Can corporate bonds earn as much or more as P2P
P2P lending is a topic that divides opinion.
The returns on offer are certainly attention grabbing, with some platforms advertising rates of up to 12% per annum. But with reward comes risk. Before plunging in, it pays to look beyond the headline figures and consider the wider implications of investing in P2P.
A closer look at the regulator’s concerns regarding P2P
The P2P sector has come under recent scrutiny from the media, but also from regulators. Indeed, the Financial Conduct Authority (FCA) has published a consultation paper that makes for worrying reading.
The FCA lays out several concerns regarding P2P, identifying “poor business practices […] in relation to disclosure of information to clients, charging structures, wind-down arrangements and record keeping”. It describes the evolution of the industry and highlights how P2P has developed a complex range of business models. Many platforms now take an active role in making decisions on behalf of their customers, creating new opportunities — and new risks for investors.
Platforms have progressed from facilitating lending to actively structuring which loans investors are exposed to, marketing their products with a focus on headline rates above all else. The FCA points out that “these platforms provide financial services that often require sophisticated risk management. […] the investor may only be exposed to relatively small individual amounts, making administration of the contract on a standalone basis potentially impractical or economically unviable.”
Of course, all investments involve risk, but investors deserve to be remunerated fairly for the risks they are taking. And significant doubts remain that the P2P market is able to do this. Corporate bonds, on the other hand, are a different story.
A closer look at corporate bonds
At first glance, it might appear that traditional fixed-income products cannot compete with the returns promised by P2P. At the time of writing, the yield on 5-year UK Gilts stands at just 0.85%.
But delve deeper into the bond market and you will discover a plethora of different credits that cater to all risk appetites. For those who are willing to go without the credit curve and invest in non-investment grade bonds, it’s possible to obtain higher yields that outstrip those offered by P2P.
As with all investments your capital is at risk. WiseAlpha members purchase Notes which are fractions of individual corporate bonds.
