Peer to Peer Lending

Despite the recent increase in the Bank of England’s base rate, interest rates available through mainstream banks and building societies, including cash ISAs, remain very low. With many years of low interest rates behind us and no expectations of significant increases

in ahead of us, it is no surprise that many UK savers have been looking at alternatives.

One alternative which has been growing in popularity is ‘peer to peer lending’. In simple terms, this type of arrangement is based around a ‘platform’ which introduces potential lenders to potential borrowers without the usual middle-men – the banks.

While a leading source of data on interest rates, Money Facts, quotes easy access savings accounts as paying a very unimpressive rate of 0.52% p.a., some peer to peer (P2P) arrangements are quoting rates in excess of 9% p.a. and, like cash deposits, it is possible to hold peer to peer accounts within an ISA structure so that the interest is tax free.

It is basic common sense that higher returns generally come at the cost of higher risk and P2P is no exception. Although some P2P arrangements will be lower risk than others, they must all be seen as higher risk than actual cash deposits. It is possible to lose some or all of your loan and the financial services compensation scheme does not apply to P2P plans.

There are a number of platforms available, mostly aimed directly at consumers, and they all have some measures in place to mitigate the risks of loss. Generally, there will be a maximum of any loan which will be allocated

to a specific borrower, personal or corporate, and they generally undertake due diligence on the borrowers before accepting them onto the platform.

As mentioned, P2P plans can be held within an ISA wrapper. The rules for these ‘Intelligent Finance’ (IF) ISAs were introduced in 2016 but very few

arrangements were able to market these as the underlying platforms required approval by the Financial Conduct Authority (FCA) which is the main financial services regulator. This was

a time consuming exercise but most platforms have now met that requirement and it is estimated that around 31,000 IF ISAs were set up in the 2017/18 tax year, a massive increase over the previous year. That said, this is a mere drop in the ocean in comparison with the 10.6 million cash and stocks and shares ISAs opened in the same period. But it is clear that IF ISAs are moving into the mainstream.

At present, anyone can invest in a P2P plan, irrespective of their investment experience, wealth, or risk appetite. But the growth in the market has caused the FCA to look more closely at it. At the end of July the FCA issued a consultation paper, CP18/20, entitled “Loan-based (‘peer-to-peer’) and investment-based crowdfunding platforms”. Despite

the fact that the platforms are already approved by the FCA, this consultation proposes further regulation to control the operations of P2P platforms to reduce the risks to consumers.

A number of specific risks are highlighted, including that consumers may:

  • not be given clear or accurate information, leading to the purchase of unsuitable financial products
  • not understand or be aware of the true investment risk they are exposed to
  • not be remunerated fairly for the risks they are taking
  • not understand what might happen if the P2P platform administering their loan(s) fails
  • not understand the costs they are paying for the services the platform provides, or
  • pay excessive costs for a platform’s services

The FCA’s paper highlights a number of changes which platforms could make to reduce risk. But they are also proposing

limiting access to P2P plans to certain categories of investor:

• those who are certified or self-certify as sophisticated investors

• those who are certified as high net worth investors

• those who confirm before a promotion is made that, in relation to the investment promoted, they will receive regulated investment advice or investment management services from an authorised person, or

• those who certify that they will not invest more than 10% of their net assets in readily realisable securities

Whilst these proposed limitations may serve to prevent consumers who do not understand P2P from investing and limit the damage which a total loss would cause to an investor, feedback to date suggests that limiting access in this way would not prove popular.

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Peer to Peer Lending

Despite the recent increase in the Bank of England’s base rate, interest rates available through mainstream banks and building societies, including cash ISAs, remain very low. With many years of low interest rates behind us and no expectations of significant increases

in ahead of us, it is no surprise that many UK savers have been looking at alternatives.

One alternative which has been growing in popularity is ‘peer to peer lending’. In simple terms, this type of arrangement is based around a ‘platform’ which introduces potential lenders to potential borrowers without the usual middle-men – the banks.

While a leading source of data on interest rates, Money Facts, quotes easy access savings accounts as paying a very unimpressive rate of 0.52% p.a., some peer to peer (P2P) arrangements are quoting rates in excess of 9% p.a. and, like cash deposits, it is possible to hold peer to peer accounts within an ISA structure so that the interest is tax free.

It is basic common sense that higher returns generally come at the cost of higher risk and P2P is no exception. Although some P2P arrangements will be lower risk than others, they must all be seen as higher risk than actual cash deposits. It is possible to lose some or all of your loan and the financial services compensation scheme does not apply to P2P plans.

There are a number of platforms available, mostly aimed directly at consumers, and they all have some measures in place to mitigate the risks of loss. Generally, there will be a maximum of any loan which will be allocated

to a specific borrower, personal or corporate, and they generally undertake due diligence on the borrowers before accepting them onto the platform.

As mentioned, P2P plans can be held within an ISA wrapper. The rules for these ‘Intelligent Finance’ (IF) ISAs were introduced in 2016 but very few

arrangements were able to market these as the underlying platforms required approval by the Financial Conduct Authority (FCA) which is the main financial services regulator. This was

a time consuming exercise but most platforms have now met that requirement and it is estimated that around 31,000 IF ISAs were set up in the 2017/18 tax year, a massive increase over the previous year. That said, this is a mere drop in the ocean in comparison with the 10.6 million cash and stocks and shares ISAs opened in the same period. But it is clear that IF ISAs are moving into the mainstream.

At present, anyone can invest in a P2P plan, irrespective of their investment experience, wealth, or risk appetite. But the growth in the market has caused the FCA to look more closely at it. At the end of July the FCA issued a consultation paper, CP18/20, entitled “Loan-based (‘peer-to-peer’) and investment-based crowdfunding platforms”. Despite

the fact that the platforms are already approved by the FCA, this consultation proposes further regulation to control the operations of P2P platforms to reduce the risks to consumers.

A number of specific risks are highlighted, including that consumers may:

  • not be given clear or accurate information, leading to the purchase of unsuitable financial products
  • not understand or be aware of the true investment risk they are exposed to
  • not be remunerated fairly for the risks they are taking
  • not understand what might happen if the P2P platform administering their loan(s) fails
  • not understand the costs they are paying for the services the platform provides, or
  • pay excessive costs for a platform’s services

The FCA’s paper highlights a number of changes which platforms could make to reduce risk. But they are also proposing

limiting access to P2P plans to certain categories of investor:

• those who are certified or self-certify as sophisticated investors

• those who are certified as high net worth investors

• those who confirm before a promotion is made that, in relation to the investment promoted, they will receive regulated investment advice or investment management services from an authorised person, or

• those who certify that they will not invest more than 10% of their net assets in readily realisable securities

Whilst these proposed limitations may serve to prevent consumers who do not understand P2P from investing and limit the damage which a total loss would cause to an investor, feedback to date suggests that limiting access in this way would not prove popular.