Peer-to-peer (P2P) lender, Funding Circle, will introduce a new tool to help investors access their money more regularly from 2 December 2019, but that’s not the only change coming for P2P investors this month.
Currently, there is no limit on how long it will take for an investor to get their money back from Funding Circle. A recent Which? investigation revealed Funding Circle investors were waiting an average of 120 days to get their money back.
Here we explain what the new Funding Circle tool will mean for investors and the three ways peer-to-peer lending will change from December.
What is peer-to-peer lending?
Peer-to-peer lending platforms such as Funding Circle match people who are willing to lend, with borrowers who could be either an individual or small business.
P2P sites seek to cut out the middleman, so they don’t have the overhead costs of traditional banks.
This means they can often offer investors more appealing rates than traditional banks or building societies – although you don’t have the same protections as a savings account.
You can find out how peer-to-peer lending works in the short video below.
- Find out more: peer-to-peer lending explained
Will Funding Circle’s new tool help you?
Currently, Funding Circle investors must sell their loans to another investor to access their money. This happens on a first-come, first-served basis, however, meaning investors have to wait until they’re at the top of the queue to sell.
As a result, your money could be locked up for months and a recent Which? Investigation revealed that Funding Circle investors were waiting an average of 120 days to get their money back.
In a blog, the platform said it constantly looks at ways to improve the lending experience and following a recent review would launch a new tool to improve the ability to access funds more regularly.
Funding Circle’s new tool will cycle through all investors hoping to sell as many times as possible within a 120-day period, meaning that investors can start to unlock their cash on a more frequent basis.
But crucially this will come at a cost and a 1.25% transfer fee will be applied. For example, when a seller sells a £20 loan part, they will receive £19.75 from the buyer.
The fee is meant to boost returns for investors that buy both new loan parts and loan parts listed for sale on the secondary market.
Funding Circle is hoping this will attract new customers and funds to the platform, which in theory will help speed things up for investors wanting to sell.
On 2 December, all investors currently selling loans will be transferred over to the new selling tool.
How peer-to-peer lending is changing
Funding Circle’s new tool isn’t the only change for peer-to-peer investors coming in December.
P2P platforms will also have to abide by new rules handed down from the Financial Conduct Authority (FCA) driven by concerns that investors remain unaware of the risks they’re taking with their money.
Here’s what you need to know.
1) P2P investment cap
Peer-to-peer platforms will now have to cap the maximum investment new and inexperienced investors make to 10% of investable assets, unless you take financial advice.
The cap is meant to prevent over-exposure to risk, after research from the Cambridge Centre for Alternative Finance found two in five peer-to-peer investors had invested more than their annual income.
It is still unclear how exactly the cap will be enforced, and it seems for now you’ll need to ‘self-certify’ by telling the provider you won’t invest more than this.
The cap won’t be applied to existing investors that have made two investments in the past two years.
2) P2P investor suitability tests
Peer-to-peer lenders will have to make investors take a sustainability test before they’re allowed to invest their money in peer-to-peer if they don’t take financial advice.
This is to ensure the lenders can prove investors understand how peer-to-peer lending works and the risks associated with this type of investment.
3) Stricter advertising
Stricter rules on who peer-to-peer lenders can advertise their products to, which could see the end of mass advertising campaigns.
Instead, advertising will be restricted to high-net-worth or sophisticated investors. Peer-to-peer platforms will also need to make the risks of investing with them very clear.
Peer-to-peer lenders must comply with these rules by 9 December 2019.
The FCA’s changes won’t apply retrospectively, however, so companies won’t be penalised if you already have more than 10% of your investable assets tied up in peer-to-peer borrowing.
- Find out more: types of investment
Is peer-to-peer lending safe?
Over recent years peer-to-peer lenders have been on shaky ground with many going into administration a few years after launching.
Most recently, in October 2019 peer-to-peer pawnbroking lender, Funding Secure, collapsed leaving thousands of investors at risk of losing their money. It joins a string of companies that suffered a similar demise, including Collateral (UK) and Lendy, a property crowdfunding platform.
Another risk peer-to-peer lending exposes you to is if a borrower is unable to repay their loan (known as defaulting).
Different platforms manage this risk in different ways. Zopa splits your investment into £10 chunks across multiple loans to help spread the risk. Ratesetter has a compensation fund, which should automatically cover you if a borrower defaults.
However, this pot is not infinite, so if many borrowers default at the same time – for example, in the case of an economic crash – it could run out of money. Funding Circle, on the other hand, doesn’t have a compensation fund, though it claims to offer lenders higher rates.
Like Zopa, Funding Circle splits your investments into £10 portions and spreads it across multiple loans to help manage your risk. As with other types of investments, your funds won’t be covered by the Financial Services Compensation Scheme (FSCS).
This means that if your peer-to-peer platform goes under, you won’t necessarily be able to get your money back.
For more information, check out our guide on peer-to-peer lending to find out more.
Editor’s note: this story was updated on 3 December 2019 to clarify that the 10% cap will be for new and inexperienced investors.