Don’t give up on P2P lending

The P2P lending sector has had a torrid year and the rules are being tightened. But it’s hardly game over, says David Stevenson.

man sitting alone, away from group of people © Getty Images

Peer-to-peer (P2P) lending has had a miserable 2019. This sector, which includes big players such as Zopa, RateSetter and Funding Circle, as well as smaller competitors such as Assetz Capital, should be sitting pretty in our new, glorious age of low interest rates for longer. Yields of between 3% and 7% per annum should be very attractive for those willing to take on some extra risk.

Yet the year was marked by the debacle that was Lendy, a P2P property platform now in administration. Lenders will reportedly be forced to shoulder platform-wide losses even though their loans were supposed to be segregated on a loan-by-loan basis with individual borrowers. And Lendy isn't the only platform to hit the buffers recently Funding Secure has also gone down, driven under in part by highly unusual loans to a major art dealer. One news report even suggested that a loan had been secured against a library of 5,000 Italian books.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Regulators crack down

These failures have sparked a regulatory backlash . The Financial Conduct Authority (FCA) introduced new rules on 9 December, which ordered the major platforms to introduce tests that "assess investors' knowledge and experience of P2P investments where no advice has been given to them". On paper these regulations sound sensible and cautious, but the practical effect is that all the effort required to get private investors' attention is proving costly and time-consuming. We've already seen some dramatic changes.

Many platforms are responding by dumping private investors altogether. Major property platform LendInvest has already stopped opening new lending accounts for private investors. Instead, it has chosen to focus on big institutional funders via deals with HSBC and National Australia Bank, as well as mortgage securitisations via the wholesale markets. Abandoning the private investor doesn't seem to have caused too many sleepless nights for LendInvest: its lending base now totals well over £1.8bn.

Advertisement
Advertisement - Article continues below

Last week alternative mortgage lender Landbay decided to close to private investors and focus on institutional money only. ThinCats, which funds small and medium-sized enterprises (SMEs) has also decided to ditch private investors. Other lenders have reacted in a slightly different way. Not long ago Zopa, for instance, decided to become a bank, which should open a whole new range of funding opportunities.

One way we can see these trends playing out is to look at the data for the sector provided by specialist research firm Brismo. It aggregates and analyses data for many of the biggest online lenders in the UK and its figures suggest that overall lending in the big platforms has only returned 3.79% after losses and fees for the last 12 months and just 0.27% for the last month. Those returns are significantly down on the 5%-6% returns seen in previous years.

Data from Brismo also points to a slowdown in lending. In the property sector, for instance, most of the online platforms have barely originated much more than a few million pounds apiece over the last three months, although LendInvest, by contrast, has lent £167m over the same period.

So, is it game over for P2P lending and alternative finance? Brismo's data suggests otherwise. Some platforms are still very much in business and lending actively. Over the last three months Zopa's main rival RateSetter has continued to originate plenty of loans: £170m has been lent over the last three months and £776m over the last year (for Zopa the equivalent figure is £881m).

Where to look now

Second-tier players such as Assetz Capital (specialising mostly in property-backed SME lending) have also continued to prosper, with just under £50m lent out over the last three months. It is hiring staff across the country.

Another stalwart is regional lender Folk2Folk, which continues to grow, especially in the south west, while property-based lender Fiztrovia Finance has grown fast, lending out over £100m in development loans in just a few months.

Advertisement
Advertisement - Article continues below

If all the new rules stipulated by the FCA unnerve you, but you're still interested in the sector, it may be worth looking at the more conventional routes into the sector. LendInvest's two retail bonds, for instance, (one maturing in 2022 the other 2023) are trading at a tiny fraction below the issue price and yield well over 5% in both cases.

In terms of equities, the two biggest listed lending funds on the stockmarket, Pollen Street Secured Lending (which used to be called P2P Global) and VPC Speciality Lending Investments are respectively yielding 5.8% and 10%. Furthermore, their share prices seem to have stabilised after big selloffs: both funds have returned around 10% in price terms over the last 12 months.

Back in the world of online lending, both Zopa and RateSetter continue to offer investors yields of 3%-6%, depending on the product. And if these rates aren't substantial enough for you, you could even think about more adventurous options. European online lending platforms such as Mintos, based in Latvia but available Europe wide, are worth a look. Since its inception Mintos has lent out over €4bn (from 222,000 investors in over 69 countries) via third-party credit specialists throughout the developing world. This is a much riskier option, but the returns tend to be in the double digits. What's more so far at least there have not been very many defaults.

Advertisement

Recommended

Visit/519928/whatever-happened-to-blockchain
Alternative finance

Whatever happened to blockchain?

Not long ago investors were getting hyped up about blockchain. Then they dropped it. But they should take another look, says Ben Judge.
2 Jan 2020
Visit/514893/peer-closely-but-carefully-at-peer-to-peer-property
Property

Peer closely – but carefully – at peer-to-peer property investments

The interest rates on peer-to-peer property investments may look appealing, but investors should tread carefully.
16 Sep 2019
Visit/510714/how-you-can-do-well-by-doing-good
Investment strategy

CITR: how you can do well by doing good

Ignore corporate virtue-signalling. The CITR is a more practical and tax-efficient way for investors with a social conscience to help struggling commu…
14 Jul 2019
Visit/510053/bitcoin-bear-market-but-dont-sell-now
Currencies

Bitcoin is back in a bear market – but don’t sell now

After its recent spectacular rise, bitcoin suffered a whopping great selloff that, technically, put it back in a bear market. But that doesn’t mean yo…
3 Jul 2019

Most Popular

Visit/economy/uk-economy/600837/rishi-sunak-new-chancellor-spending-splurge
UK Economy

Britain has a new chancellor – get ready for a major spending splurge

The departure of Sajid Javid as chancellor and the appointment of Rishi Sunak marks a change in the style of our politics. John Stepek explains what's…
14 Feb 2020
Visit/economy/600814/money-minute-friday-14-february-the-latest-from-rbs-britains-state-owned-bank
Economy

Money Minute Friday 14 February: The latest from RBS, Britain's state-owned bank

Today's Money Minute previews results from RBS – Britain’s state-owned bank – and from pharma giant AstraZeneca.
14 Feb 2020
Visit/investments/property/600826/living-on-a-houseboat-the-pros-and-cons-of-a-floating-home
Property

Living on a houseboat: the pros and cons of a floating home

Living on a houseboat sounds romantic and peaceful. But it’s not as straightforward as it looks, says Nicole Garcia Merida
14 Feb 2020
Visit/517625/tr-european-growth-trust-why-investors-shouldnt-overlook-europe
Sponsored

Why investors shouldn’t overlook Europe

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, tackles investor questions around Europe’s economic outlook and the conseq…
6 Nov 2019