Peer-to-peer lending: Bypassing the banks


    But Simon Deane-Johns, consultant solicitor at Keystone Law says the whole point of crowd investing in the shares of start-ups is positive because the firms can “harness the support of many people who will be more inclined to purchase the company’s products and act as supporters through social media.”

    When it first launched, peer-to-peer lending platform Zopa was seen as more of a curiosity than a serious savings tool. But much of that has changed. One reason is its low default rate, at about 0.8 per cent (for Ratesetter the default rate is 0.3 per cent, although the firm has been operating for less time). Another is the fact these schemes are producing returns in excess of what a typical savings account can earn when the Bank of England base rate has been locked at 0.5 per cent for four years.

    Article continues after advert

    So far in the UK these investments have been the preserve of direct investors, but in the US wealth management companies have been catching on. In January the Financial Times reported that San Francisco advisory firm Brownson, Rehmus & Foxworth added peer-to-peer loans to its list of client options and predicted $100m worth of investments by the end of this year.

    Paul Duckworth, chartered financial planner at Paul Duckworth IFA, says the advantage of social lending is the way it “cuts out the middleman” and matches lenders to borrowers based on the returns they desire. He was an early adopter and lent £500 of his own money through Zopa about seven years ago seeing an approximate annualised return of 7 per cent pa. In order to mitigate risk, that £500 was divided into small chunks – say £10 – and spread across a range of borrowers.

    Even though Mr Duckworth is a convert to social lending in a personal capacity, he is not yet ready to suggest it to clients. “I haven’t recommended it and I can’t see an immediate need to recommend it,” he said, but added that the sector’s time will soon come. “It probably needs a bit more maturity to be brought into the safety net before people like me can recommend them to their clients,” he said.

    Meanwhile, Alex Gowar at Ratesetter says he would like to see financial advisers adopt social lending as another asset class for their clients’ portfolios, but he accepts that it will take time to gain acceptance.

    Regulation, regulation, regulation

    When social lending first started, regulation was non-existent and outfits like Zopa fell outside the City watchdog’s view. But starting in April 2014, peer-to-peer lending will become a regulated activity overseen by the FCA.