This post was written prior to our January 2017 merger, under our previous firm name, MacPherson Leslie & Tyerman LLP.
Authors: Lynn Hnatick, Jocelyn R. Sirois, Katrina Wagner
A recent decision by the Ontario Securities Commission (“OSC“) granting Vault Circle Inc. (“Vault Circle“) regulatory approval to participate in marketplace lending may signal a shift in the treatment of peer lending platforms throughout Canada.
Peer-to-peer lending has been described as “somewhere between saving and investing.” Essentially, it involves a platform company working entirely online to connect individual borrowers to lenders. Much like Uber for cars or Airbnb for accommodations, a peer-to-peer lending platform company provides a similar service for money. By circumventing the traditional banking system for lenders to save their money and for borrowers to obtain loans, both the lender and the borrower obtain a better rate. The platform company has significantly reduced overhead costs by virtue of operating online, which allows lenders to receive a higher rate of return than they would saving their money with a bank, while borrowers pay less interest on their loans.
This phenomenon has been extremely successful in both the UK and the United States, but Canada has been much slower to adopt the practice of peer-to-peer lending. This is largely due to the interpretation of loans as “securities.” As a result, peer-to-peer lending is highly regulated in Canada by virtue of being subject to the strict securities legislation of each individual province.
Recently, however, Ontario has taken the lead in assisting peer lending platforms to navigate the regulatory framework imposed by the province’s securities legislation. In late September, Vault Circle announced the OSC’s approval of its operation as an exempt market dealer within the province. In order to become the first approved Canadian peer lending platform, Vault Circle had to work closely with the OSC to surpass scrutiny on numerous aspects of its business structure.
Earlier this year, we saw a partnership between a peer lending platform and a major financial institution in Saskatchewan in an alternative approach to peer-to-peer lending. Grow, a Canadian fintech company, partnered with Conexus Credit Union to allow Saskatchewan residents to apply for loans online quickly and easily. Grow’s partnership with Conexus was essential to its ability to meet the requirements of the Saskatchewan securities legislation.
However, the OSC’s recent decision on Vault Circle may see a significant shift in the use of peer lending platforms. Approval as an exempt market dealer would allow peer-to-peer lending platforms to operate without the need for partnerships or other legal structures. If more lending platforms are able to attain the progress that Vault Circle has recently achieved in Ontario, peer-to-peer lending may become as prominent in Canada as it is in the UK and the United States.