The key stories surfacing in December 2016 included the FCA’s announcement that there would be a further tightening of P2P lending rules; a few more platforms received full FCA authorisation, Cash ISA’s continued to tumble and inflation reached its highest level in two years. Industry experts also offered their thoughts on what 2017 holds for direct lending.
FCA planning tougher rules for P2P lending platforms
2016 saw the FCA launch its review into the P2P lending market and it published its interim report in December. The FCA alluded to the implementation of further rules for P2P lending platforms; key concerns centred around transparency and the worry that in such a fast-moving industry, inadequate plans were in place to protect consumer should a platform go bankrupt.
“Based on our review of this feedback, together with our supervision of crowdfunding platforms currently trading and our consideration of applications from platforms for full FCA authorisation, we believe we need to modify our rules in a number of areas” Andrew Bailey, CEO, Financial Conduct Authority.
The review is ongoing; however, to answer their immediate concerns the FCA expect to introduce new rules in the first quarter of 2017. The worry within the industry is whether a further tightening of FCA rules could hamper development and potentially slow down the already complex and lengthy consultation period. Christine Cornish, chair of the P2PFA commented: “We trust that the critical consumer test – based on a balanced and evidence-based assessment of benefits and risks will be applied as the review moves forward.”
Whilst regulation is moving forward, it is important to note that FCA regulation shouldn’t be seen as the saviour of P2P lending. Full authorisation doesn’t necessarily guarantee the quality of a platform.
Innovative Finance ISA – authorisations trickling through
Although being launched back in April 2016, the lengthy FCA authorisation process has meant the number of IF ISA’s on the market is far smaller than was anticipated at the start of 2016 – indeed 80% of platforms were still waiting FCA approval when the IF ISA launched in April last year.
FCA authorisations continued to trickle through in December with Folk-2-Folk becoming the largest P2P platform to be fully authorised. The UK’s largest three P2P lending platforms Zopa, Funding Circle and Ratesetter are still waiting along with many others. P2P platform Landbay was granted full authorisation in December and announced that it would be launching its property-backed ISA before the end of the tax year.
Surprisingly the government failed to mention the IF ISA in its recent ‘Ways to Save money in 2017’ – a savings infographic aimed at consumers. Suggesting perhaps that the government still lacks full understanding about the P2P lending market.
Inflation goes over 1% for the first time in two years
2016 saw already beleaguered high street savers hit by low interest rates. Figures published in December added to their misery as November’s CPI saw the highest rate of inflation since October 2014 at 1.2%. Figures from MoneyFacts point out that savers will find it incredibly difficult to find a traditional savings account that will match, let alone beat, 1.2%. Savers could find they are losing money in real terms, as money deposited in a traditional high street bank will be worth less in real terms after a year.
Misery is set to continue for savers during 2017 as experts warn of higher inflation to come, with some predicting that consumer price inflation will reach 2% by the end of the first quarter.
As interest rates continue to sit at a low level and inflation rises people may increasingly turn to alternative finance options in search of better returns. Inflation can impact the value of investments over time; here is how you can protect your direct lending portfolio against inflation .
Cash ISA rates continue to fall
In the past, cash ISA’s were generally considered to offer a better return than traditional savings accounts once tax had been taken into account. Since April 2016 basic tax payers are entitled to earn £1,000 tax free interest from savings or current accounts – meaning that ISAs are no longer the only way to earn tax free interest on cash savings. Coupled with the fact that the latter half of 2016 has seen the average cash ISA rate fall successively month-on-month, it has raised questions as to whether Cash ISA’s are still worthwhile.
With inflation on the rise the average Cash ISA is losing money in real terms. Figures released in December show that the average cash ISA rate is just 0.52%. Which? points out that a Cash ISA still future protects people’s money and that savers can still switch their money to other ISA such stocks and shares ISA. Both the Stock and shares ISA and IF ISA potentially offer a higher level of return (although both have a higher risk profile and are not currently protected by the FSCS.
What does 2017 hold for direct lending?
2016 has been an interesting year for P2P lending. UK growth continued however a few surprises caused a level of economic uncertainty – namely US Lending Club scandal back in May, the UK’s June’s referendum and November’s US election results.
In 2017 the consensus is that the P2P lending industry is set to continue to grow. Data from the P2PFA (representing the big eight lenders) shows that the UK’s largest platforms reached close to £6.5B in 2016.
BondMason outlined its key predictions for 2017 in its annual P2P lending market review . Whilst the big picture is still growth for 2017, it also predicts there may be another big platform failure in 2017 (not dissimilar to the headlines Lending Club made in 2016). In December we saw US lender Argon file for protection and against bankruptcy and here in the UK the mortgage platform Fruitful wound down its P2P lending arm; closing its doors to its retail investors.
The UK still leads the rest of Europe in Alternative finance, however figures released I December by KPMG and Latvian based lending platform TWINO indicate that the rest of Europe is catching up fast – growing 23% year on year.
*Warning: nothing in this article should be construed as advice. Your capital is at risk