- Peer-to-peer can offer very alluring rates
- Industry has a questionable record and has suffered under the pandemic
I was surprised when an email landed in my inbox from consumer website Boring Money revealing just how many people dabble with peer-to-peer. Surveying a sample of customers on Hargreaves Lansdown, interactive investor and AJ Bell, the results found that 16 per cent of private investors also engage with peer-to-peer lending or crowdfunding.
On the face of it, perhaps it shouldn’t be surprising. By cutting out the banking middlemen, peer-to-peer providers aim to provide investors with much higher rates than those available from banks. Funding Circle (FCH), the only listed peer-to-peer platform, says on its website that you can earn a projected annualised return of 4.5 to 6.5 per cent via loans made to small businesses.
Zopa, the UK’s second-largest peer-to-peer player, states projected returns of 2 to 5 per cent. Here, loans are made to individuals for plans such as a car purchase or home improvements. Zopa has 60,000 investors and has organised over £6bn in loans during the past 16 years. Tamsin O’Neill, public relations manager at Zopa, says investors’ money is split into chunks “as small as 0.5 per cent” of their investment before being lent out, as diversification is key for managing defaults.
Property is the third type of peer-to-peer lending, offered by platforms such as CrowdProperty, where you’re usually lending to developers or individuals so they can build or refurbish a property. To date, CrowdProperty has funded more than 280 property project loans with a 100 per cent capital and interest payback record to investors, according to its website.
Select peer-to-peer products are available within innovative finance individual savings accounts (Ifisas), which allow you to invest in peer-to-peer without paying tax on the income. Introduced in 2016, their uptake has been slow but is increasing. The government has not yet published statistics for the 2019-20 tax year, but the market value of funds in Ifisas had reached £719m as of April 2019, up from £46m in 2017.
Dealing with the pandemic
Even before the pandemic a number of peer-to-peer platforms were struggling to make ends meet. Some of the largest peer-to-peer lenders have also curtailed their private investor offering following participation in the government’s coronavirus business interruption loan scheme (CBILS), designed to save small- and medium-sized enterprises.
Funding Circle, Assetz Capital, LendingCrowd and Folk2Folk were all approved to offer CBILS. However, funding was only allowed to come from institutional investors, and there are now fewer options for private investors looking to access peer-to-peer loans. Funding Circle, for example, paused all non-CBILS lending last year, which meant new investments were not available to the private investor market.
Peer-to-peer loan quality available to private investors may also have been affected, as borrowers are less likely to turn to peer-to-peer platforms when cheaper, easier government-backed loans are available. Default rates are also expected to be higher for CBILS than the historic sector average, and they are only 80 per cent backed by the government, which could prove damaging for the providers involved.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, says the pandemic has been the biggest test so far for the peer-to-peer market and plenty of investors have discovered the downsides the hard way, with some providers collapsing and others lowering target return rates. "A flood of withdrawals early on in the crisis meant some people were waiting for months for their money back, with no idea when it would arrive," she says.
If you decide to invest in peer-to-peer, make sure you do a lot of due diligence on where your money is being put to work. Your money is at risk if the loans default, and you would probably have to wait for months to access your money in the case of platform insolvency. When you invest peer-to-peer, your money is normally not protected by the Financial Services Compensation Scheme.
However, peer-to-peer lending has been regulated by the Financial Conduct Authority (FCA) since 2014 and platforms are obliged to ringfence your assets from their own. If a peer-to-peer platform were to fold, you should still receive your investment returns provided the loans don’t default.
Below is a list of significant peer-to-peer platform closures since 2019, compiled by peer-to-peer research agency 4thWay. It applies to companies that have changed their business model, sold peer-to-peer operations that were subsequently closed or decided to close – a few in disgrace.
Now available to institutional lenders only. Permanently stopped doing peer-to-peer lending in 2021 and is winding down gently. Lenders are likely to keep making stable profits till fully repaid.
The House Crowd
The House Crowd was last claiming that lenders averaged 7%-10% returns each year from 2016 to 2020, yet the administrators state that all of its outstanding development loans are bad debts in the process of being recovered.
Stopped doing P2P lending in 2020, during the Covid-19 outbreak.
Operations sold to Metro Bank.
Closed as it couldn't meet its own liquidity targets. All lenders are fully paid off.
Decided to close gently when faced with greater regulations relating to the particular way it structured its lending. P2P Finance News reported in August 2020 that CrowdLords wants to re-open to sophisticated lenders.
Switched away from P2P lending years ago, but went bust in 2020.
Now available to institutional lenders only. Stopped doing P2P lending in 2019. All lenders got their money back and earned all interest they expected to while lending.
Switched away from doing peer-to-peer lending in December 2019. It now only allows financial institutions to fund loans through it.
UK Bond Network
UK Bond Network closed its doors to arranging new P2P loans in 2019.
Closed in 2019, stating it could no longer offer lenders the risk-reward balance it believed necessary. Most loans are already repaid.
Went into administration in October 2019 with a lot of bad debt outstanding.
Basset & Gold
The FSCS found in 2020 that Basset & Gold was mis-selling and individual lenders can now put in a claim for compensation. Basset & Gold went bust prior to this, in April 2019. Lenders haven't yet received any repayments or interest, and they will not be repaid in full.
Closed in 2019 with a lot of question marks hanging on it, such as whether it was properly ensuring that P2P lending was ring-fenced from the businesses that Lendy itself owes.
The regulator is clearly worried that people are sucked into some peer-to-peer products without fully appreciating the risks. In December 2019, regulations were introduced which meant that new investors who have not received independent financial advice must be assessed to check they fully understand how peer-to-peer works. New investors are not allowed to put more than 10 per cent of their investable assets into peer-to-peer.
Under current regulations, peer-to-peer providers are allowed to advertise to all investors, but the FCA is now examining whether an advertising ban is necessary for some platforms. A similar ban was introduced for ‘mini-bonds’ last year following serious concerns that speculative mini-bonds were being promoted to private investors who neither understood the risks involved nor could afford the potential financial losses.
If an advertising ban comes in, this could present an existential threat to some of the smaller providers that rely on individual investors to generate loans. The FCA has said that it is not suggesting an advertising ban for all peer-to-peer agreements, but is looking at whether certain types of high-risk peer-to-peer agreements should not be mass marketed to private investors.
Ben Yearsley, director at Shore Financial Planning, believes that most peer-to-peer products are only suitable for sophisticated investors. He has looked at providers such as Funding Circle, Zopa and Rate Setter and been put off owing to an “opacity” around them – you can’t see exactly where your money is being lent.
The brighter side
Some of the largest peer-to-peer lenders have consistently delivered decent returns for customers. O’Neill says Zopa’s core product achieved average returns of 4 per cent while Zopa Plus returned 5.1 per cent in 2020. She adds that in 2020, Zopa Core had a net default rate of 2.5 per cent and Zopa Plus 3.5 per cent. To manage high demand for its investment products amid tighter lending criteria, the platform put new investors on a waiting list towards the end of last year.
While Yearsley is cautious on the sector, he has invested via Downing and achieved target returns of around 5 per cent. Downing offers Ifisas lending money to UK businesses that own real assets such as care homes and solar farms. The bonds are typically secured against assets, with a loan-to-value ratio of under 75 per cent and rates that range from 2.25 to 7 per cent a year. The current weighted average interest rate on Downing Crowd Bonds is 5.37 per cent.