None the less, they have been given the stamp of approval from the Treasury, with the launch last week of the Innovative Finance (IF) Isa, which allows lenders to put money for lending, and interest they receive, into a tax-free account. These products are not protected by the FSCS, however.
For Andrew Lawson, chief product officer at Zopa, it is his job to steer his company’s IF Isa towards legitimacy by receiving full permissions from the FCA in a couple of months.
However, he is taking cautious steps about launching it into the market. He said: “We as an industry are lending out around £200m a month of money, and the 2014/15 Isa subscription was £78bn, with the majority of that happening in April. If we got 25p on every Isa subscription, that’s our entire lending in one go.
“It’s important not to get drunk on liquidity. Our lending criteria is our lending criteria and getting a wall of Isa money is not going to change that. If you can’t lend it out it’s an unhappy experience for all.”
It is for this reason that he is not actively pitching to financial advisers, or trying to get onto any platforms, any time soon.
P2P platforms work on the basis that a lender – an individual – will agree to lend money to a borrower, either a business or individual, for an agreed rate of interest. With Zopa, the loan is spread over a number of lenders, and the rate of interest is set by the platform.
This is based on the borrower’s credit profile, which Mr Lawson said is done carefully by the platform. A borrower – in Zopa’s case, an individual – will on average pay about 8 per cent, although some will pay about 3.5 per cent. Lenders’ interest rates are determined by Zopa, but start at between 3 per cent and 4 per cent.
He said: “The market we operate in for personal unsecured loans has tremendous data. When a borrower applies for a loan, we look at their performance on previous loans, and how much debt they have, and we run that through a score card. We look at disposable income and debt-to-income.
“We’ve stuck to ‘super-prime’ unsecured personal loans. Our loss rate on these loans has been better than High Street banks’ unsecured loan portfolio.”
Zopa’s default rate is 0.8 per cent, and its profiling of its customers has attracted Metro Bank, which lends money through the platform.
Mr Lawson said that a typical borrower is someone who is using the money for home improvements, or debt consolidation. A typical loan repayment period might be five years, but many pay off early, he said, helped by the absence of early repayment charges.
Zopa is the oldest platform in the market, launching in 2005. Eight platforms have been authorised by the FCA to offer IF Isas – although only two have full approval from HMRC – while a further 86 firms are awaiting a decision from the FCA, with 44 on interim permissions.
The regulators are striking a note of caution: no one is allowed to offer a product under interim permissions. The FCA said this was due to complications arising from the transfer of authorisation under the Consumer Credit Act, but Mr Lawson has a different view.
He said: “The reason they said they don’t want to offer Isas under interim permissions is on the assumption that not everyone will end up with full permissions. I expect some of them not to.
“There were some concerns around some platforms that would be considered collective investments seeking permissions as P2P platforms.”
This relates to one of P2P’s bigger issues – how to classify it against other assets.
Mr Lawson said: “A lot of people look to P2P as an alternative to cash savings. We don’t look at it that way. We think it should be thought of in the same way as an investment. It’s not like a cash Isa, and it does have risks – there are things to mitigate those risks, but they’re not guaranteed [with the FSCS].”
He prefers to think of P2P as being less risky than equity investments and more risky than a cash Isa. “You have savings, which are safe and are government-backed, and you don’t earn a return, or you can do more risky things and get a better return, and you do stocks and shares. P2P sits between the two.
“I don’t think we will try and make ourselves look like an alternative to a deposit account, because it’s important people do understand the asset they’re buying.”
Mr Lawson has a financial background, concentrating in retail finance, dealing with loans and credit cards.
He was drawn to Zopa, which he joined in 2014, after witnessing the disruptive effect of the internet on other industries. He said: “I was intrigued as to why banking hadn’t been disrupted in the same way.”
The world has changed so much since 2004, when Zopa was being considered. He said: “Now it seems perfectly reasonable to pay people you don’t know because we’ve become so trusting over the internet.
“It doesn’t seem such a crazy idea.”
Melanie Tringham is features editor at Financial Adviser
2014 - present chief product officer, Zopa
2007 – 2014 Associate partner, Oliver Wyman
2006 – 2007 Head of marketing and analysis, consumer finance Spain, ABN AMRO
2002 – 2006 Senior business analyst, Capital One
This article was changed 14 April to reflect more up-to-date lending figures
