Bill 13: the Financial Innovation Act: An Opportunity to play in the Sandbox

[co-author: Jesse Fontaine - Articling Student]

On March 30, 2022, Bill 13 passed its first reading in the Alberta Legislature. If Bill 13 receives royal assent, it will establish the Financial Innovation Act (FIA). Second reading of Bill 13 commenced on April 19, 2022.

The FIA would create a regulatory sandbox for financial services and fintech companies, becoming a safe space for companies to test innovative products or services with decreased regulatory scrutiny, and allowing companies to gauge the potential value of new products and services to consumers.

If Bill 13 receives royal assent, Alberta will become the first jurisdiction in Canada to establish such a regulatory sandbox. Similar initiatives to encourage innovation in the financial sector have arisen in other international jurisdictions. Examples of technologies to which the sandbox could apply include soft tokens, biometric authentication, application programming interface (API) services, distributed ledger technologies and mobile app enhancements. The Minister of Finance has explained that the regulatory sandbox's benefits to Albertans will be twofold: first, by increasing the presence of innovative product offerings to Albertans; and second, stimulating further growth of Alberta's financial sector.

Proposed Exemptions

The FIA would enable the Minister to issue a certificate of acceptance to approved companies that provides time-limited exemptions to certain laws and regulations for a two-year period, which may be extended for an additional year. Companies participating in the sandbox may be exempt from some or all of the legal requirements set out in the following Acts:

1. the Loan and Trust Corporations Act;
2. the Credit Union Act;
3. the ATB Financial Act;
4. the Consumer Protection Act (pending approval from the Minister of Service Alberta);
5. the Personal Information Protection Act (pending approval from the Office of the Information and Privacy Commissioner); and
6. the Financial Consumers Act.

Specific exemptions would depend on the relief sought by the applicant. Additionally, the proposed legislation would establish a regulation-making authority that would allow the FIA to apply to other Acts not listed above.

Acceptance Criteria

As drafted, the acceptance criteria for the regulatory sandbox includes the following mandatory conditions.

1. Physical Presence: Applicants must maintain a physical presence in Alberta by operating an office in the Province, or employing senior staff that live in Alberta.
2. Financial Services: Applicants must offer financial products or services.
3. Innovation: Applicants must describe how each eligible product or service is new and original, or a how their product or service is a new adaption or material improvement of another product or service. Exemptions will not be granted for products or services already offered in Alberta by other companies.
4. Business Plan: Applicants must present a sound and viable business plan that includes details for testing the product or service and plans to exit the regulatory sandbox.

Ministerial Discretion

The FIA's proposed framework confers a high degree of discretion on the Minister, including the discretion to impose terms, conditions or restrictions to:

1. consult a qualified expert or auditor;
2. limit the number of customers who can purchase the product or service being tested;
3. require an appropriate amount of capital to support the venture;
4. provide proof of appropriate insurance coverage;
5. implement specific financial security or surety requirements to mitigate risk and losses;
6. implement risk management policies and procedures; and
7. maintain a consumer complaint mechanism that allows consumers to resolve concerns.

Oversight

Beyond the confines of the Alberta Business Corporations Act and similar acts, the FIA provides different processes and legal authority for oversight, offences and penalties for companies operating in the sandbox. The Minister will be empowered to appoint an individual to examine a sandbox participant or its corporate partners.

The Information and Privacy Commissioner is responsible for issuing exemptions under the Personal Information Protection Act. In such cases, the Office of the Information and Privacy Commissioner will have similar powers to appoint an examiner. Nonetheless, increased privacy measures are planned to protect consumers, such as the requirement for customers to give express permission prior to disclosing privacy information to a corporation in the sandbox.

Offences & Penalties for Sandbox Participants

Penalties under the FIA mirror the provisions in other financial sector legislation, including the Loan and Trust Corporations Act, Securities Act, Insurance Act and the Credit Union Act.

Failure to comply with the terms, conditions or restrictions of a certificate of acceptance, the FIA or its regulations could amount to a fine of up to $100,000 for a first conviction, and up to $200,000 for each subsequent conviction.

Public Information

Once a certificate of acceptance is issued to a sandbox participant or amended, the Government of Alberta would publish the following information online:

1. the name of each sandbox participant issued a certificate of acceptance;
2. a description of the product or service sandbox participants offer through the regulatory sandbox;
3. a list of regulatory exemptions provided to each sandbox participant;
4. any terms, conditions or restrictions imposed by the Minister on a sandbox participant;
5. the expiry date (including any extension) of each participant’s certificate of acceptance; and
6. any amendment, revocation or cancellation of a certificate of acceptance.

Key Takeaways

• Financial services and fintech companies should follow the progress of this proposed legislation closely, and at the appropriate time consider applying for a regulatory sandbox exemption for any innovative, new and original products or services. It is expected that sandbox applications will open on or about July 1, 2022. In advance of such date, companies should ensure that they are familiar with the application requirements, including the Alberta physical presence requirement.
• Because the reporting requirements under the FIA mirror the requirements of Alberta's Business Corporations Act, Alberta corporations should review the adequacy of their corporate records before applying for a regulatory sandbox exemption.
• Those considering exemptions should seek legal advice to understand how such exemptions may impact their business and how other legislative provisions remain applicable to their business.

We will continue to monitor Bill 13 closely.