Antoine Cardinal was looking for alternatives to traditional investments when he decided to turn to a peer-to-peer lending platform to invest earlier this year.
“I was looking for an investment vehicle to diversify my investments. I have a few stock funds, but I wanted to try to cut out the middlemen,” says the 31-year-old.
This resident of the West Island of Montreal already had experience with a non-traditional platform. He had opened an account with a robo-advisor to help him manage his personal assets. “I had invested with Wealthsimple in the past,” he says, referring to the financial technology (fintech) company in which Montreal financial conglomerate Power Corporation is a shareholder.
However, he had never used a peer-to-peer lending platform before.
Peer-to-peer (P2P) lending connects a person looking for a loan with one or more people looking to invest. It is a way to invest in consumer loans and collect monthly passive income (interest) like banks do.
“For lenders, P2P is a way to diversify savings. It generally comes with a higher rate of return than that of a savings account, but also with a higher risk,” says Jean-Philippe Vergne, professor at the School of Management at University College London, United Kingdom.
“It also gives lenders the ability to fund loans based on personal values or wanting to help people achieve specific goals, although I doubt that is the primary motivation. »
This specialist in financial technology companies adds that the days of unregulated P2P lending are over. “Regulations still vary from jurisdiction to jurisdiction, but they are now well known, understood and relatively stable. In fact, regulation has prompted many P2P lending platforms to adjust by acquiring a banking license [e.g. Lending Club in the US] or exit the industry altogether,” he says.
“After a period of relative laissez-faire from 2006 to 2012, regulators in Canada, the United Kingdom and the United States have really clarified the rules of the game over the years,” specifies this expert.
“Regulations are stricter for P2P lending because platforms offer investment contracts, which rightly come with strict obligations. »
As the alternative financing industry grows in Canada, regulation of the industry continues to expand. The Financial Markets Authority (AMF) has in the past published opinions to clarify its position regarding private loan platforms.
The AMF’s most recent opinion dates from 2017 and results from the recommendations made by a working group dedicated to fintechs created with the aim of analyzing the development of these companies and anticipating the issues that could arise in terms of regulation. and consumer protection.
In Quebec, however, there is still no specific legislative framework with regard to P2P platforms and the AMF is continuing its analytical work on the development of a legislative or regulatory framework adapted to lending platforms. These may, however, be subject to obligations under certain laws administered by the AMF, in particular the Securities Act.
And it is the responsibility of the platform to ensure compliance with the requirements of applicable securities regulations. “No one is supposed to ignore the law,” says Sylvain Théberge, spokesperson for the AMF.
Jean-Philippe Vergne points out that P2P lending platforms offer unsecured loans, meaning defaults hit lenders hard.
There are two types of failures. The company operating the platform can go bankrupt, without the loans themselves being bad loans. In this case, a third party could take over the loans and the lenders could end up recouping their investment.
There is also a risk that borrowers will default in large numbers (if an economic shock were to occur, for example), in which case lenders no longer get paid and the platform operator finds itself chasing borrowers . “This situation leads to increased legal costs, a bad reputation and, often, the bankruptcy of the platform operator due to increasing costs and decreasing revenues,” says Jean-Philippe Vergne.
If an evolution has been observed over the years despite the relatively small number of companies in the sector, Sylvain Théberge maintains that P2P has not experienced the expansion that one could have envisaged in 2007-2008, when this phenomenon was beginning to manifest itself. This assertion is, however, not supported by precise data, simply by an impression of the time, specifies the AMF spokesperson.
The Canadian Securities Administrators (CSA) maintain that it is difficult to precisely quantify the number of P2P platforms in the country, because to arrive at a precise number, it would be necessary to check the list of all the brokers on the exempt market.
A P2P platform could very well also carry out participatory financing (crowdfunding) and thus be registered or exempted from registration as a crowdfunding platform with a regulator.
A spokesperson for the ACVM nevertheless affirms that there are very few platforms doing only P2P in the country. “For example, there are 10 crowdfunding platforms registered in Canada, some of which do or could do P2P,” says spokesperson Ilana Kelemen.
