You may have read in the press about a new type of deposit taker called a Peer to Peer (P2P) Lender.
Peer to Peer lending companies use the ‘Web to “unbundle” the services of a bank, whereby depositors are put directly in touch with lenders. The result of this is that the borrower typically pays a lower rate of interest than a bank would charge whilst the lender enjoys a higher rate of return than is generally available at the banks or building societies.
HA&W have monitored this market for a number of years now and we note that the interest rates achieved are generally in the range of 3.5% to 12.0% per annum, depending on the type of lending that is undertaken by the company concerned.
P2P lenders are undoubtedly going to become a major force in the financial services industry and will certainly come to challenge the high street banks by offering a better deal to both lenders and borrowers – in effect by cutting out the middle man.
However, we are currently unable to recommend P2P lenders to customers as they are not covered by the Financial Services Compensation Scheme. This means that in the event of a P2P lender failing any depositor would lose all of his or her money. Already, a number of small Peer to Peer lenders have failed both in the UK and overseas.
P2P lenders received a boost in this year’s budget as the Chancellor announced the introduction of the “Innovative Finance ISA”. This ISA variant is designed to accommodate investment in P2P platforms, amongst other things, in a tax-efficient manner.
In our opinion P2P lending should be treated as a risk investment rather than a deposit account. However, even adopting this attitude doesn’t mean that we are comfortable recommending the product due to the lack of investor protection.
We are watching developments in this new industry with interest and if there is any change we will let you know, as we are sure everybody would welcome a higher rate of interest on their savings.
