the legislative process.”
The regulatory framework is relatively patchy, due in large part to the breadth of the fintech sector and the pace of development. This can leave fintech firms struggling to understand how regulations apply to their business model, which can span a variety of subsectors.
“Understanding which of those layers need to be pulled back and which ones don’t apply is a real challenge,” says Gregg Aamoth, CEO of POPcodes, a Calgary-based fintech startup that uses technology to deliver loyalty programs and in-store pickup via point-of-sale terminals.
Resolving these uncertainties is where lawyers can offer real value to clients, explains Kristen Thompson, partner in the national technology practice at McCarthy Tétrault LLP in Toronto. She adds that Canadian regulators have been slow to engage fintech, but it’s not because they aren’t interested.
“Regulators don’t want to rush ahead to regulate as has been done in some cases,” she says, citing the introduction of strict “BitLicense” regulations in New York State to manage cryptocurrency as an example. Instead, a soft step is preferable.
The Canadian government has emphasized fact gathering in its approach to fintech-related issues. In 2015, the Department of Finance issued a consultation paper on national retail payment systems, for example, while the Competition Bureau launched a study in May last year focusing squarely on fintech innovations.
At the provincial level, the Ontario Securities Commission is leading the pack with its LaunchPad initiative, says Stephen Redican, business department leader in the Toronto office at Borden Ladner Gervais LLP.
“This is not an incubator or a sandbox,” he explains. “It’s more of an ability for fintech companies to speak with the regulator in a non-legal way to determine what they need to do to comply with securities laws in launching their product online.”
Redican calls for partnerships between the federal government and the provinces to create similar initiatives across the complex legal landscape.
In many cases, fintech firms partner with incumbent financial services firms because they need either regulatory shelter or market leverage.
“A lot of them are looking at partnering with financial institutions, because banks here have a very good consumer confidence index, and consumers will look to banks to offer their products and services,” says Nicolas Faucher, co-president of the corporate/commercial section at Fasken Martineau DuMoulin LLP in Montreal.
This can lead to some cultural differences as two players — large, conservative incumbents and small, hungry disrupters — come to the table. Schisms can emerge between banks and fintech teams or between legal and tech teams, each of which has its own agenda. Banks are often slower and more conservative for a reason, points out Osler’s Zaman.
“As nimble as they would like to be, if you’re a large organization, you have some framework restrictions on you. You can’t easily change direction or introduce new things from a speed to market or appreciation perspective without fully appreciating the impact of that on other parts of the organization,” he says.
Conversely, fintech startup teams are often more tech-focused, and they frequently don’t understand the legal complexities that the banks face, let alone the regulatory ones. This can lead to some friction.
“What I often see happening is a first interaction where both sides come to the table maybe thinking that the other side doesn’t get it,” says Donna Parish, vice president deputy general counsel in the Canadian personal and commercial banking legal team at the Bank of Montreal in Toronto.
“Another thing I think is being open to failure,” she says, citing this as a key difference between fintechs and banks. “It may be that the proposed solution isn’t necessarily workable, or we might come across one that’s better or different in the course of thinking about it.” Teams must be flexible in how they tackle these complex, evolving business propositions, and it takes strong partnerships between banks and fintechs to do that.
These cultural challenges stem from another difficulty facing fintech firms: funding.
“A lot of startups don’t have the funds to have a team of lawyers or in-house counsel,” says Kyle Lavender, an associate at LaBarge Weinstein LLP in Vancouver, the firm that counselled Mogo on its public offering. “So you’re working with a team of smart individuals who are more focused on tech and finance kinds of things. It takes some patience sometimes on the part of legal counsel.”
Financial constraints can cripple a fintech’s ability to execute on its business plans. POPcode’s Aamoth recalls that a partner wanted $5 million in cyber-risk insurance, but the company wasn’t able to get it. The financial resource needed to handle international regulatory hurdles also stopped the company’s expansion into China and Malaysia, he recalls.
Funds may be small, but the challenges to fintech firms remain large. Alongside the regulatory issues, they face everything from intellectual property to labour law challenges, not to mention the traditional legal requirements involved with tackling capital markets.
Other challenges lie at the cutting edge and are barely visible. For example, Geoffrey Cher, partner at Wildeboer Dellelce LLP in Toronto, raises the spectre of artificial intelligence, which is increasingly making its way into fintech. Using machine learning to assess loan applications may cut down processing times to seconds as opposed to days, in a perfect example of how fintech is disrupting traditional processes. It might also introduce problems as computer code unwittingly causes a company to discriminate against some customers. Algorithmic bias is a reality, and it has already been alleged in other fields ranging from online advertising to predictions of criminal recidivism.
