Kevin Caley is founder and Managing Director of ThinCats, the UK’s largest peer to peer platform offering secured business loans. Here he sets out to debunk the myths of peer-to-peer lending
In a recent IFA Magazine article, Yorkshire Building Society published research stating that fewer than one in five financial advisers have already invested or would invest, their own money into peer-to-peer (P2P) lending schemes. The same research found that 82 per cent of advisers believe customers do not understand P2P lending rules.
So far, so bearish? But a closer look at the report paints a decidedly more optimistic picture for an industry which is one of the fastest growing financial services in the UK and has lent over £1bn to date. An estimated 20% of advisers questioned have had more enquiries from clients about investing in P2P over the last 12 months. As to the future, 45% of advisers questioned thought interest in P2P would grow with the advent of new savings rules and around 45 per cent believed the new Innovative ISA would switch more investors on to P2P. All of which suggests that clients are increasingly likely to ask advisers for advice on P2P over coming months.
Yorkshire Building Society is the first of the established players to highlight the challenge P2P poses. They have obviously spotted that the returns possible from P2P are becoming increasingly attractive to investors. As P2P becomes more mainstream and with P2P ISAs offering 7 or 8% interest set to launch in 2016 the battle lines are firmly drawn. So let’s try to dispel some of the myths associated with P2P so advisers can gauge the scope of the opportunity this exciting new sector provides.
1: P2P Has High Default Rates
P2P lending connects individuals or companies seeking capital with investors looking for a good return. Interest rates available range between 4% and 15% making it an appealing option for investors in the current low interest environment. Inevitably there are cynics who see the rates as “too good to be true” and specifically that the risks of default outweigh the reward. But this simply isn’t true. While any investment involves an element of risk, default rates for peer-to-peer are low: for ThinCats they are under 1.2%.
2: P2P is uncharted territory; we don’t understand the risks involved
P2P is a new asset class which performs differently from equities. Returns are not dependent on the markets so, the traditional health-warning that your investment “can go up or down” in value doesn’t really apply. P2P loans are based on a fixed interest rate contract between the lender and borrower so they deliver a predictable fixed return unless the borrower defaults. You only have to look at recent market turmoil to see how valuable fixed income assets like P2P can be in a balanced portfolio.
3: P2P is not regulated
A commonly held misconception is that P2P is unregulated. Central to this belief is the lack of FSCS cover for lenders. In P2P lenders make a loan directly to each borrower rather than going via an intermediary so FSCS cover isn’t relevant. But that doesn’t mean that there’s no protection, each individual loan is direct and remains enforceable even if the platform fails. What’s more P2PFA membership and FCA regulation means that each platform has to have arrangements in place to manage an orderly run-down of loans in the event of platform failure.
4: Would P2P be able to withstand a financial crisis?
As peer to peer lending came to the fore relatively recently, many question if platforms would survive a financial crash. But don’t forget that the survival of the p2p platform (which only acts as a ‘dating agency’) is distinct from the performance of the loans that it offers. So even if the platform goes out of business the loans remain in place. An economic downturn might also cause some borrowers to face difficulties in repaying their loans it is the platform’s job to minimise the possibility of default with the recovery of loans dependent upon the quality of any security. At ThinCats borrowers have to undergo a rigorous due diligence process from our sponsors before loans go on the platform. They also have to provide security that we will call in if they default. Should the worst happen and the peer-to-peer platform cease trading the FCA and P2PFA require platforms to have arrangements in place to provide an orderly run down.
5: P2P is not a mainstream investment
Another concern for advisers is that the FCA still identifies peer-to-peer lending as a ‘non-standard investment’, making it very difficult for an adviser to recommend peer-to-peer loans. We understand that this is an issue and we have been lobbying the FCA to change this. Hopefully, the introduction of the new Innovative Finance ISA, allowing consumers to invest in peer-to-peer loans inside the tax free wrapper for the first time, will encourage a rethink.