Should you be worried about peer to peer lending?

Peer-to-peer lender Funding Knight has been rescued by investment firm GLI Finance, potentially rescuing 900 investors who are at risk of not getting their money back after the company entered administration last month. 

Peer-to-peer lender Funding Knight has been given a cash injection by investment firm GLI Finance, potentially rescuing 900 investors who are at risk of not getting their money back after the company entered administration last month.

Funding Knight entered administration on 28 June, and company director Graeme Marshall announced his resignation two days later. An administrator was appointed on 6 July.

But GLI Finance has since injected £1,000,000 into Funding Knight, protecting investors - who were promised average returns of 8.96% - from losing their investments, at least in the short term.

Funding Knight’s accounts show that GLI had already lent £750,000 to the business before it went into administration, at terms that entitled it to 12% interest.

RateSetter risk?

Elsewhere in the peer-to-peer market, analysts at data firm AltFi have warned that growing bad debts at RateSetter could also put investors at risk of losses.

RateSetter runs a provision fund, which means some money from all borrowers is put aside to provide an element of protection against default funds. 

AltFi’s analysis suggests default rates (borrowers not repaying loans) have been unexpectedly high, which could drain the provision fund empty, ultimately resulting in losses for lenders.

However, RateSetter disputes AltFi’s analysis. In a response article on Altfi’s website, it admits that bad debts were higher than expected for lending in 2014, when the company was growing rapidly. But it says that in the long term, the provision fund will run at a surplus, as it did between 2010 and 2013.

Peter Behrens, the company’s chief commercial officer writes: “We recognise that our model stands or falls on our ability to underwrite credit and to provide appropriately, all within the confines of remaining competitive.

“We are not complacent and over the last two years we have made some important refinements. For example, we have prudently chosen to collect more Provision Fund contributions over the lifetime of our loans, rather than taking the entire amount upfront, which we believe is a sustainable and fair model.”

So should investors be worried?

Both of these stories should remind investors that peer-to-peer lending is much riskier than a savings account, and the risk of losing money is very real.

Money saved with a licenced deposit taker, usually a bank or building society, is guaranteed, meaning you the bank guarantees you will get your money back plus interest. Even if the bank is unable to pay you back, the Financial Services Compensation Scheme (FSCS) guarantees your savings up to £75,000. Investments in peer-to-peer lending platforms are not guaranteed or covered by the FSCS.

That’s is true of all peer-to-peer lenders, but it’s also important to understand that the risk of losses isn’t the same for every peer to peer lender, as it depends who they lend to and how good they are at predicting defaults.

Some firms will only invest to consumers, others, only to businesses and others will lend to both.

Funding Knight exclusively lends to businesses (including green energy projects and property developers). RateSetter primarily lends to consumers, but a substantial proportion of its loans are to businesses.

Generally, lending to businesses rather than consumers is seen as riskier, as it’s harder to understand the likelihood that someone won’t repay a debt.

That point was best made by Lord Adair, who warned of problems brewing in the peer-to-peer sector in February. Speaking to the BBC he said that in the next five-to-ten years losses in the sector could “make the worst bankers look like absolute lending geniuses”.

At the time he argued platforms that lend to businesses instead of consumers needed more thorough assessments.

 “You cannot lend money to small and medium enterprises in particular without somebody going and doing good credit underwriting,” he said.

“This idea that you can just automate that on to a platform, I think it has a role to play but I think it will end up producing big losses.”

By contrast, Zopa, which launched in 2000 and has lent over £1.5 billion so far, will only lend to consumers, and it’s very picky with who it will lend to. The company says only 15%-20% of applicants are accepted.

That’s not to say that Zopa is risk free, but to date, its default rates have been much lower than it anticipated, according to monthly default rates published on its website, which say that it planned for a default rate of 2.88% in 2015, but actual defaults have been just 1.15%. 

Your Comments

RateSetter's default rate is very good as well as its other protections, so I don't know how the suggestion could be made that it is even slightly worrying.


On our team we have investors and professional quantitative risk modellers (aka people who help the banks to check and reduce the risks in their loans) and from our own analysis we consider RateSetter to be amongst the very safest online lending platforms.


Two of our team have also met key people at RateSetter and our assessment from them and the reams of data they provide is that they definitely have the skills to do their job right.


We estimate that in an incredibly severe recession RateSetter's investors still would not lose money.


Regarding platforms that go bust, the regulator requires that P2P lending platforms have administrators and processes in place to wind down loan books smoothly in that event, which should mean that investors get all their money back. That said, this hasn't been tested yet, so if a platform has poor wind down plans investors could lose some of their money.


There is no Financial Services Compensation Scheme because it is an investment. If you lose money on the stock market you also get no compensation from the scheme.


Adair Turner clearly has not analysed the loan books of the top P2P lending platforms (and many others) using qualitative or quantitative risk modelling techniques - or, I believe, any techniques. My colleagues and I find the industry as a whole to be an incredibly low-risk investment at this point in time, with overall very low default rates and overall they have the right people with the right skills assessing borrowers at these platforms. You should also bear in mind that just prior to Turner making those comments he had just got involved in a competitor to P2P lending.


Neil Faulkner

CEO and Head Candid Researcher

P2P ratings agency 4thWay

Saving Stream are offering 12% pa investment opportunities in commercial land and property and only lend up to a maximum 70% LTV which means you have every chance of getting your money back ifthe borrower goes in to default