Six things to know about P2P

Six things to know about P2P

Arguably, peer-to-peer lending (P2P) is the fastest growing retail investment product of the past 10 years.

Using technology to revolutionise SME and consumer lending has produced an incredibly efficient way of connecting investors with borrowers.

Traditional financial intermediaries have looked on as they face innovative, nimble-footed competition.

P2P has now evolved and is taking its place as an asset class with much to offer investors, not least in a world of low returns and a consequent search for yield.

It has reached a stage of maturity where it can be fully assessed using in-depth analytics and can, with the right approach, form a stable portion of an investor’s portfolio (the size of capital allocated depending, however, on the risk profile of the investor).

IFAs were initially cautious about P2P lending. While their clients’ anxieties related to returns, IFAs had to grapple with tougher regulation, post RDR, and consequent increases in the compliance burden.

Although the appeal of P2P is clear, without an in-depth knowledge of the asset class it understandable that the regulatory risk of advising has, to date, been too high.

Therefore, when IFAs were allowed for the first time to recommend P2P investment to their clients on 6 April last year, the initial response was muted.

Much has changed since then, with some IFAs embracing P2P lending enthusiastically and recommending it to those clients for whom they deem it to be suitable.

By contrast, some of the more conservative IFAs show no sign of steering their clients towards P2P platforms any time soon.

But what of those in the middle, the broad group of IFAs who have thought about P2P investment, who are interested – even intrigued – by the asset class but have yet to become involved?

What do these advisers need to do to make themselves comfortable with P2P investment?

Here are six considerations that may help them towards that end:

1.     The key factor when looking at P2P is the performance of the platform concerned - and the yardstick here is actual historical default rates and subsequently net returns.

Actual default rates should be considered with the amount of loans still in circulation for a given time period. Loan terms can run for up to five years and if they are still being repaid, they are still at risk of default.

2.     Put bluntly, how much has the platform in question lent? This is important for three reasons.

  • One, the more lending that has been undertaken, the better the platform is likely to be in terms of its credit processes.
  • Two, if a platform operates a secondary market and the major platforms do, the more the platform lends, the more active this market is and the greater the chance of investors getting their money back.
  • Three, financial stability. A platform without scale is less financially stable and could become insolvent.

A caveat to that last point is that a P2P loan contract is not with the platform itself but with the borrower, and the platform’s insolvency does not affect that.

The Financial Conduct Authority insists platforms have a framework in place to ensure these contracts are fulfilled regardless of the fate of the platform.