Peer-to-peer lenders have been catching the regulator’s eye for all the wrong reasons this year. Several of the online lending platforms have gone bust over the last 12 months, owing their investors millions.
Next week, new regulations are set to sweep across the industry which has been dubbed the ‘Wild West’ of the lending world.
The firms match investors who want to lend with businesses and individuals looking for a loan.
But how will the reforms affect normal savers, and should anyone with shares in Funding Circle – the UK’s only stock market-listed peer-to-peer lender – be worried?
Peer-to-peer lending (P2P) is still a relatively nascent industry. Zopa, the UK’s first platform, launched in 2005, but momentum really picked up in the aftermath of the financial crisis.
While banks were reluctant to lend, P2P platforms offered borrowers an easy source of money. Savers were lured by the prospect of making stellar profits.
As the number of platforms proliferated, regulators struggled to catch up. Up to 2016, loans made across Zopa, Ratesetter and Funding Circle were bagging an annual return of 6.3p per cent.
But fast-forward, and returns slipped to 3.8 per cent in the first half of this year. A record £139m of loans on the platforms turned sour in that time, research by investment technology firm Link Group and data firm Brismo showed. Better-performing debt pumped out £306m of interest income, meaning lenders overall still received £167m more than they lost.
But sentiment towards P2P has deteriorated. Over the last two years, daily mentions of P2P on social media have declined from around 2,000 to 1,000, according to data from Brandwatch, and conversations have tended to be negative.
Lendy tumbled into administration in May, owing its 9,000 investors £152m. It had experienced a sharp rise in the number of borrowers failing to pay back loans.
Then Funding Secure fell apart in October. Administrators were left stunned by the range of bizarre assets which borrowers had been allowed to pledge as security against the loans.
In one case, this included a library of 5,000 Italian ecclesiastical books that has proved hard to sell and near-impossible to value.
Now the Financial Conduct Authority (FCA) is stepping in, making it harder for ordinary investors to access P2P lending. ‘You’ve had a largely unregulated industry which has had an influx of a number of operators, and this serves to drive down the standards,’ explains John Cronin, an analyst at Goodbody. ‘Like any young industry, it needs to consolidate. The strong will survive.’
He believes we haven’t seen the last of the casualties yet, but the recognised names, such as Ratesetter and Funding Circle, will probably pull through.
Those platforms that want to survive must learn to cope with the new rules, designed to limit the sums normal savers can plough in. Retail investors will only be allowed to put 10 per cewnt of their savings into P2P lending, and platforms must check that their clients have some knowledge and experience of the industry.
So unless you know what you’re doing, or have received professional advice, P2P lending will be a lot harder. Some platforms have started cutting off retail investors. Landbay, which lends to buy-to-let landlords, returned normal savers their money this week as it sold all its loans to a UK bank and closed its retail investor arm. Zopa grabbed £140m of funding in an eleventh-hour bid to secure a full banking licence this week, so it can act more like a bank.
According to Cronin, this may be for the best. ‘I’m not convinced P2P is the appropriate investment for someone with £100,000 or less,’ he says. ‘Those investors, typically, don’t entirely understand what they’re investing in.’
Investors who believe P2P lending will continue to rise can still buy shares in Funding Circle.
The platform has had a miserable time since it listed on the stock exchange in September 2018. Its shares have slumped 78 per cent, from 440p to 97.7p yesterday after a move to tighten its lending criteria worried investors.
But it is prepared for the FCA’s rules. The firm funded almost two-thirds of its loans in the UK with money from institutional investors, rather than normal savers, in the first half of this year.
Analyst Stuart Duncan, of Peel Hunt, thinks a lot of the restrictions it faces may have been baked into the share price.
He added: ‘Funding Circle was a relatively early-stage investment, some way before profitability, so you’re probably going to have bumps along the way.’
This road may get a little smoother following next week’s rules, but exposure to P2P lending isn’t for the faint-hearted.
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