They deem it to be a “high risk” product and have recommended limiting P2P lending to 'sophisticated investors’ only. Below, Finance Monthly hears from Frazer Fearnhead, CEO at The House Crowd, on why we shouldn’t’ be restricting P2P lending.
This is likely off the back of the recent collapse of mini bonds provider London Capital & Finance, which persuaded customers to invest in bonds (with a ‘fixed’ 8% interest rate) that weren’t ISA eligible. Sadly, some 14,000 people have lost most of the £214 million they had collectively invested. This has, understandably, increased regulatory scrutiny of similar products marketed to retail investors.
Nonetheless, the FCA is lumping all P2P lending companies in with London Capital & Finance, which is patently unfair. The company marketed a product as an ISA, but wasn’t one at all – it was a mini bonds investment – so we’re not even talking about comparable products here. Plus, it obviously wasn’t acting in a regulated fashion and, as a result, it’s a knee-jerk reaction to lump the whole P2P industry together with it.
Democratising investment options
Peer to peer lending, including products such as IFISAs, allow everyday people to access the sorts of returns that only high-net-worth and experienced investors historically had access to. Restricting this offering (or warning people away from it unnecessarily) would deal a big blow to the P2P lending industry and defeat its key objectives – for borrowers, to democratise access to finance and for investors, support the ability to lend in return for a better rate of interest.
Why should investments with higher interest rates be reserved only for experienced investors or those who already have significant capital? It’s precisely the savers who are working to build up a nest egg for their futures who should have such opportunities, especially since lending is much easier to understand than more complex investments. If they’re only left with options like cash ISAs (which won’t necessary beat rising inflation), they won’t be able to do it.
Why should investments with higher interest rates be reserved only for experienced investors or those who already have significant capital?
The FCA said that “anyone considering investing in an IFISA should carefully consider where their money is being invested before purchasing an IFISA.” Of course, this is still true – all investments should be carefully considered before they’re undertaken. But that doesn’t mean that we should completely rule out one of the most accessible investments available on the market today.
P2P is a diverse landscape
Another issue is that, at the moment, it seems the FCA can’t (or won’t) distinguish between different types of P2P loans with different levels of security. It’s true that many providers offer unsecured loans, but there are others that do offer more security. Lending can be secured against an asset which helps to mitigate the risk of the borrower defaulting, as a legal charge over the asset can force its sale and regain investor capital. Other lenders also operate a ‘provision fund’ as an additional security measure.
The FCA has previously warned of introducing ‘appropriateness tests’ in order to restrict who P2P lenders can market their products to, but the problem with this lies in conflating products that are in fact very different from each other. Not all P2P lending products are the same – levels of security do vary by provider, but if the right due diligence is conducted and processes are put in place to mitigate risk, they can offer consistency and reliability. Similarly, we should not look to compare, for example, a stocks and shares ISA with an IFISA. They are fundamentally different – and, arguably, the IFISA can be a safer option.
Ultimately, there are risks involved in all investments, but the answer isn’t in scaremongering. Appropriate education and transparency is what we need to get people investing their money wisely in a variety of options, and we would like to see the FCA do more to support this.
Recently released HMRC data* shows that the money being invested in Innovative Finance ISAs (IFISAs) has increased by over 700% in the last year with six times more people now saving into an IFISA.
The amount of money now in IFISAs has risen from £36million in 2016-17 to over £290million in 2017-18. The data also shows that over 25,000 people opened IFISAs in the last 12 months. Just 5,000 accounts were open in 2016-17 and this rose to 31,000 in 2017-18. One of the reasons for this sharp rise may be due to the low return’s savers are getting from other types of accounts such as Cash ISAs and every day savings accounts.
Commenting on the data, Paul Sonabend Commercial Director of Relendex, a Peer-to-Peer lending exchange dedicated entirely to financing UK property, said: “IFISAs are giving savers the chance to earn high returns on their money. The interest rates offered on these products outstrip the rates offered by high-street lenders on traditional Cash ISAs which can be as low as 0.2%. With inflation running at 3.4%**, traditional savings accounts which are not matching the rate of inflation are losing money in real terms.
“IFISAs now offer savers sensible alternatives paying more than a cash ISAs, without the level of risks and volatility of Equity ISA’s. These returns are not magical, they are produced by taking the banks out of the picture and giving the lion’s share of the interest paid by borrowers directly to savers. For example, the Relendex Secured Portfolio ISA offers rates of up to 6% ensuring that savers are seeing real benefits from their hard-earned savings.”
The UK Government introduced the IFISA on 6th April 2016. The IFISA allows individuals to use some (or all) of their annual ISA investment allowance to lend funds through the growing Peer-to-Peer lending market, whilst receiving the tax-free benefits of ISAs.
