Peer-to-peer lending (P2P)
P2P lenders, like Zopa, act as a financial middleman, allowing investors to put in cash to be lent out to individuals and businesses. P2P was designed to provide loans to areas where traditional banks had retreated whilst offering investors the opportunity for higher returns than traditional cash deposit accounts in an ultra-low interest rate environment.
The potential for higher returns than you might typically expect from traditional cash savings accounts has always come with a risk – P2P investing doesn’t come with the safety guarantees that mainstream bank and building society savings do.
This once niche investment sector expanded quickly – around £6 billion of P2P loans were made in 2019 and this in itself has led to problems within the sector, notably liquidity and defaults.
The P2P market and Covid-19
As a consequence of higher numbers of borrowers defaulting during the pandemic and more investors wanting to access their savings to use the cash, many P2P firms haven’t survived the liquidity crisis of the last couple of years; Around 15 per cent of Rate Setter’s (a British P2P company established in 2009) customers attempted to withdraw funds from its platform in just a few days in mid-March 2020, causing a long backlog in payouts and they went on to close all of their 45,000 investor accounts in April 2021.
The direction of travel seems to be for the P2P sector to seek funding from large institutional investors rather than individual retail investors. Experts have commented that P2P might soon be simply “institution to peer”.
Zopa
Zopa is a British financial services company which began as the world’s first peer-to-peer lending company in 2005.
In December 2021 they closed all of their 60,000 existing investor accounts. Investors will be able to access their money penalty-free by 31 January 2022 at the latest. Zopa have already begun the process of buying back the loans themselves in order to repay retail investors their capital. Once loans are sold, the money will be automatically placed into clients own holding accounts with Zopa. Investors can then either withdraw the cash or, if they are ISA customers, they can transfer to a new ISA provider. No interest will be applied by Zopa to money held in the holding account.
If you would like to discuss any of the issues raised in this article or any other financial planning matter, please do not hesitate to contact us on 0114 2588899 or email info@fogwilljones.co.uk.
Please remember that the value of investments, including those in a stocks and shares ISA may fall as well as rise in value.
