Peer to peer lending in Isas: The Expert View
Neil Lovatt, Product Director of mutual society Scottish Friendly
“Peer to peer lending is almost a reboot of the concept of mutuality; it’s a new source of capital for enterprise and an alternative capital model for the modern economy. The government’s proposal is a bold step that is in the long term interest of our economy and should be encouraged to develop further.
“Peer-to-peer lending has the capacity to challenge the current financial services system, allowing for more favourable features and rates for borrowers. In addition, investors benefit from a better yield than many are currently getting.
“Crowdfunding and peer to peer lending are just the first fruits of what will be possible in the future. Initiatives like the new ISA are a fundamental step in the evolution of the UK financial services industry.”
Bruce Davis, cofounder of Zopa, plus cofounder and CEO of Abundance
“Abundance welcomes today’s next step in allowing innovative alternative finance products into the ISA regime, so that the attractive returns already available become entirely tax free – levelling the playing field with Banks and the fund management industries.
We hope that some of the key issues to be tackled such as advice, transferability and access are not allowed to create additional expense or compromised benefits for the customer.
The consultation paper only covers P2P providers using “simple loans” and does not include debt securities such as the PLC-issued debentures that Abundance uses. Debentures offer distinct and significant advantages and protections for the investor and we are pleased to be continuing our discussions with HM Treasury and other debt security based providers about this model being included in the P2P ISA development.”
Andrew Hagger of Moneycomms.co.uk
“Being able to put P2P savings into the ISA tax free wrapper would be a huge shot in the arm for the established providers in what is already a rapidly growing sector.
RateSetter alone is currently seeing inflows of more than £30 million pounds per month.
With interest rates on cash ISA products at rock bottom, the option to be able to tap into an alternative market and earn a far greater return will undoubtedly appeal to savers seeking improved returns.
Banks seem to have lost interest in retail savings and this could play into the hands of P2P providers with more streamline business models, lower overheads and very attractive interest rates.
While there is no cast iron FSCS guarantee in place with P2P the most popular consumer based P2P sites, RateSetter and Zopa manage the safety of their savers money by using their ‘Provision fund’ and ‘Safeguard fund’ accordingly.
If the rates available from the P2P players today were able to be used in an ISA, the table below shows how the returns would fare compared with the best buy fixed rate ISAs.
1 year fixed rate ISA
Annual interest on £5000
Post Office – 1.70% – £85
RateSetter – 3.20% – £160 £480
5 year fixed rate ISA
5 years interest on £5000 (exc compounding)
Principality Building Society – 2.75% – £687.50
Zopa – 5.2% – £1300.00
RateSetter – 5.8% – £1450.00