Feeling High – How P2P Investors Can Understand Risk

Hello and welcome to the late-starting working week. Today, we’re sharing an opinion piece in FT Adviser. It’s replete with wisdom and common sense about the much misunderstood peer-to-peer (P2P) sector.

Imagine an asset class where investor returns have been overwhelmingly positive every year since its inception and incredibly stable, hovering around the mid-single digits, without the rollercoaster of the stock market.

Imagine that this industry was born of an older one, previously closed to retail investors, that had provided proven, stable returns to institutions for many decades, even during the great recession, and other crashes and blips.

“To many risk-averse individuals with savings, any amount of risk above bank savings is going to feel high”

Then imagine that a casual comment from the Financial Conduct Authority calls investments in that industry “high-risk”.

This actually happened just a few weeks ago, when the FCA emphasised the difference between cash Isas and Innovative Finance Isas by referring to the latter as “generally high-risk” in a short comment.

To many risk-averse individuals with savings, any amount of risk above bank savings is going to feel like high.

The statement might have had in mind some specific types of higher-risk, higher-reward lending offered by some niche platforms, although the same could be said of ‘adventurous’ unit trusts and open-ended investment companies, or many DIY share portfolios.

“Diversification [is good] because not all lending is equal, not all platforms are equally good at what they do”

It is not unhealthy to have sub-sectors of an asset class that go up the risk scale.

Perhaps instead the FCA comment was referring to investor understanding of basic steps to reduce risk, none of which are new to the realm of investing strategy.

Most importantly, it means diversification because not all lending is equal, not all platforms are equally good at what they do, and investors do not benefit from identical portfolios and returns.

It could simply be the FCA recognises the wrapper of an Ifisa is not conducive to encouraging diversification without additional communication, because some non-advised investors might open one Ifisa and put all their lending capital into it, rather than spread across other wrappers and non-wrapped investment accounts.

8% Yield Loan – Latest

The latest loan from property-backed Seascape is proving popular. This A-rated tranche yields 8 per cent gross, at a fixed rate for five years. It’s currently 56 per cent funded. As is the case with earlier tranches of credit, we have used our best efforts to ensure the truth of the assertions made, but cannot warrant their absolute accuracy. Further detail is available to logged-in members.

A Process Guide To Innovative Finance ISA Investment

Money&Co. lenders have achieved an average return of more than 8 per cent gross (before we deduct our one per cent fee). That figure is the result of £17 million of loans facilitated on the site, as we bring individuals looking for a good return on capital together with carefully vetted small companies seeking funds for growth. Bear in mind that lenders’ capital is at risk. Read warnings on site before committing capital. The annualised bad rate on Money&Co. loans in five years of trading is under 0.04 per cent.

All loans on site are eligible to be held in a Money&Co. Innovative Finance Individual Savings Account (IFISA), up to the annual ISA limit of £20,000. Such loans offer lenders tax-free income. Our offering is an Innovative Finance ISA (IFISA) that can hold the peer-to-peer (P2P) business loans that Money&Co. facilitates. For the purposes of this article, the terms ISA and IFISA are interchangeable.

So here’s our guide to the process:

  • Step 1: Register as a lender. Go to the login page, and go through the process that the law requires us to effect. This means we have to do basic checks on you to comply with money-laundering and other security requirements.
  • Step 2: Put money into your account. This is best done by electronic transfer. We can also process paper cheques drawn in favour of Denmark Square Limited, the parent company of Money&Co.
  • Step 3: Buy loans in the loan market. Once you’ve put cash in your account it will sit there – and it won’t earn interest until you’ve bought a piece of a loan. It’s this final step that requires lenders and IFISA investors to be pro-active. Just choose some loans – all loans on the Money&Co. site can be held in an IFISA – and your money will start earning tax-free interest.

The ISA allowance for 2018/19 is unchanged from last tax year at £20,000, allowing a married couple to put £40,000 into a tax-free environment. Over three years, an investment of this scale in two Money&Co. Innovative Finance ISAs would generate £8,400 of income completely free of tax. We’re assuming a 7 per cent return, net of charges and free of tax here.

Once you have made your initial commitment, you might then consider diversifying – buying a spread of loans. To do this, you can go into the “loans for sale” market. All loans bought in this market also qualify for IFISA tax benefits.

Risk: Security, Access, Yield

Do consider not just the return, but the security and the ease of access to your investment. We write regularly about these three key factors. Here’s one of several earlier articles on security, access and yield.


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Disclaimer: Money&Co.™ is the trading name of Denmark Square Limited, Company Number 08561817, registered in England & Wales, authorised and regulated by the Financial Conduct Authority (FCA). The company is identified on the Financial Services Register under Reference Number 727325. The registered office is 58 Glentham Road, Barnes, London, SW13 9JJ where the register of Directors may be inspected. Denmark Square Limited (ISA manager reference number Z1932) manages the Money&Co. Innovative Finance ISA.