Due diligence on P2P platforms

  • Describe why P2P has become more popular.
  • Identify the risk profile of P2P.
  • List how clients should use P2P.
Due diligence on P2P platforms

In the immediate aftermath of the credit crunch, politicians enthused about the new crop of peer-to-peer providers and even created the Innovative Finance Isa.

P2P was presented by politicians as a way to upend the lending market while providing a better return for investors.

However, recently the Financial Conduct Authority has raised concerns about some operators in the P2P sector and eyebrows raised about whether some investors grasp the risks associated with this type of investment.

The regulator found that a fifth of investors had put more than double their annual income into platforms that often failed to fully explain the risks involved.

The FCA is now looking into whether it should be made harder for regular retail investors to fund loans.

So, what does the future hold for P2P lending and what clients should advisers consider it for as a source of income?

At a recent FTAdviser masterclass, sponsored by Octopus Investments, industry experts and advisers gathered to discuss how advisers can make sure they pick the most suitable P2P proposition for their client and what providers could run into problems if markets take a tumble.

Big basket

Damian Webb, a partner at RSM Restructuring Advisory, pointed out the term P2P covers a wide range of types of underlying investment in assets, individuals and providers operating in many different ways.

Mr Webb said: “When this market started in 2008, followed by the global collapse in interest rates, there was a requirement for many retail investors for a search for yield.

“With [P2P] and the development of technology, you could now access the market that you couldn’t do previously.

“Before, you had regional banks which had access to deposits, but with the internet, now you have a tool that could access this capital.

“What you did see at that point in time was a huge amount of retail money accessing the sector, but what you also saw were significant inconsistencies in [provider] practices during this period of time in 2015.”

Peter Marsland, business development manager of Octopus Investments, agreed the array of vastly different investment products labelled P2P has resulted in a misconception about what this type of product is.

According to trade body the Peer-to-Peer Finance Association for investors, P2P lending provides a new investment choice, with levels of risk and return that sit between lower-risk/lower-return banking savings accounts and higher-risk/higher-return equity investments (including equity crowdfunding, which is generally regarded as representing a higher risk than P2P lending).

Mr Marsland said: “[P2P] has got nothing to do with crowdfunding.

“Everything with [P2P] is going to be lending, but that can be really diverse. That can be looking to investing in people, lending against certain asset classes.”

The challenge for advisers is they must do a new type of due diligence on P2P providers, and make sure they are asking the right questions.