The UK’s peer-to-peer (P2P) lending market expects renewed interest, following the Bank of England’s (BoE) decision earlier this month to reduce base rate – already at a record low of 0.50% since 2009 – to 0.25%.
UK savers who become investors by lending their money to other individuals or small businesses via P2P loans websites are currently being offered a rate of up to 7% interest at one P2P lender, Assetz Capital if they can leave their money tied up for five years, while peers Zopa and RateSetter offer rates of 6.7% and 5.7% respectively.
However, concerns have been expressed by some over the ways that some P2P platforms re promoted to investors. Last month, Andrew Bailey, chief executive officer (CEO) of regulator the Financial Conduct Authority (FCA) suggested when appearing before the Treasury select committee that certain lenders “get very near” to promising investors that their money is safe and they can expect fixed returns.
As investors lend to P2P platforms through a site, they are not covered by the UK’s deposit guarantee scheme. Bailey has noted that although some platforms have so-called reserve funds to compensate investors against bad debts should borrowers default, there is “no guarantee in that fund”.
Assessing the lenders
Ratings and research agency 4thWay has launched as a comparison website for potential investors who can see the interest rates, risks, costs and features offered by each P2P platform.
The site singles out six P2P lenders that have achieved their highest rating of five stars or “PLUSes”: Funding Circle, Landbay, Lending Works, Proplend, RateSetter and Zopa. Business and development loans are offered by Funding Circle and RateSetter, while Landbay focuses on residential buy-to-let mortgages, Proplend on commercial buy-to-let mortgages and both Lending Works and Zopa on consumer loans.
According to 4thWay, its rating system reflects “rigorous stress tests carried out on all the platforms using international banking standards – Basel (1)”. Their ratings seek to indicate whether investors could expect to lose money during a very severe recession.
The risk-adjusted ratings also take into account interest earned, so they show investors how long it might take to recover from those losses – after both interest and any protections offered by the online lending platforms, such as reserve funds. Both the ratings and the risk scores assume that investors spread their money across many loans, using multiple P2P lending platforms.
“There is a real need for standardised ratings in the peer-to-peer lending market that clearly indicate to investors the underlying safeness and the risk-reward balance of the different types of lending,” said Neil Faulkner, co-founder and managing director (MD) of 4thWay. “An A+ at one platform is not the same at another, but the 4thWay PLUS ratings are consistent.
“Digging through the detailed data that many platforms offer on their loans to create PLUS ratings and risk scores requires making adjustments for consistency, checking for hidden dangers such as rolled over loans, accounting for borrower-grading discrepancies, and so much more.
“Many platforms are still unrateable due to being too new or not providing enough information. However, we are glad to see a good number of platforms have received five PLUSes by performing so well against our Basel stress tests, and offering sensible interest rates and protections.”
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