Peer-to-peer lending set to be regulated
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 (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
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?