This month, the Ontario Securities Commission (OSC) published its first report (the Report) on the OSC TestLab, a regulatory sandbox designed to promote innovation and modernize regulation in Ontario’s capital markets by providing a space to test novel and innovative solutions. The inaugural round of tests explored how RegTech could help address two “problem statements” by improving the accessibility of product information and improving information sharing and enhanced client interactions.
To explore how RegTech can help address these challenges, the OSC invited seven companies to test solutions within the TestLab model, affording an opportunity for real-world testing and the chance to receive data-driven feedback. The tests involved over 50 investors, 50 investment advisors, two compliance staff as well as various subject matter experts from across the OSC.
Problem Statement 1 – Accessibility of Product Information
Particularly since the Client Focused Reforms, it is imperative that advisors understand all facets of the products they offer including their structure, features, risks, initial and ongoing costs, and the impact of those costs. A thorough Know Your Product (KYP) process is a prerequisite for a well-informed and accurate suitability determination. Feedback from the tests found that RegTech could help improve advisors’ workflows, better understand the wide array of products available, and assist with sharing information and explaining recommendations to clients. Specifically, the first round of tests found that:
- Product information/comparison tools can help advisors monitor and understand portfolio fluctuations to assess recommendations and support suitability reviews.
- Automation and integration of product platforms with client information, onboarding, trading, or reporting systems can reduce friction in an advisor’s daily workflows.
- Product information tools that incorporate additional data points (i.e., comparable securities, performance benchmarks, advanced risk metrics) and solutions that create highly customized reports can help explain recommendations to clients.
- Solutions which include clear, simple, and intuitive visualizations for portfolio performance and benchmarking make the underlying data easier for advisors to understand and explain to clients.
Problem Statement 2 – Improved Information Sharing & Client Interactions
As the KYC process becomes increasingly wholistic, including understanding a client’s personal and financial circumstances, RegTech solutions can offer effective and efficient methods to gather and maintain fulsome information to satisfy this critical requirement. Particularly for firms who still deploy a manual KYC process, RegTech solutions can offer a number of benefits including improving the speed and accuracy of client onboarding, the automating of client information refreshes, and centralizing records to improve document accessibility. One particular solution which was received positively by both advisors and clients was a secure system wherein clients could update their own information. This sort of solution has obvious appeal, so long as advisors and clients remain cognizant of how those updates can impact product suitability determinations.
In addition to improving the Know Your Client (KYC) process, the initial testing revealed meaningful ways in which RegTech could improve communications between advisors and clients. For instance, RegTech solutions can for instance increase client “buy-in” by using novel approaches to facilitate discussions, minimize errors through automation by pre-populating fields and showing clients their prior responses as a comparison, and by allowing advisors to group related accounts for aggregated review and management. Solutions with these features received positive feedback during the testing.
From these initial tests, the OSC identified some “key insights” which indicate that RegTech can help support registrants and clients through improved information sharing, more accessible product information, more engaging risk assessments and knowledge building to help facilitate more informed decision-making, and an overall improvement in efficiency, quality, and variety in our capital markets. However, the Report notes that RegTech faces a range of challenges from development and testing hurdles, to supporting an evolving regulatory framework which requires innovators to build agile solutions that support registrants while providing accurate, explainable, and interpretable results.
As a takeaway, the OSC maintained its commitment to continue its work in the following ways:
Supporting the RegTech Ecosystem – the Report provided feedback that participants found real value in the opportunity to meet with other stakeholders in the space to discuss RegTech solutions. In support of this, the OSC has endeavored to continue to host periodic RegTech sessions to keep this dialogue going.
Improving Regulation Accessibility – participants in this round of testing found it challenging to craft solutions which were reliably responsive to the changing regulatory framework in light of how regulations are published. National Instruments and Companion Policies for example are currently published in PDF format making them difficult for computers to decipher. In response to this sentiment, the OSC advised that it would explore potentially making OSC rules machine-readable to support automation in developing and updating solutions when necessitated by regulatory change.
Building Support for Testing – another difficulty expressed by testing participants was a general lack of willingness on the part of market participants to engage with and test novel solutions, even under the TestLab model. In response, the OSC advised that it will be reaching out to registrants to better understand their pain points and explore why they may be reluctant to test new solutions.
Shaping/Sharing RegTech Standards – the setting of domestic and international standards was identified as a key development to help support RegTech innovation and adoption. To this end, the OSC advised it would remain active in the Global Financial Innovation Network (GFIN) to support financial innovation and explore perspectives that can help Ontario’s RegTech stakeholders and registrants.
May 31, 2023