George Osborne shied away in his Budget from including peer-to-peer lending (P2P) in the Isa framework, but platforms specialising in such lending remain quietly confident their day will come soon.
Hopes that Osborne would allow P2P lending schemes within an Isa – perhaps even launch a special ‘Lending Isa’ (Lisa) specifically for them – were raised by his 2014 Autumn Statement in which he said the Treasury would consult on the proposal. Expectations across the P2P world were high ahead of this week’s Budget, but in the end Osborne put off reporting on the consultation till the summer.
Should the fast growing P2P lending sector worry that it is being fobbed off? Should it fear that the lack of a go-ahead from Osborne this week means the government has cooled on the idea? Giles Andrews, chief executive and co-founder of Zopa, launched in 2005 and the UK’s oldest P2P lending platform thinks not. He believes it is understandable for the government to be taking its time: “Including P2P lending within the Isa framework is far more complex than just adding a new category, so it is better to get it right than to rush it through.”
Osborne seems keen on allowing P2P lending in Isas if the details can be worked out. But with the general election looming, surely Andrews is concerned a change of government could mean the proposal being put on ice indefinitely? Again, he remains positive: “There is strong cross-party support for including P2P lending within Isas as it is being driven by the Treasury and will continue to be worked on irrespective of who wins the election.”
The peer-to-peer lending sector – through which loans from individuals are channelled to borrowers including companies in return for relatively high rates of interest – may be tiny compared to conventional bank lending but it has experienced remarkable growth. According to a report published last December by UK innovation think tank Nesta, P2P lending to companies last year totalled £749m, while P2P lending to consumers totalled £547m. For the period 2012-2014, growth for the two have average 250% and 108% respectively, and Nesta expects this strong performance to continue.
The sector is tapping into huge disenchantment with high street banks among borrowers and savers alike. By cutting out the middle-man – conventional banks – platforms such as Zopa can offer borrowers slightly lower rates, and savers much better returns. The platforms themselves get their cut of the action by charging a fee.
Certainly, the potential returns for lenders look very attractive compared to the pitiful rates offered savers by banks. The longer you are willing to have your money away, the higher the returns. Zopa, for instance, is offering 4% for three years and 5.1% for five years.
Handsome returns – but beware of the risks
The peer-to-peer lending sector has, over the years, delivered for many willing to lend through it. But it’s still a young industry, and not suitable for everyone. There have been no big scandals as such, but at present it is still very much for those with a healthy appetite for risk. On a positive note, as of April 2014, the sector has been regulated by the Financial Conduct Authority, which means users of peer-to-peer platforms are better protected than they used to be.
Zopa’s Andrews is clear about the risks associated with P2P lending: “It is a relatively low risk investment but still carries some risk as you may experience the occasional default and your capital is at risk.”
He adds: “We [at Zopa] go to great lengths to reduce the risk of lending by having the best credit risk decision models of any bank or P2P lender in my opinion, diversifying your lending across many borrowers so the risk is spread and we have a Safeguard fund to cover any potential losses.”
Andrews says regulation for the P2P sector is “extremely important” as it ensures only the most responsible platforms are operating and with common standards and procedures. It also provides a stamp of approval for consumers looking at platforms to lend or borrow from. “Regulation provides additional trust in the industry.”
He hopes to hear good news from the Treasury on the ‘Lisa’ front this summer. “Including P2P in the Isa framework will be a game changer for millions of Brits who have suffered from poor returns since the financial crash. It would signal that P2P lending has become a mainstream way to invest.
“With cash Isa rates from banks at rock bottom, the real benefit to consumers for including P2P lending within the Isa framework will, I believe, be reliable and predictable tax free returns that will beat most other asset classes.
“We expect huge demand for lending through an Isa and see P2P lending becoming one of UK’s most popular ways to grow your money as well as adding revenue to the UK economy through personal and business loans.”
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