Peer-to-Peer (P2P) lending companies have facilitated almost £6 billion of loans to those seeking alternative finance since 2010 while providing attractive returns to investors. There is no doubt they now provide major competition for the mainstream banks.
Despite the rise in alternative finance the industry leaders are calling for tighter regulation to ensure all potential investors are aware of what is involved.
The trade body, the Peer-to-Peer Finance Association (P2PFA), made up of the 8 lenders which account for 75% of the P2P lending market is pushing the Financial Conduct Authority (FCA) to introduce standardised rules to ensure consumers make fully informed investment decisions.
Finance for businesses and investors
Offering cheaper finance for borrowers and better rates of return for the individual investor lenders than the traditional banks the sector provides a viable alternative for many of the 100,000 small businesses who are refused loans from the main British banks, a sentiment very much backed by the Chancellor of the Exchequer.
What is P2P lending?
A P2P investment typically offers between 4 and 8 percent to consumer investors whose funds are pooled and loaned directly to borrowers such as small businesses, land owners and developers. Minimum investments start from £10 with many P2P lenders allowing for monthly withdrawals.
Protecting the industry
In its letter responding to the FCA’s consultation, the P2PFA highlighted that investors are aware of the risks but hopes pre-emptive steps are taken to protect the future of the industry by targeting offers of instant cash, suggestions that loans are equivalent to bank deposits and the extension of borrowing periods.
Like any investment the offer of higher returns often comes with a higher risk. The return is based on the repayment of the loan with some P2P lending companies offering a protection fund to cover unpaid debts. However, investors should be ready to accept that the investment may not be returned and aware that they will not benefit from the protection of the government backed Financial Services Compensation Scheme.
With the growth of small and medium sized businesses of vital importance to the UK economy, the availability of alternative finance is seen as an important component by many businesses and the government alike. As well as this, the opportunity for good investment returns means the P2P lending market is set to grow and fill in the gaps left by any post-Brexit squeeze felt by the mainstream banks.
Such fast paced and continued growth in any sector gives rise to new factors to consider and the welcoming of further regulation by the industry leaders aimed at protecting consumers can be seen as a positive step.