Marketplace lending booms even as P2P lenders face ‘uncharted’ regulatory waters

While Toronto-based digital lender suspends loans, Vancouver’s Grow nears $1 billion mark  

Grow founder and CEO Kevin Sandhu | Photo: Chung Chow

Vancouver-based Grow launched little more than a year ago, but, by Kevin Sandhu’s estimate, the dollar figure attached to applications processed by his online marketplace lending service is “nearing a $1 billion.”

“There was a big spike in mid last year onward as we started to branch out and explore a bunch of partnrships that opened up a lot of exposure,” the CEO told Business in Vancouver.

That includes securing more deep-pocketed investors backing loans to borrowers, a partnership with First West Credit Union and an investment totalling $10 million from the respective founders of Vancouver’s PlentyOfFish and Peer 1 Hosting.

While $1 billion might be small compared with what Canada’s Big Five banks process annually, Grow and other marketplace lending services are not deposit-taking institutions.

Marketplace or peer-to-peer (P2P) lenders cut out banks from the loan process altogether. Instead, digital platforms connect investors directly to borrowers, who can get approved for loans online within 24 hours.

Institutional funds, credit funds and a growing number of traditional financial institutions back most marketplace lending in Canada.

Sandhu said he couldn’t reveal the typical yield delivered to investors, but corporate securities lawyer Alixe Cormick said these types of lenders usually offer 8% to 14% interest to investors.

Other entrants to the Canadian market over the past year include Toronto’s Borrowell and OnDeck, a lender headquartered in the U.S., where P2P lending faces fewer restrictions.

In June 2015, the Ontario Securities Commission (OSC) cautioned P2P lenders that they were required to follow the province’s Securities Act.

“If you are approaching any Ontario investors to fund peer-to-peer loans or loan portfolios, then you should be talking to the OSC about securities law requirements, including whether you need to be registered or require a prospectus,” said Debra Foubert, the OSC’s director of compliance and registrant regulation.

But on March 1, months after the OSC’s warning, Toronto-based P2P service Lending Loop voluntarily suspended new loan requests.

“Lending Loop is currently engaging in discussions with the appropriate securities regulatory authorities,” the company posted on its website.

“We’d like to thank you for your patience as we put forth efforts that will bring a more robust peer-to-peer lending model to Canada for the long term.”

The BC Securities Commission (BCSC) did not directly respond when asked if it had concerns that local companies were not be complying with securities regulations.

“Where we find evidence of non-compliance, we would investigate and prosecute it the same as we would outside the peer-to-peer lending space,” the BCSC said in an emailed statement.

Sandhu said he has consulted with regulators in B.C., Alberta and Ontario to ensure Grow is complying with rules in those provinces.

“When you get to that true peer-to-peer [lending], as in a regular retail investor, a mom-and-pop investor with $20,000 worth of savings … now we’re getting into a bit of uncharted territory,” he said.

Cormick, founder of Venture Law Corp., said most of the online platforms in Canada are registered as exempt market dealers. This allows them to underwrite securities that are exempt from prospectuses.

“Investors are agnostic. They don’t care if it’s a consumer loan or a loan to a small business,” Cormick said. “When you’re talking about loans to small businesses, the portals are actually offering a security. So a promissory note is considered a security in that context.”

Sandhu said he favours tighter regulations due to the significant amounts of sensitive information lenders possess.

“Like any other growing industry, you invariably attract some bad apples,” he said, “and I think that those bad apples are going to end up impacting consumers.”