Investments  

Advisers are the gateway to P2P

Jonathan Minter

Jonathan Minter

The introduction of new rules for the P2P sector could be the catalyst for more advisers to consider this fast growing market. 

It is fair to say, to date, many advisers have not fully embraced the sector.

In a poll Intelligent Partnership conducted of advisers for an upcoming Alternative Finance Quarterly Update, less than 20 per cent said they had recommended P2P or debt based securities to their clients.

Just 2 per cent said they regularly recommended it.

Under current rules, even whole of market advisers are not obliged to consider P2P for their clients.

There has been a perception that it is less well regulated, it often does not fit nicely into standard due diligence methods, and the asset class is still relatively young and unproven with many platforms yet to experience a full economic cycle. 

In turn, many P2P platforms have shown limited interest in attracting advisers.

Many do not currently have adviser portals.

Instead, they have focussed on attracting retail investors directly, and the vast majority of the marketing budgets of these platforms have been used to that effect.

The result is that both advisers and platforms are losing out.

Engaging with IFAs has the potential to open up sizable investment inflows to P2P while offering advised clients an effective route to portfolio diversification  with stable, inflation beating returns that could help shield some capital from market volatility.

The new P2P regulations, which came into force on Monday, may give both sides cause to reconsider.

For the platforms, the creation of the ‘restricted’ investor class limits the amount ordinary investors can invest in these platforms to just 10 per cent of their investable assets unless they are high net worth, sophisticated or receiving financial advice.

In other words, the IFA route has now become one of only three ways they can receive substantial investments from retail investors.

For those with minimum investments starting at £1,000 or more, the regulations will remove a large section of the population from their customer base altogether, unless an IFA is involved.

From the IFA perspective, the new regulations should also make the P2P market a more appealing one.

The new, more detailed disclosure requirements will help advisers with their due diligence, allowing them to more easily find detailed information about the risks, fees and charges involved, pricing data and a more detailed analysis of defaults and expected defaults.

Prescriptive rules for a risk management framework requiring platforms to gather information about a borrower to be able to sufficiently assess credit risk, systematically categorise them by risk and reflect this in the pricing provides a baseline for underwriting standards, which did not exist before.

Superior underwriting will remain a potential competitive advantage for some platforms, but the rules now guarantee a minimum standard.