Follow this topicFollow this topic Knowledge » Politics and Finance

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

Enjoyed this? Show it some love

Twitter
General

Comments (10)

  • Mike10613
    Love rating 626
    Mike10613 said

    The interest I get from Zopa is lower too, but still way above inflation. I do have late payers (still no bad debts), but considering the state of the economy and rising unemployment; peer to peer lending is holding it's own. No business that is open, fair and ethical is going to fear regulation. It makes for customer confidence and fair competition. The playing field is level and no one is fixing bonuses or interest rates behind the scenes. The market operates effectively. I would prefer peer to peer lending to cater a little more to those people now taking out payday loans and be a little more social, but we have to be realistic. Maybe when the economy returns to a more normal state and the public schoolboys are no longer running the country, peer to peer will develop even more.

    Report on 07 December 2012  |  Love thisLove  0 loves
  • Arblaster
    Love rating 43
    Arblaster said

    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.

    As they say, the road to hell is paved with good intentions. But these are not the real reasons: the real reason is that the government (aka the banking industry) does not like peer-to-peer lending.

    Peer-to-peer lending is something that takes place between consenting adults. For the price of greater risk, you hope for a greater reward. No one forces you to lend money via Zopa etc, and if you lose money at it, you have no one to blame but yourself. Having the government and the FSA poking their big, fat noses into peer to peer lending, will increase costs, and that will mean either higher costs for borrowers, and/or lower returns for lenders. Peer to peer lending will be stone dead, which is, of course, the object of the exercise.

    Report on 07 December 2012  |  Love thisLove  2 loves
  • PoohBah
    Love rating 23
    PoohBah said

    @arblaster: You possibly failed to read all the way through the article before commenting: "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."

    Report on 07 December 2012  |  Love thisLove  0 loves
  • mollosrabbit
    Love rating 0
    mollosrabbit said

    I think it's a ridiculous idea that losses from P2P lending should be protected by the FSCS. There is a higher risk, and a higher reward to go with it.

    The P2P organisers need to be regulated as trustees of the money, without propert safeguards there is the possibility that someone could run off with the money.

    I am worried that the general level of low interest rates is sucking naive investors into P2P lending. Rates are falling, certainly on Zopa, to an extent that after fees and bad debts (and there are bad debts once you have been doing it long enough), the returns are barely above those available from long term deposit accounts with institutions.

    Currently the risk/reward ratio on Zopa is too low and personally I am not lending very much on there at the moment after 4 years of good returns.

    Report on 07 December 2012  |  Love thisLove  0 loves
  • Arblaster
    Love rating 43
    Arblaster said

    @Poobah

    You said

    @arblaster: You possibly failed to read all the way through the article before commenting: "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."

    Just because I don't agree with something does not mean that I didn't read it. Yes I did read it. I ignored it because it is a pile of old tut. Who are these peer to peer lenders who have been campaigning for regulation? Let me guess, one or two busybodies who see some form of human activity, and instantly want to (a) infest it with stupid rules, or (b) better still, ban it altogether. These Dudley Do-Rights cite all kinds of reasons - money laundering, scam artists, terrorism, everything but the kitchen sink. These are the same people who want to ban hunting with hounds, smoking, car boot sales, untidy gardens, large dogs, ball games etc.

    Peer to peer lending does not need to be regulated. Come to think of it, neither do most things.

    Furthermore, what a lot of people do not realise is that "protecting" life's losers to the tune of £85k a time actually increases the likelihood of being ripped off. If it were not there, sensible people would be more wary and put smaller amounts into risky investments. Now they will put the whole £85k into any old bank promising to pay an unrealistic interest rate, secure in the knowledge that they will be bailed out by other investors. It is like going to Monte Carlo, losing your money, and expecting the casino to pay you back.

    Report on 08 December 2012  |  Love thisLove  0 loves
  • tuttogallo
    Love rating 99
    tuttogallo said

    I have just put some savings with Tesco at 2.85%. It looks to me like the advantage of lending peer to peer is virtually non existent.

    Report on 08 December 2012  |  Love thisLove  0 loves
  • dh1948
    Love rating 11
    dh1948 said

    tuttogallo

    I take your point, but the writer has (deliberately?) chosen the lowest rate available on Ratesetter. At present, it is easily possible to get 6% over five years.

    Ratesetter is also different from the other platforms in that money is set aside to cover bad debt, so there is very little chance of being affected by that.

    Report on 08 December 2012  |  Love thisLove  0 loves
  • Meanmachine2
    Love rating 39
    Meanmachine2 said

    The only snag with peer to peer lending would seem to be that once you have put your money in is to get it out again as you have to sell your debts. Yes you can get a better interest than the banks but I do prefer to be able to get at my cash when I want it

    Why in fact should someone buy your debts when they can simply start up their own arrangements.

    Report on 08 December 2012  |  Love thisLove  0 loves
  • oldhenry
    Love rating 343
    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

Post a comment

Sign in or register to post a reply.

Our top deals

Credit card
company
Balance transfers rate and period Representative
APR
Apply
now

Barclaycard 31Mth Platinum Visa

0% for 31 months (2.99% fee) Representative 18.9% APR (variable) Apply
Representative example: Assumed borrowing of £1,200 for 1 year, at a Purchase Rate of 18.9% (variable), representative 18.9% APR (variable). Credit available subject to status. A Balance Transfer fee of 3.5% will be applied, then reduced to 2.99% by a refund (terms and conditions apply). Plus an additional £20 fee refund on balance transfers over £2000.

Barclaycard 30Mth Platinum Visa

0% for 30 months (2.89% fee) Representative 18.9% APR (variable) Apply
Representative example: Assumed borrowing of £1,200 for 1 year, at a Purchase Rate of 18.9% (variable), representative 18.9% APR (variable). Credit available subject to status. A Balance Transfer fee of 3.5% will be applied, then reduced to 2.89% by a refund (terms and conditions apply). Plus an additional £20 fee refund on balance transfers over £2000.

MBNA 30Mth Platinum Credit Card Visa

0% for 30 months (2.89% fee) Representative 18.9% APR (variable) Apply
Representative example: Assumed borrowing of £1,200 for 1 year, at a Purchase Rate of 18.9% (variable), representative 18.9% APR (variable). Credit available subject to status.
W3C  Thank you for using The Four Horsemen of the Apocalypse