Is YOUR cash safe as risky lenders face crackdown?
Just months after this boss reaped £4m for himself from a £17 BILLION boom in trendy ‘peer-to-peer’ deals...
FEARS are mounting over troubles with ‘peer-to-peer’ companies as i nvestors report slipping returns and delays t o withdrawing funds. These companies match people who want good investment returns directly with borrowers in need of loans.
But amid reports of a creeping fall in standards, the UK’s financial regulator is now seeking to tighten its grip with its first major clampdown since taking charge of the sector five years ago.
Businesses have j ust seven weeks to get their act together as the Financial Conduct Authority introduces a new set of rules to protect investors – including capping how much they can invest.
This squeeze on the industry comes in the wake of:
Nearly £4 billion being loaned by investors in the UK in the space of 12 months;
Investors complaining they did not understand the peer-to-peer arrangement they entered;
Complaints of much l ower returns than were advertised;
Investors with one big provider – Funding Circle – suffering long delays to withdraw money;
Two platform failures within 14 months, while others have disappeared from the market, been swallowed up by a rival or changed their business model entirely.
WHAT IS PEER-TOPEER?
THESE companies match investors seeking good returns with borrowers in need of loans. Dozens exist, lending money to individuals and small businesses while taking deposits from people who can start investing with modest sums as low as £5 – though a £1,000 minimum is more typical.
Since the 2008 recession their popularity has grown rapidly among savers wanting above-inflation returns but without the volatility of investing in stock markets. There are now 275,000 lenders with funds in peer-to-peer platforms.
Borrowers in turn have been lured by competitive loan rates, the flexibility to overpay without charges in some cases and modern online dashboards to keep track of repayments.
Peer- to- peer quickly changed from a niche idea for the few to a popular salvation for i ncomestarved middle England.
It seemed a win-win for hundreds of thousands of people. So much so that investors have cumulatively loaned more than £17 billion in the UK. Nearly £4 billion of that sum has been loaned out in the last year, according to Brismo which provides lending performance data.
WHO ARE THE BIG PLAYERS?
THE most well-known and used names in the industry are Zopa, RateSetter, Funding Circle, Lending Works and Assetz Capital – though there are many more. Zopa and Lending Works distribute investor money to individuals in want of a personal loan; Funding Circle lends to small business; while RateSetter lends to both individual and business borrowers. Assetz Capital lends to small businesses and property developers.
Funding Circle was floated on the London Stock Exchange last October – helping its co-founder and boss Samir Desai make £ 4 million last
year. In terms of money invested, Zopa is the largest peer-to-peer firm. Its existence precedes the crash of 2008 and investors have loaned £ 850 million through the platform in the last year.
In 2017, the company ditched its safety net scheme designed to restore investor losses if borrowers defaulted on repayments. But Ratesetter and Assetz Capital still maintain ‘Provision Funds’ to compensate investors at risk of loss. Some of the interest repaid by borrowers on their loans is siphoned off to replenish the funds.
WHY THE WORRY OVER LENDERS?
LAST year, Manchester-based peer-to-peer provider Collateral went into administration after it was found to be operating without regulatory authorisation. In May this year, property finance provider Lendy failed. Clients waiting for their money back will likely have access to the £11 million currently frozen in accounts by the end of this month.
Large sums of money are funnelled into peer-to-peer, but complaints are also emerging over proper disclosure of risk, the true rates of return that can be expected and access to money when it is demanded.
The regulator has long had concerns over misleading financial promotions in the peer-to-peer market – with some providers having overstated the returns and underplayed the risks. In particular, when companies do not make it clear that rates of return are a ‘target return’ not a guaranteed one.
This is particularly important given a recorded slide in average returns across the major providers – steadily falling over two years and from a peak in 2011.
Yields on loan-based investing are generally favourable – about 7 per cent according to recent figures – compared t o UK Government bonds (currently 0.5 per cent on five-year offerings, for example), but people handing over their money do not always fully understand the deal they have entered.
Rupert Taylor, of Brismo, argues the need for a standard way for investors to compare providers. He says: ‘Loans can be a great new asset class, but it has got to be easier for investors to understand what’s going on.’
Martyn James, of online consumer complaints service Resolver, says investor complaints he has seen focus on fees and charges, higher levels of risk, unclear or misleading advertising and confusing claims about returns.
‘The FCA has been sending out clear warning signals about the way peer-to-peer lending has been sold to investors,’ says James. ‘As with any investment portfolio, you should spread your risk over a range of products – and always fully understand what happens if things go wrong.’
Neil Faulkner, of peer- to- peer research agency 4thWay, says: ‘The vast majority of peer-to-peer investors continue to earn positive and stable returns every year. What has really caught the attention of the FCA is that investors are deficient in some essential basic knowledge about peer-to-peer lending.’
A strong example of this, he argues, is investors who don’t take a longer-term view when they put money in – perhaps because of confusion when platforms operate a secondary market. Faulkner adds: ‘Early exit by selling loans on to other lenders will not always be as speedy as investors hope.’
Under new FCA rules investors will only be allowed to stump up 10 per cent of ‘investable assets’ in peer-to-peer deals. This is essentially one tenth of your savings and investments minus any consumer debt. Investors will also need to declare themselves on forms as ‘restricted’ or ‘sophisticated’ investors, much the same as those who invest in mini-bonds.
This action won’t be required if an investor has already taken regulated advice – basically getting the green light from an informed professional to go ahead and dabble.
Peer-to-peer providers will also need to up their game when it comes to providing more information to investors and what process will be followed if their platform fails. They will also need to be able to back up any claims about ‘target returns’ to show those ambitions are reasonable to advertise.