The rise and risks of crowdfunding

After a rapid rise, peer-to-peer lending and crowdfunding gain official support in April when a special Isa comes on stream – but remember that there are risks.

This is set to be a record-breaking year for peer-to-peer lending (P2P), whereby savers lend their money directly to individual borrowers and businesses.

P2P has exploded in popularity in the past couple of years, and on 6 April this year a new Isa created just for it – the Innovative Finance Isa – will be born. The move to put P2P on a level playing field with banks’ savings products and investment funds will widen its appeal.

2m people have bought a property to let out

The most recent figures show around 100,000 investors have put £3.7bn into P2P, up from £100m five years ago. The typical investor entrusts between £5,000 and £8,000 a year.

The number of investors could feasibly reach 500,000 in 2016 and the amounts invested could be sizeable, given that the Isa limit will remain fixed in 2016 – £15,240 a year.

This booming demand should be welcomed. The returns on offer are much higher than any savings account, with the biggest websites typically paying between 5pc and 6pc. P2P firms, like banks, are middlemen – it’s just that they charge far less.

Mortgaged landlords will pay significantly more tax

But there is an important distinction; P2P should be viewed as an investment, not a savings product. The £75,000 protection of the Financial Services Compensation Scheme covers bank and building society accounts, but not P2P. You’re on your own.

Most firms have set up buffer funds so if some borrowers default, investors don’t lose their money. Two firms have gone bust so far, with minimal impact. But the sector – and these buffer funds – have not been properly tested.

However, it would require a serious financial crisis for investors to lose capital, according to recent testing. The rush to invest predicted for 2016, however, could cause a mismatch between supply and demand after April and returns may fall below 5pc.

Buy-to-let investors will primarily depend on capital growth for their returns

That won’t undermine the long-term prospects of P2P. The number of people dabbling – and it’s wise only to dabble – will probably swell into millions. A more likely headline in 2016 will concern crowdfunding, where start-ups use websites such as Seedrs to raise capital. Tennis star Andy Murray has made various bets. However, someone high profile will eventually come unstuck.

Certain crowdfunding investments, which allow the public to invest in start-ups, may also be included in the new P2P Isa, but at the time of writing the full details have not yet been ironed out.


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