Marketplace Lending protective measures

How safe is peer-to-peer lending?

Marketplace lending is now a commonplace investment and borrowing solution. Borrowers have benefited from faster processing and better repayment rates, while retail investors have reaped the reward of some of the best interest rates on offer. But, for you, the investor, how safe is peer-to-peer lending? How safe is your money?

It is common knowledge that investment in peer-to-peer lending platforms is not covered by the Government-backed Financial Services Compensation Scheme (FSCS), which protects bank savers up to £75,000. So, in short, savings invested through peer-to-peer lending platforms are at risk.

However, the issue when discussing investments is never about the risk. The issue is the level of risk and what is being actively done to mitigate risk.

Asset Security and Provision Funds

If we compare peer-to-peer lenders we can see that many of them require asset security from the borrower before you can lend directly, and some also maintain a provision fund to cover any shortfall if a lender defaults and the asset sale is not sufficient to repay you.

Peer-to-peer lending comparison is a must, visit our Home Page and compare peer-to-peer lenders making sure to the security features implemented are acceptable to you.

Platforms offering asset secured loans and provision fund protection: (statistics correct at time of publication)

Landbay

With Landbay you lend to asset secured buy-to-let mortgage loans. They have a loan-to-value (LTV) of 65% of the asset value, meaning if the borrower’s asset is worth £100,000 a loan of £65,000 is the maximum that will be lent.

Landbay’s ‘Reserve Fund’ (provision fund) stands at 0.6% of their loanbook (based upon stress testing) and can be used on a discretionary basis depending on the claim.

Wellesley & Co

Wellesley & Co lend to asset secured property developments at an LTV of 69% weighted value. If a borrower defaults their asset will be sold to cover your repayments.

Wellesley & Co’s provision fund will pay out at the discretion of the company directors and there have been no claims to date.

Assetz Capital

Assetz Capital lend to businesses and property borrowers. They have the option of a manual account as well, where you manually select the loans you wish to invest in. Assetz lend at an LTV maximum of 75% of the asset value.

Assetz Capital’s provision fund will be activated on a discretionary basis and will NOT cover manual investments.

Saving Stream

With Saving Stream, you lend to asset secured property borrowers. You must manually select your borrowers, which is riskier, but the loan to value on the asset is 70% of Open Market Value.

Saving Stream’s provision fund covers upto 2% of their loanbook at any given time.

More on provision funds and how they protect your investment here.

Peer-to-peer lending UK covered by FCA

Peer-to-peer lending UK, as of 2014, has been regulated by the Financial Conduct Authority (FCA). This ensures that you are offered a good level of protection. The FCA has a number of regulations that must be adhered to, including one for minimum capital stored in provision funds which will become mandatory from 2017 and will amount to £50,000.

Beside the FCA regulations, the peer-to-peer lending platforms keeping true to their spirit of being innovation leaders have stepped up to ensure that your funds are lent with a reasonable degree of protection.

The first step in ensuring the money of peer-to-peer investors is safe is to give loans only to reliable borrowers. According to an FCA report (independence ensures objective reporting) published in February 2015 the average default rate for personal loans was less than 1%. Also, the FCA report added, that having visited platforms there was sufficient understanding of credit-risk and the appropriate KYC (Know Your Customer) and AML (Anti-Money Laundering) checks. However, the FCA raised a concern that they had heard from market intelligence that on some websites negative reviews were deleted; this will be investigated by FCA.

Minimising risk

LendingWorks, another platform we list at Orca, offers insurance. The insurance covers investors from defaults on loans arising from sickness, death or unemployment and most important of all, losses arising from any potential Cybercrimes.

Conclusion

The FCA regulation in the UK has helped make peer-to-peer lending safer. Aside from that, one has to appreciate the steps taken by numerous platforms to safeguard your funds. What is required from the investors is active research to compare peer-to-peer lenders. Not all platforms offer equal risk mitigation. Rather than individually review every marketplace lender, why not use Orca Money’s handy comparison tool on our Home Page!

Investigate peer-to-peer products before you invest, like this famous quote suggests:

A woodsman was once asked, “What would you do if you had just five minutes to chop down a tree?” He answered, “I would spend the first two and a half minutes sharpening my axe.”