RETAIL investors are at risk of being shut out of the peer-to-peer lending sector due to the so-called 10 per cent rule that will come into force this December.
The rule change is part of investor marketing restrictions introduced by the Financial Conduct Authority (FCA) to protect consumers. The new rules say that platforms can only offer products to sophisticated or high-net-worth investors or everyday investors who certify they will not put more than 10 per cent of their portfolio in P2P.
However, a number of P2P lending platforms have a minimum investment of £1,000, which would mean that individuals must have at least £10,000 in total to invest across a variety of asset classes. Official statistics indicate that most UK adults do not have this amount of money to invest, which could effectively bar them from certain platforms.
P2P lenders such as Zopa, Funding Circle and ThinCats require a minimum investment of £1,000, but the FCA’s latest financial lives survey shows that 49 per cent of UK adults, equating to 25 million people, either have no such assets or have less than £10,000 in value.
This suggests some existing and new investors on these types of platforms may struggle to meet the 10 per cent threshold and the firms may have to favour or rely on sophisticated or high-net-worth investors. It is understood that the FCA was warned at the time of the consultation that the 10 per cent rule could stop ordinary people getting a decent return on their investments.
Funding Circle and ThinCats declined to comment.
Zopa said the 10 per cent limit would reflect how its investors already operate. “We have seen that Zopa customers typically fund an initial amount and then build up their portfolio as they get more comfortable with how the product works,” said Natasha Wear, chief executive of Zopa’s P2P operations.
“Reflecting this, the new investment limit remains in place until a new customer funds their P2P account twice in the first year – at which point it is removed.
“It’s also important to note that it does not impact existing P2P customers, who are deemed to already have a good understanding of the product.”
John Goodall, chief executive of P2P property lender Landbay, which has a minimum investment of £100 for its standard product and £1,000 for its Innovative Finance ISA, said he did not believe investors would be restricted.
“Most P2P lenders’ target investor demographic would have more than £10,000 in investable assets,” he said. “I think that the FCA is comfortable with that – it naturally sees P2P as a more sophisticated investor product.”
Jonathan Minter, of analysis firm Intelligent Partnership, said the restrictions could end up limiting access for some investors. However, he added that the sector is not homogenous as there are already different minimum investment levels available.
“The restrictions don’t apply to those who have received investment advice, potentially increasing the importance of advisers to the P2P sector,” he said.
“The FCA figures show that those P2P platforms with a £1,000 minimum investment will still have access to a market of more than 25 million UK adults.”
Other major players in the market such as Assetz Capital and RateSetter require lower minimum investments, at £1 and £10 respectively.
Mario Lupori, chief investments officer at RateSetter, said the lower amount lets investors “dip their toe into P2P lending.” “People like to try before they buy,” he said.
“If the minimum investment on one of our competitors is £1,000 then the buy aspect will be a lot higher if it needs to be in that 10 per cent bracket. “It’s a fair assumption that it is likely to affect their attractiveness to general retail investors. “Others will have to rely on institutional money.”
Iain Niblock, co-founder of P2P analysis and investment platform Orca, suggested some platforms may be tempted to lower their minimum investment to attract new customers. “P2P platforms need capital to match funds to borrowers,” he said.
“It is the capital that fuels their business model, not the number of investors. If reducing the minimum investment limit generates more capital from more investors, we may see this strategy being implemented.”
He warned that the operational and customer service cost of managing lots of small investors may outweigh any benefits. Niblock added that the 10 per cent rule will be hard to police. “It will rely on the individual investors being forthright in their position,” he said.
“From a strategic standpoint, an arbitrary 10 per cent figure might feel sensible but from a user experience standpoint it’s relatively complicated and confusing.
“Peoples’ wealth changes drastically over time particularly at low levels of wealth and it may not be clear what should be included in the calculation.
“I think common investors will either ignore the statement by simply clicking yes and for newer investors it may act as a deterrent.”
This article featured in the August issue of Peer2Peer Finance News.