Lender failed to ring-fence investors’ money

MILLIONS OF savers despair of securing a fair rate of return on their money. Far too many use bank and building society deposit accounts which pay such meagre rates that they all fall short of inflation, measured as 2.2 per cent on the Retail Prices Index.

This means that the value of their money is being eroded. Instead of going for the sensible option of a reputable corporate bond or equity which is paying a sound dividend, the high returns promised with peer-to-peer investing appear remarkable.

Peer-to-peer (P2P) is a loan arrangement for a person or business who wishes to raise capital from non-traditional sources. It is usually conducted through an intermediary. Whilst a few investors may enter P2P out of benevolence to help a start-up or to cut out the banking fraternity, most are lured by the promised high returns.

The P2P organisers act in different ways. Funding Circle said repayments typically took 15 days but some savers have had to wait six months.

The crucial point is that a higher return brings increased risk. P2P should make the risks clear. Savings lent are not protected by the Financial Services Compensation Scheme.

If there should be failure, investors will be assured their money is ring-fenced. Yet, despite such an undertaking, Lendy – a major P2P source – made no such arrangement. It owes over £150m but much of this will be used to fund insolvency specialists and creditors.

The regulator, the Financial Conduct Authority (FCA), authorised Lendy to write secured loans to property developers. It did not check that ring-fencing was in place. This means that costs and expenses and even a dividend for creditors will be taken from money owed to investors.

Again, the FCA should hang its head in shame. Just why was its staff not supervising properly? No wonder its chief executive is departing but has managed to secure the post as the next Governor of the Bank of England.