The Daily Telegraph - Saturday - Money
‘I have a year’s salary in peer-to-peer loans’
Tens of thousands of people are turning to peer-to-peer investments, enticed by high returns of more than 10pc. However, consumers are being urged to ensure they properly understand the risks of investing in this way.
Interest in the sector has grown since the launch of the “innovative finance Isa”, intended for new asset types of this kind, in 2016. Allowing peer-to-peer (P2P) investments to be held in a tax-free Isa was seen as a stamp of approval from the Government for the sector.
Data from the Peer-to-Peer Finance Association trade body, seen exclusively by Telegraph Money, showed that savers flocked to open accounts in the 2017-18 tax year, despite some big firms not launching these Isas until late in the year.
A total of 28,184 of the tax-free accounts were opened in the year to April 2018, the trade body said, with a combined value of more than £300m. As the association represents around 60pc of the market, the true number of investors is likely to be much higher. A further 150,000 people already invest in P2P via non-Isa accounts.
The simplicity of peer-to-peer is attractive. Investors lend money to other individuals or small businesses, using a P2P platform as a middleman.
With top easy-access savings rates still below 1.5pc, platforms that offer up to 10pc returns continue to tempt disillusioned savers. Even the most conservative P2P providers offer returns of around 4pc.
However, potential investors should look at how platforms judge risk and the charges they apply. There are no industry standards and different providers assess the creditworthiness of borrowers in different ways.
Neil Faulkner of 4thWay, a peerto-peer analysis firm, said investors should not assume that lower rates automatically implied safer loans.
“We’ve seen some of the riskiest lending – bridging and development loans – returning less than 2pc,” he said. “Whereas some extremely attractive propositions have been paying double digits.”
Even the major firms can get into trouble. RateSetter, considered one of P2P’s “big three” alongside Funding Circle and Zopa, was last year forced to bail out investors after it approved a loan that broke its own rules.
Paul Smee of the Peer-to-Peer Finance Association said investors should stick to platforms with transparent lending policies that clearly displayed the incidence of bad debt. “Investors should make sure they have full information about how their money will be invested and what the
platform’s track record is against its expectations,” he said.
Richard Austin is among the investors attracted by the high returns on offer. “I thought it was a clever way to match investors with people who need money,” he said. “I had a cash Isa but the return was next to nothing. It was dead money.”
Mr Austin, a general manager from Leamington Spa, opened an account with Funding Circle in 2015 and has enjoyed returns of 7pc after fees and bad debts are taken into account.
“My initial investment was £500 and now I probably have more than a year’s salary in there. You know the odd loan is going to go wrong, but as long as you are diversified I don’t worry too much about that,” he said.
He has yet to “sell” any of his loans and doing so would not always be easy. Many platforms have a “secondary market” that allows investors to sell their loans, subject to a charge, but Mr Faulkner said there was no guarantee that a buyer would be available.
This would be a particular problem in a financial downturn. Apart from Zopa, founded in 2004, most of the P2P market has yet to go through a recession. This would be likely to increase loan defaults. There is also the risk of the platform going bust. P2P loans are not covered by the Financial Services Compensation Scheme and if the platform got into difficulty your cash would be at risk.
The Lifetime Isa, whose abolition just a year after its launch was recommended by a parliamentary committee this week, is “a mis-selling scandal waiting to happen”, a prominent critic has said.
The Treasury Committee criticised the Lisa’s complexity, “perverse incentives” and apparent lack of popularity among consumers and the financial services industry. Lisas were launched in April 2017.
Savers can put up to £4,000 into a Lisa each year, either kept in cash or invested, and receive a 25pc government bonus on that money.
They can then use the pot to buy a house or keep it until they reach 60, although contributions can be made only until age 50. Otherwise withdrawals result in a steep penalty of 25pc of the amount withdrawn, so a saver could get less back than they put in.
The Treasury Committee’s report accused the Government of not being “clear enough that those withdrawing their money early lose not only the 25pc bonus but also a fraction of their capital.”
It added: “In this respect, the standards of disclosure on the gov.uk website fall far below those expected of regulated firms.”
Giving evidence to the committee, Ros Altmann, a Tory peer and former pensions minister, urged ministers to recommend abolishing the Lifetime Isa. She said: “It is, in my view, another mis-selling scandal waiting to happen.” She said the permitted uses of Lisas confused house buying and pensions in “a very unhelpful way”, while stopping contributions at 50 gave people of that age the false impression that they could stop saving for retirement.
“If people start relying on Lifetime Isas for retirement, they are bound to be pretty poor in their 80s,” she said.
The report also questioned the value of pension tax relief as an incentive to save. The committee advised the Government to consider fundamental reform and proposed a raft of incremental changes in the meantime. These included removing the £1.03m lifetime allowance, cutting the £40,000 annual contribution limit and offering a flat rate of tax relief for all.
Can the promise of 10pc-plus returns be trusted? Adam Williams looks at the pros and cons of peer-to-peer investment ‘I had a cash Isa but the return was next to nothing. It was dead money’