Investing money with peer-to-peer lending sites has always had risk attached. Although rates of return can tower above traditional savings accounts and Isas, your money hasn’t been protected – until now.
When you invest with a peer-to-peer lending site, there’s an element of risk that’s understood when you sign up – people who borrow your money could potentially default on their loans.
But there have been bigger risks too. After all, without cover from the Financial Services Compensation Scheme, you could potentially lose some or all of your money if the site you’ve invested through goes bust.
Cutting down the risks
However, that could soon change under plans to regulate the peer-to-peer lending industry from April 2014 under the scope of the Financial Conduct Authority. We want to make sure its proposals lead to raised standards and greater consumer protection, and will help people make informed decisions about the risks and returns of this new way to borrow and save.
Peer-to-peer lending sites such as Zopa, Funding Circle and RateSetter have become increasingly popular in recent years – not only among savvy savers, but also with consumers and businesses unwilling or unable to access funds from the banks.
The rise of peer-to-peer lending has been largely been built on interest rates that beat the banks. And now, with one of the major risks neutralised, we hope those appealing benefits will stick around.
A challenge for the banks?
Combined with increased consumer confidence, this pioneering industry has the potential to shake up the traditional banking system. In fact, Andrew Haldane, a director at the Bank of England, recently claimed peer-to-peer platforms could render some bank functions surplus to requirements in the future.
So far, the big banks have lost little sleep over the emergence of peer-to-peer lending. But the government’s intention to invest £55m in such sites to increase their reach is another key step in this sector’s climb to prominence. It’s yet another wake up call to the banking sector that it needs to change. If you snooze, you might just lose.
Have you ever used a peer-to-peer lending site, or do the risks put you off? Will the new protection from the Financial Conduct Authority give you more confidence to invest in peer-to-peer lending?