Last year, peer-to-peer websites lent out more than twice as much money as they did in 2012. In fact, this alternative to borrowing and saving with a bank recently became a £1bn industry.
From 1 April, loan-based peer-to-peer and crowdfunding websites will be regulated by the Financial Conduct Authority (FCA), which should provide increased consumer protection and give further credence to alternative finance. These are exciting times for an industry rapidly growing in popularity.
Peer-to-peer lending matches investors, who are willing to lend, with borrowers who may have struggled to get a loan from the banks, through dedicated websites. The attraction for investors is that rates of return can be better – by around 2.5% on average – than those offered by traditional savings accounts.
Matching savers with borrowers
Peer-to-peer websites see regulation as a key moment in the industry’s fledgling history. Combined with the fact alternative investment activities are to be included in the new tax-free Isa wrapper worth up to £15,000 it’ll almost certainly result in an influx of new, interested investors putting money into peer-to-peer sites.
However, this may put the services under pressure to meet demand. Up to now, they’ve been conservative in assessing credit risk as they know that having too many risky borrowers in default, thus losing investors’ money, will soon deter people.
Some sites have indicated that they’re now keen to relax risk profiles as they seek to maintain momentum. While they believe they can do so without defaults rising too much, it’s inevitable that they’ll start to increase.
Regulation should help investors make informed decisions about the returns and risks of peer-to-peer lending. But the sites need to be careful not to endanger the endorsement that it brings as they seek to take advantage of the opportunities for growth ahead of them.
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