The UK Government announced in October 2014 that it was launching a consultation exploring how peer-to-peer (P2P) lending could be included in the ISA regime, and whether a third ISA should be introduced. Finance Monthly caught up with Rhydian Lewis, Founder and CEO of RateSetter, one of the biggest P2P lenders in the UK, to get his response to the news
What is peer-to-peer lending and how can investors currently get involved?
Peer-to-peer (P2P) lending involves matching up savers directly with people (or small businesses), who are looking to borrow – at interest rates agreed by both parties. By using the internet to cut out traditional financial institutions, savers and borrowers benefit from higher rates without a mark-up on the deal.
Although P2P lending is a relatively recent phenomenon, the sector is beginning to expand dramatically. In September RateSetter matched over £30 million (€38 million) in loans. This compares with £7.4 million (€9.4 million) lent in the first twelve months of operation, which shows how far the industry has grown in just four years.
What would a third ISA option mean for the P2P sector in terms of increased opportunity, recognition and exposure?
This consultation represents the most significant development since ISAs were first introduced in 1999. It will finally offer savers more choice in a market of stagnant rates: an option between low yield cash and high risk stocks and shares.
Statistics from HMRC show that the number of adult ISAs subscribed to has fallen in line with returns, from 14.6 million in 2012/13 to 13.5 million in 2013/14, a major concern given that ISAs are something of a national favourite. As such, the public consultation is a particularly welcome development for hard-pressed savers who have been crying out for a better option. The appetite is certainly there.
Research we carried out with Populus earlier in October found that 61% of the British public have been struggling to get a decent rate of interest on their savings and around two thirds of people would save more into an ISA if the interest rate was higher. Four in ten (39%) agree that including P2P lending in ISAs will reinvigorate the ISA market.
With new opportunities for investment, recognition and exposure of the P2P market will only increase and research by Liberum suggests that inclusion will see the sector grow from £2 billion (€2.5 billion) to £45 billion (€57 billion) within the next few years.
How would a P2P ISA work? And what changes would P2P lending have to undergo to fit with the ISA scheme?
The government has stated that it wants to encourage greater competition and choice in financial services, and allowing P2P into ISAs is a crucial part of that. This third type of ISA could be offered by P2P lenders and transform the future of savings. Returns would be boosted by making them exempt from income tax – saving 40% for higher-rate taxpayers.
The exact details of how P2P ISAs would work are still under consultation. However, it has already been agreed that P2P platforms like RateSetter will be able to become “ISA Managers”, allowing us to offer our P2P product directly to customers, improving accessibility and continuing to cut out the middlemen.
While the details are still being fine-tuned, it is clear that the wrapping of P2P lending in ISAs will offer investors greater choice and better tax-free returns. It will also support the government’s aim to introduce new methods of alternative finance to borrowers by encouraging the growth of the P2P lending sector.