The peer-to-peer lending industry lent £1.2bn in 2014, according to the Peer-to-Peer Finance Association (P2PFA), and has now lent more than £2.1bn in total, doubling in size since the end of 2013. The figures also show growth in the number of people using peer-to-peer lending, with the number of lenders increasing by one-third, and borrowers by almost 90 per cent.
Peer-to-peer lenders bring together potential lenders and borrowers via their websites, offering both parties terms that beat bank rates. They are able to do this as they are typically online businesses with fewer overheads than banks and building societies.
Rates you might get with peer to peer lending
| Lender | Possible interest rate (%) |
| Zopa* | 5.1 |
| RateSetter** | 6.2 |
| Funding Circle*** | 7 |
| ThinCats**** | 9 |
| Lendinvest***** | 6.65 |
| Landbay****** | 4.4 |
Source: lenders' as at 11 February 2015
* Projected return on loans up to 5 years
**5 year average, pre tax, assumes reinvestment and no early repayment.
***Current estimated return a year
****Average interest
*****Average net return a year
****** 3 year annualised fixed rate of interest
Read more on peer-to-peer lending
Since April 2014 peer-to-peer lenders have been regulated by the Financial Conduct Authority (FCA), which has recently conducted a review of the regulatory regime for both peer-to-peer lending and equity crowd funding. With equity crowd funding, investors put money into an unlisted company in exchange for its shares and then have partial ownership of it. You profit if the company does well, but can lose some or all of your investment if it fails.
The FCA reported that a number of companies did not meet its standards for financial promotions in 2014. It found that some peer-to-peer lenders compared investing in peer-to-peer loans to savings accounts, giving the impression that the lender's capital was secure. "Investors are heavily reliant on the credit checks and risk assessments performed by peer-to-peer firms and must understand the risks that borrowers may not pay back all of the interest or the capital," says Danny Cox, chartered financial planner at Hargreaves Lansdown.
Peer-to-peer loans are a debt investment, which is riskier than cash, so should be considered as a high-return, but high-risk alternative investment in your portfolio. If you invest in peer-to-peer loans you are also unlikely to have instant access to your money.
What's more, peer-to-peer lending is not covered by the Financial Services Compensation Scheme (FSCS) in the event that one of the companies involved collapses. If your cash is in a regulated bank and the bank becomes insolvent, up to £85,000 of your savings per company will be repaid to you via the FSCS.
The FCA was also concerned about insufficient information in promotional material about the taxation of investments; the omission or lack of prominence of the representative annual percentage rate (APR); and a lack of balance due to the prominence of the benefits of borrowing without a prominent indication of risk in relation to the borrower's financial circumstances.
The FCA says that a 2014 survey by Nesta and the University of Cambridge found a majority of those investing in personal loans said they used at least some money that would otherwise be saved. "We are, therefore, particularly concerned about promotions in this sector that encourage investors to see loan-based crowdfunding (peer-to-peer lending) as being equivalent to holding money on deposit," says the FCA. "Investors should understand that there are greater risks involved and that they may lose some or all of their money."
In terms of equity-based crowd funding platforms, the FCA said that its supervision resulted in a number of interventions, for example to ensure that only appropriate types of customers were allowed to invest, and that financial promotions were clear, fair and not misleading, with regards to both the nature and performance of the assets invested in and the exit opportunities for investors.
The FCA said that the most common problems were:
■ A lack of balance, where many benefits are emphasised without a prominent indication of risks.
■ Insufficient, omitted or cherry-picked information, leading to a potentially misleading or unrealistically optimistic impression of the investment.
■ Downplaying important information, for example risk warnings being diminished by claims that no capital had been lost or the relevant risk warnings being less prominent than performance information.
The FCA also says it has had reports of sites deleting negative comments, which could lead to users overlooking the risks. But it adds that when it told the companies concerned to make changes to their websites all were keen to comply and most made the required changes with immediate effect.
Hargreaves to enter P2P market Last week Hargreaves Lansdown announced that it is setting up a marketplace lending (peer-to-peer) service and new cash management services, although these will take 18 to 24 months to develop. The service is initially expected to be available only to Hargreaves Lansdown customers as borrowers or lenders, and borrowers' loans will be secured against the value of their portfolios. Mr Cox says borrowing against your portfolio is a service more associated with private banks. Hargreaves says this service will allow clients to stay invested even if they need money for something, reducing capital gains tax liability, avoiding transaction costs and improving growth. |
Peer to peer Isas
The Financial Conduct Authority (FCA) has also conducted a consultation on how it will include peer-to-peer loans in individual savings accounts (Isas). It is expected that it will release a policy statement on this in mid to late March, and that investors will be able to include peer-to-peer loans in Isas this year or in 2016.
However, the form that this will take is currently unclear. Options include allowing peer-to-peer loans to be included alongside other investments in stocks-and-shares Isas, or the launch of stocks-and-shares Isas that invest exclusively in peer-to-peer lending. However, the second option would severely limit choice as you are only permitted to open one stocks-and-shares Isa each year, and so would have to put all your money in peer-to-peer lending and cash.
However, many providers favour the launch of a third Isa category based purely on peer-to-peer, which would allow investors to hold these alongside Isas invested in cash, and stocks and shares. "Our strong view is that government should establish a new Isa category to enable consumers to understand the difference between peer-to-peer lending, cash savings and stocks-and-shares investments," says Christine Farnish, chair of the P2PFA.
But transferring a peer-to-peer Isa could be difficult.
"Investors have to have the option to transfer their Isa to another Isa manager if they wish," says Mr Cox. "However in the case of a peer-to-peer investment this option would not be available without cashing in, and without a secondary market investors might have to accept large losses if they did. A third-way peer-to-peer Isa could have different rules on transfers to cash and stocks-and-shares Isas."
It has already been agreed that peer-to-peer platforms will be able to offer their own product direct and act as Isa managers, although it is hoped that other Isa managers will offer peer-to-peer loans. The main fund platforms have not yet said what their plans are in relation to peer-to-peer Isas, in part because they are waiting to see the outcome of the Treasury consultation.
