Platforms and advisers – especially advisers – are going to find it a lot harder to ignore peer to peer (P2P) lending in the coming year. Two important events will drive this market in the coming few months: P2P lending will qualify as an ISA investment under the new Innovative ISA rules and this week, Hargreaves Landsdown shared some more detail around their plans to enter the P2P market later this year.
And all this is against the background of low interest rates generally and the search for income by thousands of desperate investors.
What’s more, the new tax environment will also help – notably with the introduction of the new £1,000 savings income allowance from April, which effectively means that the first £1k of savings income will be tax-free. Add together a couple’s ISA allowance and say £40k generating 5% – that’s over £70,000 generating a possible £3,500 a year.
So what’s not to like from an investment that can generate apparently cash-like returns of 5% or so, and with a reassuringly safe looking track record, at least if you look at the likes of Zopa’s past performance? The answer is that however much it looks like a cash deposit with a bank – it’s a very different animal under the skin.
There are potential downsides – no FSCS protection if the P2P platform goes bust, the potential for losses if borrowers default, and there’s the possibility of losses if interest rates rise and they want to bail out from loans prematurely as well as other possible liquidity issues. The past performance of the larger platforms like Zopa in picking borrowers is pretty impressive over several stages in the lending cycle and in the light of the first decade of growth. But this year’s possible spurt in growth could drive down loan quality or returns or both under pressure of a much more competitive environment.
Advisers will need to decide how to approach P2P. One thing is for sure, lots more of their clients will get to hear about it and want the juicy sounding yields on offer. And we expect the HL push into this territory will stimulate demand.
When advisers wake up to this market (and they certainly need to know about it) most will probably treat it in much the same way as they deal with buy to let property or deposit accounts. They will give broad guidance about the risks, take investments into account in planning, but not advise on it directly or charge on the basis of its being included in a portfolio.
Will other platforms be tempted to follow HL into the market? Platforms’ cash offerings to clients are seriously unimpressive, if only because banks mostly regard platform deposits as undesirable embarrassments. So maybe, but no one should underestimate the know-how that the P2P pioneers have accumulated over the years. The software expertise alone is impressive. And they shouldn’t underestimate the hazards of getting into this new territory.
We will be publishing a paper on P2P, advisers and platforms later this year. To share your views, contact us on enquiries@platforum.co.uk.