How to use peer to peer within client portfolios

After seven years of bad luck, we thought it could not get any worse for Britain’s beleaguered savers. Sadly it has. 

The decision earlier this year by Bank of England governor Mark Carney to cut the base rate to a new historic low of 0.25 per cent, from its record run at 0.5 per cent since March 2009, will rub yet more salt into the wounds of people who have become ever more cautious with their money.

In this context, it is not difficult to imagine even the most risk-averse of investors becoming more adventurous in their search for real returns, all the more so given that inflation, although still low, is now rising.

And one area of the market many could turn to in growing numbers is peer-to-peer (P2P) lending.

Essentially, P2P lending is an industry that seems to have come of age in the low-interest rate environment of post-recession Britain. 

In fact, lending through P2P platforms now runs into the billions each year. Even in its slowest year yet, 2015, the sector grew at a rate of more than 80 per cent. 

Most P2P products do not make it easy for advisers to write the business, let alone earn through it

However, because it is growing so fast, the time is right for advisers to help their clients separate the wheat from the chaff when it comes to the world of P2P lending.

The forthcoming launch (in theory if not practice) of the ‘Innovative Finance Isa’ (IFISA) has sparked yet more interest in P2P lending, as it will put interest earned through eligible P2P lending products in line for tax relief.

Some market commentators have predicted 500,000 new investors could enter the sector for the first time as a result of the creation of the IFISA.

A critical but cautious audience

Despite the enormous growth of P2P lending over the past few years, and its potential future growth as it becomes Isa-able, financial advisers have remained cautious about the opportunity. 

In part, this is because the opportunity has not always been clear, as most P2P products do not make it easy for advisers to write the business, let alone earn through it.

But it is largely - and understandably - because most P2P providers are unknowns. The vast majority of P2P lending outfits, for example, are less than five years old. Even the oldest (Zopa) is just 11. In itself, this lack of long-term track record implies a degree of risk.

On top of that, most P2P lenders have no track record whatsoever in the intermediary space and little, if any, experience of engaging with financial advisers.