What’s new in the peer-to-peer lending industry?
As regular readers will probably know, we are currently running a trial investment of peer-to-business lending, which is currently going well (6.2% annual returns).
We also previously held an interview with the CEO of Lending Works where I asked him 9 questions that our readers wanted answering related to peer-to-peer lending.
Today, we shall turn our attention to the changes in the peer-to-peer lending industry and what this means to you as a potential investor.
Possible investment in ISAs
The first, and in my opinion, the most significant change is the possibility of placing peer-to-peer lending into New ISAs (NISAs). This will mean that any interest earned from your investments will remain tax free:
This effectively increases your investment returns by either 20%, 40% or 45% depending on your current income tax rate.
For my current investment, I’m earning 6.2% returns on my peer-to-business lending. However, after tax this falls to only 4.2%, which whilst still attractive compared to current savings rates, but less appealing than if this wasn’t taxed. Additionally, you will save the hassle of filling out a tax return:
Currently, we are not 100% sure when NISAs will begin to accept peer-to-peer lending, but it is expected to sometime in early 2015. Equally, we envisage that you will be able to simply transfer your existing peer-to-peer investments into an existing ISA and it will form part of your total £15,000 allowance.
One of the biggest negatives to peer-to-peer lending in the past was that it was entirely unregulated. This made it seem extremely risky and whilst agreements existed between different platforms in the case of one provider going bust, it was not air-tight.
However, from 1st April 2014, the FCA started regulating all peer-to-peer lenders. This was a move which was strongly supported and encouraged by the peer-to-peer lenders as they desperately wanted to show that, unlike the banks, they were doing things the right way!
Moreover, there are new regulations from 1st October 2014 regarding keeping client money separate to company funds, dealing with the Financial Ombudsman and other rules intended to protect investors in peer-to-peer lending:
For the main providers, most of this is already being done. Take Zopa for example. They use “Zopa Safeguard” which is a fund held in trust. As the fund is held in trust this means the money in it cannot be used by Zopa and there are rules for how the fund can be used. This keeps this separate to the cash used by Zopa for operating activity and is used only to support bad loans on investments you have made.
The Safeguard fund has covered all bad loans since it launched, but of course there remains some risk it may not always be able to do so. Also, peer-to-peer lending is still not covered by the FSCS, which is still a worry for some investors.
My opinion is that this poses some risk. However, as part of a balanced portfolio of investments, the additional risk is more than compensated by the additional reward when compared to bank savings.
Are you still worried about investing in peer-to-peer lending? Will you start when they can be placed into NISAs? If you have any questions on peer-to-peer lending, let me know.