But there are questions that need to be asked. David Petrie, head of the Institute of Chartered Accounts in England & Wales (ICAEW) corporate finance faculty, says it is an important area of finance. However, questions still remain about the model’s robustness.
“It is high-risk investing. It is also important to differentiate between lending schemes, equity investment ones, reward-based ones and social venturing,” he says, adding, “There are also other well-established routes to backing growing companies, such as business angel networks [groups with money to invest] and VCTs.”
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.
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.
