The peer to peer industry has grown at a phenomenal rate in the last decade and many have embraced it as a welcome new channel for investors to earn healthy returns on their money.
But when it comes to recommending P2P to their clients, financial advisers still approach the sector with caution. Part of this is because it’s a new asset class seen by some as unproven. There is also the misconception that P2P is ill-prepared for an economic downturn or overly risky.
This year, most major platforms are likely to be granted FCA authorisation for their innovative finance Isa products, marking a watershed moment in terms of the sector’s growth.
With this in mind, it is clear advisers are starting to become open to the benefits P2P can offer their clients – set rates of interest, varied terms for lending, diverse portfolios of investment opportunities to spread risk, and the potential for better interest rates than with many other forms of investment.
One criticism levelled at peer to peer has been that it’s unproven and unregulated. Central to this is the concern that investments aren’t covered by the FSCS. P2P lenders make loans directly to each borrower rather than going via an intermediary, so FSCS cover isn’t relevant.
This doesn’t mean, however, that there’s no protection for borrowers, as each individual loan is direct and remains enforceable even if the platform fails. What’s more, P2PFA membership and FCA regulation also provide arrangements that manage an orderly run-down of loans in the unlikely event of platform failure.
With peer to peer still relatively young, some also question whether it would survive an economic downturn. But it should be noted that platforms are distinct from the performance of the loans that they offer.
They act like an agency, so even if one goes out of business, the loans remain in place. A financial crisis may also cause some borrowers to face difficulties repaying, so it’s the platform’s job to minimise the possibility of default and protect loans with security and reserve funds.
Peer to peer platforms tend to offer higher returns than other asset classes and will be viewed as more risky as a result. But it’s worth remembering P2P loans perform differently from equities, offering fixed rates of interest, with returns not susceptible to market turbulence.
Loans are based on a contract between the lender and borrower so they can deliver a predictable return. And while there is a low risk that loans may default, this is carefully protected against so as to be manageable within the advertised rates.
This year the peer to peer market is likely to be transformed by the arrival of the much-anticipated Innovative Finance Isa among the leading platforms. The IFISA market is yet to come into full effect, but when it does, the amount of P2P investors could potentially double.