P2P’s 10th birthday – a cause for celebration?
Since its start, the peer-to-peer sector has evolved rapidly. An average of six new lenders have entered the market every year; Zopa, the world’s oldest (and, indeed, Europe’s largest) is celebrating its 10th birthday too; to date, the firm has lent £763m to borrowers, and expects to surpass the £1bn mark later this year. In April last year, the industry became officially regulated (and recognised) by the Financial Conduct Authority (FCA). There is also an official consultation into allowing P2P investments in ISAs.
However, is this anniversary a call for celebration? We spoke to Danny Cox CFP of Hargreaves Lansdown.
“The first thing for savers and investors to bear in mind is that no P2P lender is covered by the Financial Services Compensation Scheme (FSCS),” Cox states.
However, while many may be understandably concerned by a financial product not afforded the protection of the FSCS, Cox believes this isn’t the end of the world. In fact, many lenders have established their own defences to shield investors from the impact of a default.
For instance, two years ago, RateSetter introduced a ‘provision fund’. “This measure provides for anticipated losses over a full term,” Cox says, “and is now being adopted more broadly across the industry.”
Other lenders spread an individual’s investment across as many borrowers as possible – perhaps as many as 100 or more – in order to minimise risk. This means an investor’s exposure to a defaulting lender is minimised.
“Of course, P2P investing –like any form of investment – is not risk-free,” Cox continues, “but it’s not necessarily a high-risk prospect either. Default rates in the industry have been fairly low, and aren’t anticipated to rise in the long-term.”
Whether or not these elective safeguards go some way to calming consumer fears, do rates offer an incentive to get involved in peer-to-peer? “At present, three-year fixed-rate accounts with leading lenders offer an average return of 4.4 per cent,” says Cox. “This is significantly higher than average returns on three-year fixed-rate savings accounts with mainstream financial institutions.”
There is much variation between rates from lender to lender, too. For instance, RateSetter offers accounts starting at 2.6 per cent a month, rising to 3.5 per cent a year, 5.5 per cent over three and 6.1 per cent over five. ThinCats and MarketInvoice offer variable rate accounts, which can reach highs of 10 per cent and above.
Over the past year, the prospect of P2P loans being permitted within an Isa wrapper has been widely discussed – there was even speculation that a change in the law could be announced as part of this year’s budget. While some fear that P2P will merely be bundled with stocks and shares ISAs, Cox believes a new type of ISA, just for P2P and crowdfunding to be the most likely route – but he isn’t optimistic that it’ll be available any time soon. “Many expect an announcement in the near future, I think we’re still some way off.”
With the introduction of the new pension freedoms now weeks away, many retirees are looking for products and solutions beyond annuities that offer better rates of return. Some may well be considering scattering their tax-free lump sum across a number of P2P lenders. If so, Cox recommends sticking with members of the P2P Finance Association, a voluntary and unofficial industry body. “Membership is conditional on adherence to a stringent regulatory regime, which demands transparency, integrity and protections for borrowers and lenders alike.”
However, Cox warns that all investors must treat P2P with caution.
“P2P may be attractive to investors looking for higher yields from alternative finance, but it is still a relatively new investment and a small market,” he concludes. “There are still questions about liquidity, the way some platforms credit-score their borrowers, and the stability of yields and defaults in the event of an economic downturn. Overall, P2P should not in most cases form more than 10 per cent of a portfolio.”