Yorkshire Building Society (YBS) has issued yet more warnings about the UK’s flourishing peer-to-peer lending sector.
The company’s latest bout of research reveals that as many as 728,000 over-65 year olds would consider investing money into peer-to-peer lending platforms. The key point of concern, for Yorkshire, is that P2P products are not covered by the FSCS (Financial Services Compensation Scheme). Of the pensioners surveyed by YBS, 42% were aware of the P2P space. Of that 42%, 60% were unaware of the fact that P2P investments fall outside of the remit of the FSCS. Furthermore, nearly three-quarters didn’t know that peer-to-peer platforms charge lenders fees (which some of them do), and 53% didn’t realise that putting money into the platforms should be viewed as an investment, rather than as akin to a savings account. YBS has also raised red flags about the perceived illiquidity of peer-to-peer lending.
If this is all sounding rather familiar, that’s because it’s the third time that YBS has cast aspersions on the peer-to-peer sector in recent months. Each of the surveys has revolved around the fact that P2P investments sit beyond the reach of the FSCS, and each has raised concerns that everyday investors are not sufficiently aware of that fact.
Andy Caton, Executive Director at Yorkshire Building Society, said:
"Pension freedoms are transforming how savers fund their retirements and increased flexibility on how people invest their money is very welcome."
"The increased freedom, however, is putting the responsibility squarely on the shoulders of retired people and there must be some concern that over-65s will take unnecessary risks with their cash, chasing potentially better returns without fully understanding how capital and income may be at risk.”
"P2P may be entirely appropriate for some people but investors need to be well-informed about the potential risks including the lack of FSCS protection and the risk of losing capital and income. That particularly applies to pensioners putting retirement cash into schemes."
It is most noble of YBS to shoulder something of the burden that is educating prospective peer-to-peer investors on the risks of investment. Let's address some of the building society's major concerns.
Yes, peer-to-peer investments are not covered by the FSCS. But, no, that doesn’t mean that they are unpalatably risky. The top platforms have various methods of guarding their investors against losses. Some employ provision fund structures. Others deal exclusively in asset-backed lending. A few platforms insure their lending against the risk of default. Not to mention the fact that many of the most established companies have made their full loan books publicly available, which provides individual lenders supreme clarity as the to the quality of a platform's lending.
The era of full authorisation begins in October. From then on, all platforms that are fully authorised by the FCA are required to employ a back-up servicer that will assume responsibility for administering existing loan contracts, in the event that a platform closes down. Members of the P2PFA already have such mechanisms in place.
As for the issue of illiquidity, it very much depends on the platform in question. It might be difficult to sell out of loan contracts on an early stage P2P lender. But such is the weight of money flowing into the established marketplaces that the secondary markets of, say, RateSetter or Zopa are in truth pretty liquid. Early withdrawal can be executed within a matter of days. But of course, liquidity is changeable, and a run on any of the secondary markets would likely elongate withdrawal times.
Broadly speaking, it is correct that investors – particularly the more silvery-haired variety – ought to be properly educated about the risks of investing pension money in P2P products. But the platforms themselves are constantly at pains to stress the potential risks of their own products. Furthermore, some platforms have been busily tailoring their propositions to better suit the needs of the pensioner market. Take Lending Works, for example, which among other things has now guaranteed each of its over 65 year old lenders a named representative, who will be on-hand to talk through the finer details of the peer-to-peer lending process.
“Our products pay between 3.1pc and 5.7pc 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."
“Paradoxically, if you wanted to guarantee that your savings would lose value over the last 5 years, a pretty good way of doing it would have been to put your money into one of the many FSCS-backed savings accounts which have paid sub-inflation returns year after year. Since 2010, savers have lost close to £80bn in purchasing power from their savings due to a combination of low interest rates and high inflation, according to a June 2015 report from Henderson.”