New regulations for platform lending, also known as the peer-to-peer (P2P) sector come into effect on Monday. We’ve reported on this several times. Here’s the take from our friends at Crowdfundinsider:
The new rules were the result of a review by the UK Financial Conduct Authority (FCA).
The UK largely created the entire sector of peer to peer lending. One of the most prominent sectors of Fintech, P2P lending has emerged as a viable asset class generating better risk-adjusted returns in a low-interest rate environment. While not without a few growing pains, P2P has been a net positive for both credit markets and for smaller investors seeking higher rates of return on their money.
At the time the updated rules were announced in June of 2019, the FCA stated:
“[The] P2P sector had developed a wider, more complex, range of business models. Many platforms in the sector are now taking a much more active role, by taking decisions on behalf of the investor. In addition, we explained that we had also seen some poor business practices, for example, in disclosure of information to clients, charging structures, wind-down arrangements, and record-keeping.”
The response by platforms has mostly been positive with some questioning if the net effect will be to dim innovation in the online lending sector. The UK P2PFA, the advocacy group representing the P2P industry, stated at the time the new regulations were announced that the rules “reflect what is already good practice in the peer to peer lending market and we welcome that.
Platform lending of the kind we facilitate here at Money&Co. can be a lucrative activity. The average yield achieved by our registered lenders over more than five years of loan facilitation on this platform is more than 8 per cent, before we deduct our one per cent charge. That return has handsomely outperformed retail price inflation, which has averaged around two per cent over this time.
Historical Performance And IFISA Process Guide
That figure is the result of over £19 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.
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:
The ISA allowance for 2019/20 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.