A match made in heaven?
Richard Wazacz, head of Octopus Choice, explains why P2P lenders and financial advisers can – and should – see eye to eye
Peer-to-peer lending and financial advice aren’t exactly natural bedfellows. For most advisers, P2P lending is a disaster waiting to happen. At best, it’s an unproven industry engaged in low quality lending to the unbankable. At worst, it’s a group of disingenuous fraudsters hoodwinking unsuspecting investors with the prospect of false reward.
The fledgling market’s fragile reputation hasn’t been helped by some hiccups along the way. Platforms have come and gone – sometimes unceremoniously. American market leader Lending Club has covered itself in scandal. And, back in April, the former chief of the now-defunct Financial Services Authority knocked some of the wind out of the industry’s sails by infamously declaring – in words he would later come to soften – that the losses soon to be witnessed would “make the worst bankers look like absolute lending geniuses”.
For an audience who are naturally cautious of new developments, such developments have been anything but reassuring. When it comes to advisers, at least, P2P lending has an image problem.
At the same time, it’s probably fair to say that advisers aren’t at the top of most P2P lenders’ Christmas card lists. After all, most of them created platforms explicitly to cut out the middle man, not collaborate with them.
But the simple fact is this. Neither party is going anywhere. The P2P market continues to go from strength to strength, growing at a year-on-year pace of over 80 per cent and running into the billions each year. According to the P2PFA, of the £5bn that’s now been lent through P2P platforms, £2.5bn was lent in the last year alone.
Meanwhile, according to Yorkshire Bank’s (admittedly regretful) prediction, half a million new investors will try their hand at P2P lending as a result of the tax incentive and mainstream approval brought by the Innovative Finance ISA (IFISA).
But it’s precisely this influx of new and inexperienced investors which, I think, makes the role of financial advice so important. In spite of its relative infancy, the P2P universe is already hugely diverse, spanning everything from unsecured credit card debt to secured residential property lending. It’s complex and confusing.
Read more: IFAs need to communicate better with clients
With a vast array of products out there, each one offering a different risk-return profile, it’s important that investors know exactly what they’re getting into. Anyone unsure about what’s right for them should seek independent financial advice.
And plenty of people do. Just as most of us would consult the doctor before taking a serious decision around our physical health, millions of us place our financial health in the hands of trained intermediaries.
Across the UK, financial advisers collectively manage billions of pounds. They’re a crucial feature of our financial landscape that it pays not to ignore. But winning them over won’t be easy.
Financial advisers are paid to be conservative. We entrust them with one of the most serious tasks anyone could be given – to look after our money. And, at the end of the day, it’s their neck on the line.
It’s not in their interests to take any more risk than they need to, and to satisfy their compliance teams and professional indemnity insurers, they’ll need to undertake a level of due diligence research and suitability assessment that most P2P lenders simply aren’t cut out to support.
But it’s high time they start making the effort. Just as financial advisers should accept that P2P lending isn’t going to go away, lenders should do more to work with this important sector of the UK’s financial community. The prize is there to be seized. Time to seize it!