By bringing peer-to-peer (P2P) lending into the ISA stable, the government and the regulator have kicked off the sector’s journey to the mainstream. Now they need to finish the job.
Approach with caution
Some commentators estimated nearly half a million new investors would try their hand at P2P lending when the Innovative Finance ISA brought eligible platforms into the ISA fold.
This is unsurprising given that, according to government statistics, British consumers have around £500 billion either saved or invested in ISAs.
Not only can the tax wrapper give investors’ returns a welcome boost, it can also give their investments a stamp of mainstream credibility.
However, the stampede has not arrived yet. Though the market continues to grow at a rapid pace, many investors, and many more financial advisers, have remained cautious of the opportunity.
Some of that is to do with another of our favourite Kitemarks – or rather, its absence – the Financial Services Compensation Scheme (FSCS).
The FSCS was set up in 2000 as the ‘compensation fund of last resort’. When they hear ‘FSCS’, most people think of the deposit protection service, which guarantees the first £85,000 (2017/18 tax year) of an individual’s savings if a bank goes bust. But the scheme also protects certain investments, yet many investors do not really understand how.
Plenty of people think the FSCS offers an insurance policy against poor investment performance. It does not. If a share portfolio tanks, for example, the scheme will not be there to save you. That is the risk you run by choosing to invest in the equity markets.
The FSCS is, however, on hand to compensate investors if a provider has been shown to mismanage its product, and has subsequently gone bust. Only then does it offer up to £50,000 (2017/18 tax year), not the larger amount doled out to savers.
Exemptions need lifting
P2P lending products are not savings accounts: they are investments. But even so, the market has not been included in the FSCS’s remit. This has dampened plenty of financial advisers’ appetite to recommend it to their clients.
It is a hang-up of the P2P industry’s early days. The Financial Conduct Authority did not want to strangle young, nimble firms by taking on the additional regulatory costs that come with the territory.
That said, the time is right to invite P2P players to pay into the pot. Over the past few years, the market has grown very fast. It has also become much more sophisticated, with a wealth of different offerings that are beginning to look quite complex and mature in nature.
As the industry grows up, it seems only fair that the exemptions of youth start to be lifted. After all, with adulthood comes responsibility. As more and more people are looking to experiment with P2P, stringent and effective regulation is exactly what is needed.
It might even help sort the wheat from the chaff. After all, if a product provider is not cut out to fulfil the requirements of the FSCS, do we really want consumers investing in it? If you cannot stand the heat…
Time for take off
If P2P lending is included in the FSCS purview, its mainstream popularity can really take off. For most people FSCS protection is not a ‘nice to have’ or added-value feature: it is the price for entry. People do not just want it, they expect it; advisers in particular.
Despite having the scope of their investment permissions automatically widened to include advising on P2P lending, until now the response from most providers has been muted.
Part of this concerns brand: most providers are complete unknowns in the intermediary space. But a lot of it is because it does not have the FSCS stamp of approval.
Sam Handfield-Jones is head of Octopus Choice