WHEN the Financial Conduct Authority (FCA) rolled out a new raft of rules for the peer-to-peer lending sector, there was one requirement which received decidedly mixed reviews. In an effort to promote diversification and risk awareness, the regulator announced plans to limit everday investors to investing no more than 10 per cent of their portfolio in P2P.
This announcement was met with concern that the 10 per cent rule could discourage new investors from considering alternative finance. However, opinions are now shifting as P2P lenders start to realise the potential benefits of the FCA’s soon-to-be imposed limit.
“The 10 per cent is described as a limit but it could also become a target: in time, why wouldn’t everyone have 10 per cent of their money in our asset class?” said Rhydian Lewis, chief executive of RateSetter.
Rather than discouraging investors from using P2P, the 10 per cent rule could be seen as a way to encourage existing investors to redistribute 10 per cent of their stocks, shares and cash portfolios into the P2P sector – a development which could be worth billions of pounds annually to the UK’s growing P2P market.
In the ISA universe alone, P2P platforms could benefit to the tune of £6.9bn per year, if all taxpaying investors chose to take the FCA’s advice and divert 10 per cent of their money into Innovative Finance ISAs (IFISAs).
In the 2017-18 tax year; £69bn was invested in adult ISAs. This represented a rise of £7.8bn compared to the 2016-17 tax year, with the increase fuelled largely by stocks and shares investments. By comparison, in 2017-18, just £290m was invested in IFISAs, which allows taxpayers to make tax-free investments in P2P and alternative finance.
Of that overall total of £69bn, £28.9bn was invested in stocks and shares ISAs. By targeting these investors, P2P platforms could win an extra £2.89bn per year.
Of course, there are plenty of other factors to consider, including the possibility that investors would choose to invest outside of the ISA wrapper, and the fact that some people may prefer to invest in P2P-related stocks, shares and funds rather than via direct lending. However, the 10 per cent rule has the potential to bring billions of new money into the P2P sector and to upend the classic equity/debt/cash ratio that investors have long ascribed to.
So, could the 10 per cent rule attract £6.9bn in P2P investments each year? Probably not in year one, but as P2P becomes more mainstream, and portfolios become more diverse, it won’t be long before P2P platforms reap the benefits of strong regulation and a higher profile in the investment world.