“All of a sudden you now have constitutional laws and discrimination issues,” he warns. The more of the future that technology carves away, the more frayed the edges become — and the more unexpected the challenges may be.
Startup budgetary constraints combined with fintech’s broad implications mean that lawyers have to think differently about the way they engage new players in this fast-evolving space.
“Traditional firms service the banking world, which have big budgets,” says Mogo’s Skakun. She challenges legal service providers to think of the engagement as a partnership that tests their own understanding and use of technology to make themselves more efficient.
“Our roles are much more as strategic advisers [with] an understanding of the technology environment. If you don’t have that, it’s very difficult to advise the client,” says Zaman’s colleague Wendy Gross, partner and technology co-chairwoman at Osler in Toronto. “It’s about thinking outside the box, on a blank sheet of paper, about how you can creatively structure a relationship.”
Whether in-house or agency-based, legal counsel for fintech startups need a unique mix of skills. They must be arbitrators, able to negotiate between incumbent institutions and young tech experts who are charging unnavigated territory. They must steer a steady course through sometimes stormy regulatory seas, and — perhaps most importantly — they may find themselves doing it on a shoestring.
No one said disruption was going to be easy.
“I said ‘you can do them, but for some of them, you need to be a bank,’” recalls Zaman, a partner in the financial services group at Osler Hoskin & Harcourt LLP.
“OK,” said the young, hungry and entirely unfazed client. “How do I become a bank?”
This type of conversation plays out more often in legal offices than one might think. Fintech firms are disruptors. Typically for startups, their business is built on revamping entrenched business models, targeting the traditional finance sector with new technology solutions. They bring their own challenges for Canada’s lawyers.
Fintech is a potentially lucrative industry for lawyers who understand the nuances of the business. Thomson Reuters analyzed PitchBook, the data source on investment activity used by the U.S. National Venture Capital Association, and found a 35-per-cent increase in Canadian fintech investments during 2016, reaching $137.7 million. Five years ago, Canadian investments in the sector reached just $21.8 million. Many such firms may be small fish now, but which of them will become the next PayPal?
Those that do will need legal advice to help them get there. The financial sector is perhaps one of the most heavily regulated in the country, as Mogo knows all too well. The Vancouver-based online lending company completed its initial public offering on the Toronto stock exchange for $50 million in June 2015. Its journey has taken it through many regulatory hurdles, explains the fintech company’s chief administrative and legal officer, Lisa Skakun.
“Even though we’re not a traditional bank in that deposit-taking world, we are regulated,” she says, pointing out that lending companies fall within consumer protection regulation and that its marketing activities subject it to the Competition Act. As Mogo just launched into the mortgage brokering business, it also incurs regulation related to this industry at the provincial level.
Anti-money-laundering and know-your-client technologies — collectively called “regtech” — jostle alongside technologies covering payments, investing, cryptocurrencies and even insurance in their bid to disrupt financial services companies. Robo-advisers tackling wealth management must navigate securities laws.
“The primary challenge to fintech firms is the gap between what the laws permitted before the technology existed and the solutions new technology can bring that weren’t previously possible,” says Michael Holder, associate general counsel and chief compliance officer of Toronto-based robo-advisor firm Wealthsimple. “The pace of technology is faster than the legislative process.”
The regulatory framework is relatively patchy, due in large part to the breadth of the fintech sector and the pace of development. This can leave fintech firms struggling to understand how regulations apply to their business model, which can span a variety of subsectors.
“Understanding which of those layers need to be pulled back and which ones don’t apply is a real challenge,” says Gregg Aamoth, CEO of POPcodes, a Calgary-based fintech startup that uses technology to deliver loyalty programs and in-store pickup via point-of-sale terminals.
Resolving these uncertainties is where lawyers can offer real value to clients, explains Kristen Thompson, partner in the national technology practice at McCarthy Tétrault LLP in Toronto. She adds that Canadian regulators have been slow to engage fintech, but it’s not because they aren’t interested.
“Regulators don’t want to rush ahead to regulate as has been done in some cases,” she says, citing the introduction of strict “BitLicense” regulations in New York State to manage cryptocurrency as an example. Instead, a soft step is preferable.
The Canadian government has emphasized fact gathering in its approach to fintech-related issues. In 2015, the Department of Finance issued a consultation paper on national retail payment systems, for example, while the Competition Bureau launched a study in May last year focusing squarely on fintech innovations.
At the provincial level, the Ontario Securities Commission is leading the pack with its LaunchPad initiative, says Stephen Redican, business department leader in the Toronto office at Borden Ladner Gervais LLP.
