Perhaps unsurprisingly, a traditional lender has cast aspersions on the peer-to-peer lending space.
Yorkshire Building Society has unveiled research which suggests that the risks associated with investment via P2P platforms suffer from a lack of understanding amongst everyday investors. The company surveyed over 1,500 UK adults in mid-January 2015, discovering that 42% claim to be familiar with the concept of peer-to-peer lending. Of those people, 60% were unaware that P2P investments are not protected by the FSCS.
For those that aren’t aware, the FSCS (Financial Services Compensation Scheme) offers state-backed coverage for up to £85k for UK bank and building society accounts. In the event of a bank failure, the Government will refund those account holders that have lost money. No such guarantee exists within the P2P space.
The advent of the lending ISA – which will shelter P2P investments – appears to have sparked Yorkshire Building Society’s concerns. The assumption is that these changes to law will spur on increased retail investment within the P2P space, with some of that investment coming from people who aren’t fully aware of the associated risks. Yorkshire Building Society points to the fact that 10% of those surveyed by Consumer Intelligence in mid-May said that they would definitely take more risk following the arrival of the new ISA rules, and that 40% will at least consider riskier investment strategies. Furthermore, according to PollRight, 70% of financial advisers foresee increased client risk appetite, while 45% believe the new ISA rules will ramp up interest in P2P lending.
Andy Caton, Executive Director at Yorkshire Building Society, explained:
“The Government is helping to encourage saving and investment with new rules and looks as if it will be successful with people keen to take advantage of increased flexibility and new tax-free allowances.
“Providers need to match that ambition by helping to encourage responsible saving and investing as there is a genuine threat that enthusiasm for saving and investing will be damaged if people are exposed to unnecessary risks they do not understand.
“Advice will be crucial in helping achieve success for the launch of new savings rules and we would urge anyone considering riskier investments such as P2P or equity-based investment to take independent financial advice before doing so.”
Are these concerns justified?
Perhaps, perhaps not. It is right and proper to call for appropriate consideration of risk prior to P2P investment. But it is not right to infer that peer-to-peer lenders are not making the risks of investment plain. The platforms are bound by regulation to be moderate in their marketing methods, and indeed are not bashful about the fact that P2P investment is a generally risker (and often more rewarding!) game than storing money away in a bank or building society. There’s also the P2PFA’s guiding principles to consider – which include conveying “clear, balanced and fair” information to consumers. And as RateSetter CEO Rhydian Lewis pointedly told the Telegraph:
“Our products pay between 3.4pc and 6.2pc for investors willing to take on a small amount of risk, so it’s no surprise that incumbents such as Yorkshire Building Society – which pays between 0.5pc and 2.0pc for an FSCS-backed product – are worried.”
“We believe that calculated risks are both necessary and acceptable for investors to earn a good return. Nobody has ever lost a penny lending through RateSetter, but we make it very clear that money lent through us is not covered by the FSCS and that capital is risk."