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8 Oct 2019

Funding Circle investors face three-month wait to withdraw money

Liquidating a peer-to-peer investment may involve a long delay

Investors using Funding Circle currently need to wait an average of three months to get their money out of the peer-to-peer lending platform.

In some cases, the wait is even longer. In July this year, 30-year-old Collin Ryder from Kent attempted to withdraw his money from Funding Circle but was told it would take at least 60 days, which later increased to 108 days. To date, he hasn't been able to access his funds.

Peer-to-peer lending offers attractive rates to investors keen for a better return on their savings. But there are drawbacks, including a potential delay if you change your mind about the investment.

Here, we look at why investors can't immediately access their money through Funding Circle and whether peer-to-peer investing is a safe place to invest.

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What is peer-to-peer lending?

Peer-to-peer lending platforms like Funding Circle match up people who are willing to lend, with borrowers who could be either individual or small businesses.

Peer-to-peer 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

Accessing money invested in Funding Circle

Funding Circle, which launched in 2010, allows individuals to lend to businesses, earning interest in return. So far, 92,000 people have lent over £7.5bn to businesses around the world.

But in order to access your money, the loans you have mademust be sold to another investor.

There's no limit to how long it takes to sell a loan, meaning that your money could be available virtually instantly or locked up for months. Indeed, Funding Circle told us the average wait is currently 120 days.

As borrowers continue to pay interest, investors are able to withdraw part of the money they lend out alongside interest which works out to 5% of their outstanding portfolio each month.

This, however, may be little help to those who want to pull their funds out of Funding Circle at once.

'We've been trying to access our money since July'

Collin Ryder, a business analyst, first signed up to Funding Circle in 2016 after hearing about the returns friends and close family members had made using the peer-to-peer lender.

He says: 'They were making returns which sounded really appealing, so my wife and I decided to sign up.'

Collin first withdrew money from Funding Circle in 2017, taking out £10,000 for a mortgage deposit. At that point, it took just 40 days to receive his cash.

He says: 'Since then we've treated it like a savings account and add money in where we can. We have over £6,000 in there.'

In September 2018, Funding Circle launched an IPO. By 2 July 2019, the peer-to-peer lender revised its annual revenue growth expectation from 40% to 20%. This saw its share price crash, with a 29.1% drop compared with just before the IPO.

The fall worried Collin, who decided to withdraw his funds. He says: 'Following the continued negative press about Funding Circle, we made the decision to withdraw all of our money on 7 July 2019.

'We were shocked to find that the average time needed to sell the loans to access our money had increased to 60 days. A month later, it had increased to 108 days.'

Over three months later, Collin still hasn't been able to access his money. Funding Circle has posted a notification on his online account to say that the delay in selling his loans is due to a lack of demand from other investors to buy them.

He says: 'There's been no contact from them other than the notification on my account. I'm quite worried about the situation and really wanted to move it out as a precaution.'

A spokesperson from Funding Circle told Which?: 'As businesses regularly pay back part of their loan plus interest, investors are able to withdraw [around] 5% of their outstanding portfolio each month as standard.

'While we also provide the additional option to sell loans to other investors, this depends on supply and demand on the platform and can't be guaranteed. We're currently reviewing the functionality of our secondary market to try to ensure the best possible outcomes for our customers.'

It's also worth noting that when someone invests money through Funding Circle, they're not buying any equity in the platform itself, and Funding Circle share price movements do not affect the businesses that investors will lend to.

Is peer-to-peer lending safe?

With interest rates on savings accounts struggling to beat inflation, more people are considering peer-to-peer lending as a way to boost the returns on their savings.

But there are a number of risks you should be aware of before parting with your money.

Firstly, peer-to-peer lending is fundamentally different from putting your money into a savings account. Your cash is tied up in a business loan, meaning you won't be able to withdraw all of it as and when you need it. If there's a lack of interest in from other investors when you try to sell on, it could take a long time for your money to be paid back in full.

Another risk with peer-to-peer lending is that the business that borrows your money may make late repayments or default on their loan altogether.

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 offers 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.

Regulation of peer-to-peer lending

The Financial Conduct Authority (FCA) launched a review of how peer-to-peer platforms were operating and marketing their investments in 2016. This was partly fuelled by concern that investors remain unaware of the risks they're taking with their money.

In June this year, the FCA announced several new rules to help govern peer-to-peer investing, which include the following:

  • Capping the maximum investment you can make to 10% of your investable assets in peer-to-peer loans unless you take financial advice.
  • Making investors complete a suitability test before they're allowed to invest their money in peer-to-peer if they don't take financial advice.
  • Stricter rules on who peer-to-peer lenders can advertise their products to, which could see the end of mass advertising campaigns.

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.

For more information, read our comprehensive guides on peer-to-peer lending and other types of investment.

Editor's Note (8/10/2019): Updated to reflect how Funding Circle loans are paid back and how investments are spread across multiple loans