Peer-to-peer lending (P2P) has experienced astonishing growth in the UK since its inception a decade ago, but it is only over the last eighteen months that it has changed course from ‘alternative’ to mainstream. The previously constraints of choosing between putting your money into low-risk, low-return options such as bonds (or even just straightforward bank savings accounts) and negotiating the often volatile stocks and shares market are no more.
By lending money directly to real people seeking a loan, both lender and borrower reap the benefit of a streamlined, online matching process. For the latter, this translates into a personal loan at a competitive APR, while the lender will enjoy returns typically in excess of 5 per cent. Compared with the derisory rates currently being offered by banks on savings accounts, the clamour which has seen the P2P industry breach the £3 billion mark comes as little surprise.
This number is expected to swell to £50 billion by 2017 too with the launch of a new Innovative Finance ISA (IFISA), of which P2P is recognised as the premier component. IFISA, which goes live in April 2016, represents a huge coup for our sector, and is an important acknowledgement of the uniqueness of peer-to-peer as an asset class.
Given our differing risk profile to banks – lender capital is not covered by the Financial Services Compensation Scheme – the existing Cash ISA would have been an inappropriate wrapper for P2P to be shoehorned into. Yet, given the dependable returns the P2P sector has provided lenders over a tumultuous period for the rest of the UK’s financial services sector, the existing Stocks & Shares ISA would hardly have been a good fit either.
Despite the lack of FSCS cover, most platforms have measures in place to minimise the risk of capital loss. A lender’s money is normally diversified over multiple loans, while reserve funds to compensate for any arrears and defaults on borrower repayments are commonplace.
Consumer confidence is the very lifeblood of our sector, and it is why we take such measures to ensure those who invest their hard-earned money with us can rest easy at night. As such, every platform worth its salt in the UK stands united in their embrace of regulation.
The big breakthrough on this front for peer-to-peer lending has been that of incoming FCA regulation. Platforms have been allowed to operate under interim permissions since April 2014, but the application deadline of 31 October for full FCA authorisation is a defining one. Over 100 companies have already applied, and any industry which experiences exponential growth (around £1.3 billion in loans were originated in the UK in 2014, versus £480 million in 2013) will attract its share of opportunists and upstarts.
However, the rigorous – and expensive – demands laid out by the FCA regulatory framework will wean out those platforms not fit for purpose, leaving behind only the most credible who have proven their worth as a sound investment option for lenders.
The collective view among us all is that we want to create an enduring service which presents a sustained challenge to the inefficiencies and poor risk-reward value that has dogged financial services in the past. Regulation will be key in achieving this, and, most importantly, will give lenders reaffirmation that they are justified in their investment choice.
We would never advocate piling all of one’s money into any single platform, or in peer-to-peer lending as a whole, becausediversification is at the heart of sensible investing. But for those looking to do more with their portfolios, P2P is becoming a viable and lucrative candidate for a slice of the pie.
We’re often referred to as alternative, or as ‘disrupters’. And yes, such terms carry a modicum of truth to them, given the size of the high-street establishment we’re up against. But our outlook is that we’re actually delivering a simplified service where the value and benefit is absorbed by the consumer, not a series of profit-hungry intermediaries. If that’s disruptive, then our question is… How on earth has the status quo persisted this long?
Nick Harding is the CEO of Lending Works