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Cash interest rates are poor – should we consider peer to peer lending?

Cash interest rates are extremely low as I’m sure anybody sitting on substantial cash deposits will know. Cash ISA rates are getting lower and the favourite current account for interest on your cash has just slashed their interest rate in half.

So should we look at peer to peer lending to boost returns on savings? Our regulator the Financial Conduct Authority (FCA) has taken more of an interest in this sector. The FCA is to probe peer to peer lending for the second time in two years following calls for tougher regulation of ‘alternative finance providers’.
The FCA are going to scrutinise this fast growing sector to see if consumers who lend and invest money understand the risks they are taking, especially retail clients who are generally less knowledgeable.
The former chair of the Financial Services Authority (predecessor to the FCA) told the BBC in February this year ‘over the next five to ten years, P2P loans could be the source of losses that make the worst bankers look like absolute lending geniuses’.
According to the regulator these are a few of the potential risks savers/lenders could face:
• A ‘maturity mismatch’ between the three to five year terms of loans and the promise to return cash within 30 days if needed.
• It is also possible that platforms could only repay investors if they have money of their own available. The FCA warned ‘this might also transfer risk from investors who leave platforms to those that stay on’.
• The ‘pooling of credit risk’. All investors become vulnerable to defaults by borrowers they did not wish to be exposed to.
As usual ‘peer to peer lending’ and ‘loan based crowdfunding’ are more established in the USA. Shares in Lending Club, the biggest US P2P platform, halved in value after employee fraud was exposed and its chief executive resigned in mid-May.
We have been watching developments here with interest and decided not to advise on any peer to peer lending. In addition we are carrying out due diligence on asset backed lending for investors and we will have a keen focus on the financial strength and experience of any provider.
We think it’s appropriate to take a cautious stance and urge those of you understandably looking for better returns for your cash holdings to seek independent financial advice.

Steve Speed 22/08/2016