Peer-to-peer lending may not be a familiar part of an adviser’s arsenal, but interest in the area is on the rise and the industry’s overall growth rates add weight to its suggestion that it is moving into the mainstream.
However, a recent paper by the FCA that has suggested consumers are at risk of harm shows there is work to be done to convince more advisers of its merits.
At its heart, P2P is a way of for consumers to lend money to companies and individuals – via platforms, which either set interest rates themselves (the most common method, as Table 1 shows) or allow consumers to do so.
The attraction is that these rates are typically substantially higher than can be found elsewhere. But as always, the greater yields come at the expense of higher risk of default, and P2P is not covered by the Financial Services Compensation Scheme.
For intermediaries, such lending might provide a useful option when catering for clients with short-term time horizons, such as one to three years, in cases where equities pose too much of a risk to capital and cash is unable to match inflation.
The sector’s relative infancy has meant the number of advisers dipping their toes in remains fairly small. But providers say they are starting to see a notable uptick in intermediaries using P2P for client recommendations.
“A few years ago very few financial advisers were using [P2P]. But we’ve now got 1,100 advisers registered on the platform, and adding more and more every day,” says Sam Handfield-Jones, chief product officer at Octopus, who adds his company’s loan book has grown to in excess of £250m.
“They range from advisers having 10, 20, 40, 50 clients on [the platform], through to advisers using it to solve really specific problems or one or two clients, so it’s still massively varied as to how it’s used.”
Nathan Mead-Wellings, director at London-based advice firm Finura Partners, says more clients are starting to broach the subject. “There is an interest among the higher net worth to get into the lending space where they have reasonable knowledge of asset-backed lending in particular,” he says.
“Familiarity with larger platforms such as Ratesetter is also filtering down. These clients are often prepared to view these as high-risk investments and are aware that they lack FSCS protection.”
Growth and responsibility
Growth in the sector has certainly been eye-catching. Data compiled by the UK Peer2Peer Finance Association shows cumulative lending had risen to nearly £9bn in the first quarter of 2018, a jump of more than 50 per cent from the second quarter of 2017. Almost two-thirds of this lending was shared between two providers – Funding Circle and Zopa, the longest running P2P platform.
Greater regulation is inevitable in any new sector that starts to gain popularity with consumers. Back in 2016, FCA chief executive Andrew Bailey remarked of P2P: “It’s a fast-moving, evolving industry. Some of the directions in which it’s going are posing some quite big challenges in terms of transparency and fairness.