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.
An instrumental move toward becoming regulated was the creation of the Peer-to-Peer Finance Organisation in August 2011.
“From our perspective, the regulatory piece is essential, it gives us legitimacy,” says Mr Gowar at Ratesetter. “It’s a rubber stamp of authenticity.”
Specific details about the regulation itself are yet to be released and are still in consultation, but it is believed they will cover credit-checking procedures and capital adequacy requirements. Mr Gowar says, while there have been numerous recent innovations in finance, all have operated within regulations that were set down decades ago; social lending is the first new regulated activity in 30 years.
For the crowdfunding platforms, regulation already exists and the firms have taken the necessary steps to make sure they are being supervised by the FCA. “It is our view that regulation is required and we are legally obliged to have authorisation,” says Jeff Lynn, chief executive of Seedrs.
Platforms like Abundance Generation, Seedrs and CrowdBnk are regulated to offer investments, but the manner in which they do this is different. Abundance Generation allows investors to buy debentures – a type of debt instrument – in the renewable energy projects, whereas Seedrs is regulated like a fund manager. Meanwhile, CrowdBnk is an appointed representative of BriceAmery Capital, the asset management company.
One thing to bear in mind about all of these firms, however, is their treatment under the FSCS. Social lenders like Ratesetter are not covered. And for crowdfunding platforms like Seedrs and Abundance Generation, the lines are blurred. Crowdcube, for example, says it has FSCS coverage in the event it fails to meet its liabilities, but this is not the case for the actual underlying investments.
Risk factors
