Direct Lending and P2P Lending news – key stories from the last month
May saw inflation rise again to 2.9%, with economists predicting it will creep higher still over coming months. With interest rates still at 0.25%, savers and investors will struggle to search out reasonable returns. | Q1 lending exceeds £1 billion - is this an indication that Direct Lending and P2P Lending are coming of age? | More pensions providers are considering P2P, potentially reflecting a growing shift in the industry towards recognising Direct Lending as an increasingly mainstream asset class. | Recently accessed figures from the FCA have revealed that 3500 firms have voluntarily given up permissions to advise on P2P agreements since April 2016 – with over three quarters of firms retaining these permission for the moment.
Inflation hits a new high
Last month UK inflation rose to 2.9% - the highest rate for four years and significantly above the Bank of England’s 2% target. The current political uncertainty in the UK – leading to a weak pound - could mean that we see inflation creep higher still over the coming months; with economists predicting a peak in the last quarter of 2017.
What does this mean for savers? High inflation coupled with record low interest rates means that many savers with cash in traditional high street savings accounts will be effectively losing money in real terms. Even the some of the new challenger banks with more competitive rates will struggle to beat inflation over the coming months. Interestingly, a recent survey revealed surprisingly low expectations amongst retail investors – with the majority expecting their portfolios to be outperformed by cash over the next year. As AltiFi point out, according to the Bank of England the average return on cash stands at 0.15%: “This means that cash products deliver a real-terms loss to savers, considering the prevailing inflation rate”.
Small businesses are also suffering under rising inflation, with Brexit uncertainty adding to their concerns. According to the Federation of Small Businesses SME’s are finding less room to invest for growth, as inflation has meant operating costs have soared by an average of 3.2%.
As rising inflation and low interest rates impacts both individual savers and SME’s, there is a growing interest in alternative investments. Investors open to more risks are increasingly adding Direct Lending and P2P lending to their portfolios, and more and more SME’s are considering asset-backed finance as a viable alternative to traditional loans. As Robert Pettigrew, Director of the P2PFA notes: “"At a time when macroeconomic uncertainty appears to be the prevailing narrative, more than £600 million has been lent to businesses through peer-to-peer platforms in the last three months, with almost thirty-seven thousand businesses having a loan at the end of the period. It is clear that the ability of platforms to provide an offering responsive both to the aspirations of investors and the needs of borrowers has enabled a consistent pattern of growth which any sector would find attractive.”
Direct Lending coming of age – Q1 lending exceeds £1 billion
According to the Peer to Peer Finance Association (P2PFA), lending for its nine member platforms exceeded £1 billion in the first three months of 2017. This growth in lending volumes could indicate that Direct Lending and P2P lending are maturing and becoming recognised as a mainstream asset class. In a recent poll of Moneywise users, 48% use P2P lending to target a higher return on their savings. This is a 9% increase from August 2016. A further 27% said that they would consider using P2P in the future.
Placed somewhere between cash and shares (much riskier than cash but potentially less volatile than the stock market), Direct Lending is opening up to everyday investors who are willing to take on more risk to target a better return for their money. Lending, until recent years, has been monopolised by the banks; however, the economic downturn has seen an increasing number of SME’s look to P2P as an alternative source of loans.
Institutional investors are also taking an increased interest in Direct Lending. P2P platform Ratesetter was valued at £200 million last month in its latest funding round – attracting large investment firms such as Artemis. Despite the scrutiny that the P2P lending is currently under, this is possibly an indication of the confidence in Direct Lending as a mainstream asset class that is here to stay.
There are however, concerns within the industry that too many savers are entering the market without fully understanding the potential pitfalls of P2P lending and some platforms not clearly stating that capital is at risk.
Pensions – providers looking at P2P as an investment option
Back in April, BondMason launched its SIPP (Self Invested Personal Pension) service. Offered through SIPP administrators looking to diversify pension investments for their clients. This reflects a growing shift in the industry as more administrators and investors are recognising Direct Lending as an increasingly attractive asset class. As BondMason CEO, Stephen Findlay notes, there are some practical difficulties for SIPP administrators in monitoring the activities of clients looking to invest in P2P, which BondMason has helped to solve for its clients: “We’ve launched this SIPP product because we recognise the need to make P2P lending as straight forward as possible, and because it fits with what our clients want and what SIPP administrators need.”
There is a growing appetite for using alternative finance products like P2P in SIPPS. A working party run by TISA (Tax Incentivised Savings Association) is currently in the process of gathering advisors’ views on P2P with the aim of bringing P2P and crowdfunding into the SIPP world. The key is to work with SIPP Administrators as to how they can overcome such obstacles such as tax regulation. BondMason has outlined and resolved some of these difficulties in its new guide for SIPP Administrators .
Political uncertainty – what is the impact for investors?
June’s election result has meant that the UK continues to face a period of political and economic uncertainty. The consensus from the financial press is that there will be a weakening of global confidence in the UK – the immediate impact was a 2% fall in sterling – and stocks and shares may be knocked by some short- term volatility.
Savers and investors will continue to suffer as interest rates are unlikely to rise any time soon and weaker sterling means we are likely to see a continued rise in inflation – probably throughout this year.
Finding reasonable rates of return will continue to be a struggle as many savers are losing money in real terms – money has to work harder and stretch further. Savers and investors willing to take on some risk, may need to cast a wider net and consider alternative finance options to target a better return.
75% of advisors choose to retain permissions for the moment
Recent figures from the FCA following a request from Bridging and Commercial, revealed that 3,500 firms have voluntarily given up permission to advise on P2P agreements since April 2016 – with over three quarters of firms retaining these permission for the moment – this could potentially be a positive indication for the P2P space moving forward. Indeed, following the FCA figures, P2P platform Ratesetter notes that there have been no signs of any reduction in appetite from advisors: “…We’ve seen steadily increasing demand from advisers, and the value of IFA-administered accounts on our platform has doubled over the last year.”
There are of course hurdles and, as BondMason CEO Stephen Findlay points out, advisors may be slower to advise on P2P space since, the industry is complex and growing quickly with many operating models all with different lending opportunities and levels of risk. Professional indemnity also needs clarifying. At the moment it is not clear whether existing insurance covers advising on peer to peer lending.
Robert Pettigrew, Director at the P2PFA echoes the sentiment that advisors still view P2P as an attractive space and that the more platforms can do to ensure investors understand the implications of engaging with P2P the better “Mechanisms which enhance the capacity of advisers to engage effectively with peer-to-peer lending products are to be welcomed and encouraged”.
*Warning: nothing in this article should be construed as advice. Your capital is at risk