How to navigate the P2P maze

Against a backdrop of rising inflation and continued low interest rates, it is no surprise that a growing number of the UK’s financial advisers are looking for ways to make their client’s money work harder.

And there is one solution in particular that has caught the attention of eagle-eyed advisers: peer-to-peer (P2P) lending.

There is a risk to capital with P2P lending platforms, yes, and they do not come with FSCS protection. Equally, nobody can deny that it is still early days for the sector, which brings added risk.

The key, as ever, is to help their clients separate the wheat from the chaff. Richard Wazacz

But advisers are increasingly wary of the very real savings risk of client capital being eroded in real terms.

Assuming current Bank of England inflation at 2.3 per cent, according to latest figures, and interest rate forecasts, money deposited in the average high street savings account today will shrink in real terms after both one and two years.

In fact, some high street bank cash savings accounts are offering just 0.01 per cent in savings - less even than the current Bank Base Rate of 0.25 per cent.

Additionally, with some inflationary forecasts considerably more extreme than the Bank of England’s, keeping cash really has become a huge challenge. As a result, a growing number of advisers are seeking alternatives.

For one Northamptonshire-based IFA, to not even look at P2P lending should be considered poor practice: “If advisers simply pass it by without a thought, they are doing their clients an injustice”, says Mike Searle of Nouveau Wealth Management.

Full FCA authorisation granted

‘P2P’ lending is an industry that has evolved rapidly in the low interest rate environment of post-recession Britain, with lending through P2P platforms now running into billions each year.

Even in its slowest year yet, 2015, the sector grew by over 80 per cent according to one report (Nesta, Pushing Boundaries: the 2015 UK alternative finance industry report).

And advisers have no doubt had their interest in the sector piqued by the automatic extension of their permissions to include advising on P2P lending – a move that the regulator took back in April of last year.

P2P lending is likely to grow even faster as more and more P2P lenders receive their full FCA authorisation – heralding the arrival of the ‘Innovative Finance ISA’ (IFISA), which will almost certainly add to the momentum the sector is experiencing.

The IFISA — which a platform can only offer once it has successfully been granted its full regulatory authorisation — brings interest earned through P2P lending products in line for tax relief.