“This is not an incubator or a sandbox,” he explains. “It’s more of an ability for fintech companies to speak with the regulator in a non-legal way to determine what they need to do to comply with securities laws in launching their product online.”
Redican calls for partnerships between the federal government and the provinces to create similar initiatives across the complex legal landscape.
In many cases, fintech firms partner with incumbent financial services firms because they need either regulatory shelter or market leverage.
“A lot of them are looking at partnering with financial institutions, because banks here have a very good consumer confidence index, and consumers will look to banks to offer their products and services,” says Nicolas Faucher, co-president of the corporate/commercial section at Fasken Martineau DuMoulin LLP in Montreal.
This can lead to some cultural differences as two players — large, conservative incumbents and small, hungry disrupters — come to the table. Schisms can emerge between banks and fintech teams or between legal and tech teams, each of which has its own agenda. Banks are often slower and more conservative for a reason, points out Osler’s Zaman.
“As nimble as they would like to be, if you’re a large organization, you have some framework restrictions on you. You can’t easily change direction or introduce new things from a speed to market or appreciation perspective without fully appreciating the impact of that on other parts of the organization,” he says.
Conversely, fintech startup teams are often more tech-focused, and they frequently don’t understand the legal complexities that the banks face, let alone the regulatory ones. This can lead to some friction.
“What I often see happening is a first interaction where both sides come to the table maybe thinking that the other side doesn’t get it,” says Donna Parish, vice president deputy general counsel in the Canadian personal and commercial banking legal team at the Bank of Montreal in Toronto.
“Another thing I think is being open to failure,” she says, citing this as a key difference between fintechs and banks. “It may be that the proposed solution isn’t necessarily workable, or we might come across one that’s better or different in the course of thinking about it.” Teams must be flexible in how they tackle these complex, evolving business propositions, and it takes strong partnerships between banks and fintechs to do that.
These cultural challenges stem from another difficulty facing fintech firms: funding.
“A lot of startups don’t have the funds to have a team of lawyers or in-house counsel,” says Kyle Lavender, an associate at LaBarge Weinstein LLP in Vancouver, the firm that counselled Mogo on its public offering. “So you’re working with a team of smart individuals who are more focused on tech and finance kinds of things. It takes some patience sometimes on the part of legal counsel.”
Financial constraints can cripple a fintech’s ability to execute on its business plans. POPcode’s Aamoth recalls that a partner wanted $5 million in cyber-risk insurance, but the company wasn’t able to get it. The financial resource needed to handle international regulatory hurdles also stopped the company’s expansion into China and Malaysia, he recalls.
Funds may be small, but the challenges to fintech firms remain large. Alongside the regulatory issues, they face everything from intellectual property to labour law challenges, not to mention the traditional legal requirements involved with tackling capital markets.
Other challenges lie at the cutting edge and are barely visible. For example, Geoffrey Cher, partner at Wildeboer Dellelce LLP in Toronto, raises the spectre of artificial intelligence, which is increasingly making its way into fintech. Using machine learning to assess loan applications may cut down processing times to seconds as opposed to days, in a perfect example of how fintech is disrupting traditional processes. It might also introduce problems as computer code unwittingly causes a company to discriminate against some customers. Algorithmic bias is a reality, and it has already been alleged in other fields ranging from online advertising to predictions of criminal recidivism.
“All of a sudden you now have constitutional laws and discrimination issues,” he warns. The more of the future that technology carves away, the more frayed the edges become — and the more unexpected the challenges may be.
Startup budgetary constraints combined with fintech’s broad implications mean that lawyers have to think differently about the way they engage new players in this fast-evolving space.
“Traditional firms service the banking world, which have big budgets,” says Mogo’s Skakun. She challenges legal service providers to think of the engagement as a partnership that tests their own understanding and use of technology to make themselves more efficient.
“Our roles are much more as strategic advisers [with] an understanding of the technology environment. If you don’t have that, it’s very difficult to advise the client,” says Zaman’s colleague Wendy Gross, partner and technology co-chairwoman at Osler in Toronto. “It’s about thinking outside the box, on a blank sheet of paper, about how you can creatively structure a relationship.”
Whether in-house or agency-based, legal counsel for fintech startups need a unique mix of skills. They must be arbitrators, able to negotiate between incumbent institutions and young tech experts who are charging unnavigated territory. They must steer a steady course through sometimes stormy regulatory seas, and — perhaps most importantly — they may find themselves doing it on a shoestring.
No one said disruption was going to be easy.
