Columnist

The alternative finance boom

Peer-to-peer lending has come on our radar more recently. It offers attractive interest rates to savers who lend money directly to individuals or businesses – but with the risk that they may not get it back.

Interest rates of as much as 10% are offered by some peer-to-peer services, but less risky arrangements offer more modest headlines, albeit still at rates that make even NS&I Pensioner Bonds look relatively poor. But of course, when investing in a National Savings product you’re lending your money to the UK Government rather than a bunch of strangers via a third party.

Peer-to-peer lending companies are the new alternative finance institution for businesses and investors flocking to lend through these firms to get the high rates on offer has caused the industry to boom.

According to figures published this month by the P2P Finance Association (P2PFA), lending to UK businesses and consumers reached £1.2bn in 2014, taking total lending by the industry to £2.18bn – more than double the figure at the end of 2013. Whilst impressive, that’s still less than Pensioner Bonds raised in a few weeks. However, they’re only available to the over 65’s.

So whilst the sector has yet to become mainstream, its growth has rightly caught the attention of the financial regulator. Following a review into crowdfunding and peer-to-peer lending launched in March 2014, the Financial Conduct Authority released its findings earlier this month.

It found that some crowdfunding sites had been “cherry-picking” what they disclose to investors and “downplayed” important information. Some peer-to-peer lending websites had similar issues as well as failing to disclose an APR for the borrower, insufficient tax information and implying capital was more secure than it was by comparing themselves with banks.

It is therefore clear that the sector has some way to go before it will become a trusted mainstay of the financial landscape, but with peer-to-peer lending due to become eligible to be held in an ISA this April it might not be long.

It will be worth keeping an eye on peer-to-peer lending and at Lowes Financial Management, we are waiting to see further positive evolution before we expose our clients.

This was posted in Bdaily's Members' News section by Lowes Financial Management .