How much risk are you tak­ing to get your 12pc?

The Daily Telegraph - Your Money - - FRONT PAGE -

Peer-to-peer lend­ing is boom­ing as re­turns else­where col­lapse, but can you truly as­sess the risk? Sam Brod­beck re­ports

As re­turns on most as­sets plunge yet fur­ther, the prospects on of­fer from peer-to-peer in­vest­ing – now a decade old and hav­ing at­tracted al­most £6bn of sav­ings – are more al­lur­ing than ever. An­nual in­come of up to 12pc is promised, and the in­vest­ments en­joy the in­di­rect back­ing of the Gov­ern­ment by be­ing el­i­gi­ble for Isas and pen­sions.

But is it safe? While other, main­stream lenders pull back in the face of eco­nomic un­cer­tainty, is it wise to be lend­ing to in­di­vid­u­als and small busi­nesses via peer-to- peer ar­range­ments which in many cases have not weath­ered a severe down­turn?

Here Telegraph Money draws on one of the few cred­i­ble sources of risk anal­y­sis to iden­tify sites that of­fer the best re­turns for the least “risk”.

Peer-to-peer (or P2P) by­passes banks by us­ing web­sites to con­nect in­vestors, or lenders, with bor­row­ers. Lenders earn more for their cash and bor­row­ers pay less than would be the case with a typ­i­cal bank. Lend­ing mod­els dif­fer markedly be­tween P2P firms. You can lend to in­di­vid­u­als or com­pa­nies and for a va­ri­ety of pur­poses, in­clud­ing loans against prop­erty.

There is typ­i­cally an agreed term, with fees ap­ply­ing if money is with­drawn be­fore ma­tu­rity.

Spe­cial­ist P2P an­a­lyst 4thWay com­pares peer-to-peer plat­forms and has de­vel­oped its own “stress test­ing” for­mu­las to gauge the abil­ity of plat­forms to cope in a down­turn. This in­cludes as­sess­ing how bor­row­ers would fare – in terms of con­tin­u­ing to make re­pay­ments – in a re­ces­sion of a sever­ity that oc­curs only once in a cen­tury and which in­volves, for in­stance, a 55pc crash in house prices.

The tests pro­duce a range of credit rat­ings, with some P2P firms hav­ing dif­fer­ent scores where they have dif­fer­ent tranches of loan.

Many P2P firms split their loans into their own risk cat­e­gories, of­ten de­nom­i­nated by let­ters “A”, “B” and so on, and 4thWay then ap­plies its own grade to each of these.

Ac­cord­ing to its anal­y­sis the high­est re­turn avail­able, along with the best stress-test score, is Fund­ing Cir­cle’s 8pc pro­vided through the firm’s “D” busi­ness loan tranche.

The next-high­est re­turns are also of­fered by Fund­ing Cir­cle, through its B and A+ loans, at 7.2pc and 6.5pc re­spec­tively.

Of the 11 tranches of loans over­seen by the six P2P plat­forms cov­ered by 4thWay, eight re­ceived the high­est stress test score.

Fund­ing Cir­cle’s “A” and “C” tranche of busi­ness loans and Pro­plend’s “B” and “C” tranches of com­mer­cial prop­erty loans missed out on the top score. In­vestors here could ex­pect to have to wait longer to re­coup losses in the case of a se­ri­ous down­turn, 4thWay’s anal­y­sis sug­gests.

The firm ex­plained that the large pro­por­tion of high scores was due to the fact that the plat­forms trans­par­ent enough about their book of loans tended to be the more es­tab­lished play­ers.

It warned: “Lenders, like all in­vestors, should al­ways treat

‘If it’s not trans­par­ent do not in­vest at all – or in­vest less’

‘More in­vestors than bor­row­ers could lead to higher risks’

less trans­par­ent in­vest­ment op­por­tu­ni­ties with a lot more cau­tion – ei­ther don’t in­vest or in­vest less.”

While stress-test­ing is use­ful, Adrian Low­cock, in­vest­ment di­rec­tor at Ar­chi­tas, a fund man­ager, warned that the weak­nesses within a mar­ket would emerge only after a “full cy­cle of boom and bust” had com­pleted. He com­pared the sit­u­a­tion to that of the late Nineties be­fore the tech­nol­ogy stock cor­rec­tion.

Some plat­forms hold re­serve cap­i­tal to bail out in­vestors in the event of bor­row­ers de­fault­ing.

Rateset­ter has the largest buf­fer fund of all, at just over £17m, with the firm claim­ing that this equates to 128pc cover for all the claims it ex­pects to re­ceive. It boasts that none of its 45,000 in­vestors has ever lost money.

At the op­po­site end of the scale, Fund­ing Cir­cle has no fund against bad debts at all. It said hav­ing a fund rep­re­sented a new risk, of hav­ing ei­ther too much or too lit­tle in it. The plat­form said spread­ing in­vest­ments across dif­fer­ent bor­row­ers was a bet­ter way to pro­tect in­vestors.

Neil Faulkner, founder of 4thWay, said backup funds were “not es­sen­tial”.

“If a pot of money is be­ing put aside re­turns will be lower,” he said. “If you do not have that pot of money you would ex­pect the in­ter­est rate to com­pen­sate you for that risk. What is es­sen­tial is spread­ing your money across lots of bor­row­ers and lots of dif­fer­ent P2P plat­forms.”

Per­haps be­cause of the dif­fi­culty in as­sess­ing the risk of dif­fer­ing P2P propo­si­tions, fi­nan­cial ad­vis­ers have been slow to bring them to the at­ten­tion of their in­vest­ing clients.

Phil Young, of ad­viser sup­port firm three­sixty, said there were also fears that P2P lend­ing was be­ing viewed as low-risk or a “proxy for cash”.

Mr. Young warned that rates of re­turn were drift­ing down and that de­mand from bor­row­ers was weaker than that from lenders, lead­ing to some plat­forms tak­ing on more risk to gen­er­ate higher re­turns.

Zopa, the sec­tor leader, has al­ready an­nounced that it will cut the rates across its three ac­counts by 0.2 per­cent­age points, warn­ing that the in­dus­try faced a short­age of bor­row­ers.

“To date, in­vestors have done too well, bet­ter than they de­serve to, given the risks they have taken,” said Mr Faulkner.

“Rates are com­ing down, but if you in­vest steadily and spread your money you can ex­pect sat­is­fac­tory re­turns.”

Does it in­fan­tilise chil­dren if their par­ents mon­i­tor ev­ery last penny spent or saved? Or is it a way of en­cour­ag­ing a healthy, re­spon­si­ble at­ti­tude to­ward money? We look at the new ‘pocket money’ tech­nolo­gies.

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