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Peer-to-peer lending set to be regulated

John Fitzsimons
by Lovemoney Staff John Fitzsimons on 07 December 2012  |  Comments 10 comments

Saving with a peer-to-peer lender such as Zopa, RateSetter or Funding Circle is about to become safer, with the prospect of full regulation.

Peer-to-peer lending set to be regulated

Peer-to-peer (P2P) lending is set to be regulated by the new financial regulator, the Financial Conduct Authority (FCA).

The move to regulate this small but growing area of the financial industry is part of the Financial Services Bill, a piece of legislation which is also set to bring in interest rate caps on payday loans.

How peer-to-peer lending works

With banks, you put your money in a savings account, and that money is then used to fund the bank’s lending. Peer-to-peer firms essentially cut out the middleman, allowing savers to lend their cash directly to borrowers.

As a result, you tend to get a better rate on your cash.

For a look at the different peer-to-peer sites and how their models vary, check out What is peer-to-peer (P2P) lending?

Why regulation is needed

I’m delighted that the peer-to-peer market will now be regulated. Not because I think firms like Zopa, RateSetter or Funding Circle have done anything wrong; quite the opposite actually.

No, I think regulation is important because it adds credibility to their propositions, and it will help put people’s minds at ease that they are dealing with a reputable firm. It may sound strange to say this, given the many failures of the financial regulators in recent years, but it’s clear that for some people it's reassuring to know that the Financial Services Authority (or now its successor the FCA) is keeping an eye on things.

It also raises the prospect of protection from the Financial Services Compensation Scheme, meaning that lenders will know their cash (currently up to a limit of £85,000) is protected, no matter what happens to the peer-to-peer firm.

It’s also a victory for the peer-to-peer lenders themselves, who have been campaigning for regulation. They know that now they have this added credibility they are fighting on a level playing field with more mainstream names.

What happens next?

Inevitably, the road to regulation is a long one. There will now be a period of consultation as the regulator works out exactly how hands on it needs to be, and the whole process is likely to take around 18 months.

My own experience

I wrote in Why I've started saving with RateSetter about my own move into the P2P lending world. And I’ve been thoroughly impressed.

OK, the rates I can get on the money in my account have fallen; when I started I could get 3.6% in the monthly access account, compared to 2.8% today. But compared to the best instant access and top notice savings accounts, those rates more than hold their own.

I hope that the prospect of regulation means more people will give it a go. What do you think? Does the fact that the FCA will be regulating the industry make you more likely to give it a go?

More on peer-to-peer lending and savings

What is peer to peer (P2P) lending?

Why I've started saving with RateSetter

Why Zopa, RateSetter and Funding Circle are the future of banking

The top fixed rate savings bonds

The best instant access savings accounts

The best regular savings accounts

The best notice savings accounts

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Comments (10)

  • oldhenry
    Love rating 350
    oldhenry said

    Regulation is not free, it will cost money and large sums if there are many defaults. I imagine the FSCS would love to suck it into main stream lenders so that P2P can bail out the dodgy banks there. Also , someone gets a nice job in the FSA with a warm office and a good pension, so you are all doing someone a favour.

    I have never tried the P2P as I am a pessimist at heart ( or realist) and now I would get bad debts from day one. I was with Heritable and Icesave, luckily the Governmnet bailed me out but my local council were not so lucky. The Heritable had good S&P rating too as the Audit Commission lost a packet on their investment. Actually, Heritable has paid back a fair amount to the councils.

    Report on 08 December 2012  |  Love thisLove  0 loves
  • TJ
    Love rating 0
    TJ said

    I have lent money (£1,500) through Zoppa since they started and got a 9.5% return. I have had no bad debts. Zopa actively chase anyone who gets behind with their payments. I believe in this fair and just system where everyone helps each other out, everyone wins! Try it with just £100 and see if it works for you.

    Report on 09 December 2012  |  Love thisLove  0 loves

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