Data, digital innovation, and intermediaries driving growth in financial-services regulation: lawyer

Alana Scotchmer recently joined Gowling WLG from the Royal Bank of Canada

Data, digital innovation, and intermediaries driving growth in financial-services regulation: lawyer

In Canada, business and financial institution operations are becoming more complex, posing risks for the financial system regulators are working out, says Alana Scotchmer, a partner and member of the financial services regulation group at Gowling WLG.

From recent difficulties in the US banking system, the broadening presence of non-bank financial intermediaries, digital innovation, and the rise of big data and its potential, Canada’s financial-services ecosystem faces several remodelling influences, some of which are potentially transformative.

The changes are causing the regulatory landscape to grow, says Scotchmer, whose practice is focused on financial institution regulation, banking, insurance, reinsurance, and financial service intermediation.

“It's just becoming more complicated, and I think we're heading into a world where the volume of regulation is increasing, and the complexity is also increasing,” she says.

She recently joined Gowling WLG from the Royal Bank of Canada, where she served as senior counsel, advising on federal bank regulation.

Three US banks have failed since March, when Silicon Valley Bank of Santa Clara, California, was closed by the Department of Financial Protection & Innovation, and the Federal Deposit Insurance Corporation was named as receiver. Two days later, on March 12, New York’s Signature Bank suffered the same fate as San Francisco’s First Republic Bank did on May 1.

In the wake of these failures, the Office of the Superintendent of Financial Institutions (OSFI), as Canada’s prudential regulator, is reviewing the Canadian regulatory system and comparing it to other jurisdictions to ensure the safety of Canada’s financial institutions, says Scotchmer. She says there is a focus on protecting depositors with depositors’ insurance and generally enhancing consumer protection.

Scotchmer says that the increasing interconnectedness of global commerce is also driving financial institution complexity.

“We're in an increasingly globalized world, and that's been happening for the last 100 years…The connections continue to grow internationally, and the connections between players in the ecosystem are also growing.”

Banks are increasingly interacting with non-bank financial intermediaries, and tech companies are playing a growing role in the financial services world. This increases the third-party risk and the need to extend the regulatory requirements to those other players. The financial intermediaries and service providers who supply customer solutions and technology to large financial institutions are facing an increasing amount of voluntary or contractual regulatory compliance, says Scotchmer.

“If they're dealing with a bank or insurance company, a lot of the regulations that apply to the bank or insurance company are being pushed down upon them,” she says. “They have to figure out how to deal with that and how to make their business work in that context.”

The new industrial revolution will likely accompany artificial intelligence and alter how our society functions, which can also transform how people interact with financial services. Businesses are examining what technology such as generative AI means for how they provide products and services. Regulators must understand the risks and how the risks will develop in the future as the technology advances, says Scotchmer.

Something that goes together with digital innovation is the proliferation of data. Because a few players dominate Canada’s banking and insurance sectors, each institution has sensitive information on many Canadians. She says this concentration raises the obligations of enhanced data protection and cybersecurity.

“Data is a huge focus for all of these clients; any kind of financial institution or service provider data is massive…Every Canadian financial institution is becoming a is a custodian of data. They're also conversely looking at ways that they can use that data to improve their service offering and their product.”

Regulators must respond and determine the necessary protections while balancing the potential opportunities data can offer to transform the business, she says.

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