Canadian alternative finance lags behind the US and Europe, perhaps this is due to the regulator.
While US regulators appear to be finally allowing investment to flow to SMEs - their neighbours in Canada have been much slower to get on board. The alternative finance space has been much slower to take off in Canada and Crowdfunding options remain exclusively available to accredited investors.
On top of this, last week the Ontario Securities Commission (OSC) called into question the practices of P2P platforms, questioning whether their loans and other debt related products should be classified as securities. Under the Ontario Securities Act some debt products made online are classified as securities. Whilst loans are not regulated, other debt related products, such as bonds or debentures, are. The platforms must be registered as dealers rather than advisors in order to issue them to non-accredited investors.
“It is only feasible to work with Accredited Investors and institutional partners to fund loans on a cost competitive basis.”
Part of the regulatory confusion is due to each platform having a different structure, meaning that the regulations must be applied anew each time. For this reason, Debra Foubert (director of Compliance and Regstrant Regulation at the OSC) says:
“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.”
This is in clear contrast to the US, which has just enacted title IV of the JOBS act – enabling non-accredited investors to take part in crowdfunding (under strict rules) – and suggests a possible reason why alternative finance is a much smaller game in Canada, as regulatory barriers and licence costs are preventing platforms from expanding their operations.
That being said, the sector is showing clear signs of growth. OnDeck, an American firm which provides loans to small businesses in Canada, followed Lending Club’s example and went public last December, listing on the New York stock exchange. They raised $200 million in their IPO, valuing the company at $1.3 billion – not bad for a company created in 2006. In fact, Steven Uster (co-founder and chief executive of FundThrough) argues that the “industry is growing rapidly, so guidance from securities regulators at this time is helpful." And that effective regulation will benefit both lenders and borrowers.
Of course, whilst the alternative finance space is more restricted in Canada than in the US, it is still much less regulated than the traditional banking sector in Canada, leading to many Canadian bank CEOs to bemoan the competitive advantage. Perhaps as the industry grows and matures and risk levels fall then the regulators will relax restrictions further, closer to US or even UK levels, and allow the trading of more products and allow activity from non-accredited investors.