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Are the 15% accounts too good to be true?: Saving City superwoman Nicola Horlick is the latest to join the peer-to-peer online lending revolution. Rupert Jones reports

February 15, 2014

Rupert Jones



Websites that bypass the banks by matching up savers with borrowers are taking off in a big way - and with some claiming to offer returns of 10%-15%, it is no wonder punters are piling in.

New companies seem to be launching almost weekly, prompting suggestions that this will be the year that "peer-to-peer lending" explodes into the mainstream. So should you be signing up - and is it safe?

What are they? Peer-to-peer lending sites put savers with money to lend in touch with individuals or small businesses that need to borrow. The idea is that both benefit from better rates than they could get from financial institutions. The three best-known players are Zopa, Funding Circle and RateSetter, but lots of others are snapping at their heels.

Next month, City "superwoman" Nicola Horlick (right) will join the fray, with the launch of a peer-to-peer website called Money & Co. Like many of the new sites it will allow people to lend money to small and medium-sized enterprises and enjoy returns which she estimates could initially average 8% gross, reducing to 7% after fees.

Money & Co is due to go live on 17 March, and the mother of six, whose business ventures already encompass the worlds of investment, movies and restaurants, told Guardian Money that out of all the things she has done in her career, "this is one of the most exciting. There's a real need. It will help companies, help the economy, and help individuals to get a better return on their cash". She believes the sector is still in its infancy, but adds: "I would expect us to be one of the winners . . . Our system is built to be global."

How do these sites work for savers? They all operate in different ways, and the sites that lend your money to businesses tend to offer higher rates than those lending to other individuals. Some, such as Zopa and RateSetter, are at the mainstream end of the sector, while others are more niche or high-end. In the case of Zopa, the UK's biggest and best-known peer-to-peer site, you choose how much you want to lend (the minimum is pounds 10) and the period (up to between three and five years). Your money is then lent in small chunks to a number of borrowers, and you receive repayments each month, made up of interest and the money you lent out.

What about returns? Zopa says its lender investors can expect to make 4.9% interest over five years, after its 1% annual fee is deducted, or 3.9% over three years. Some may feel that isn't enough, bearing in mind the risks.

RateSetter this week quoted rates of 1.9%-5.5%, while Funding Circle, where people lend to businesses, says its investors are earning an average of 5.7% after fees and bad debt. Some of the smaller or newer sites quote higher rates - rebuildingsociety.com boasts of an average gross yield of 15.6%, while ThinCats claims lenders can earn 6%-13%.

Why are they growing in popularity? According to industry trade body the Peer-to-Peer Finance Association, the sector more than doubled in size in 2013. That is mainly because of a perfect storm of factors: years of rock-bottom interest rates that have prompted desperate savers to seek out alternatives; a lending freeze that has hit consumers and small businesses hard; and a string of financial scandals that have led to a loss of trust in Britain's banks.

Any downsides? Yes - there is little regulatory protection for investors and borrowers, though this is about to change. From 1 April peer-to-peer lenders will be policed by the Financial Conduct Authority (FCA), which will mean more rights and greater protection for those who use them. There will be minimum capital requirements, rules to protect "client money", and a requirement that steps are taken to make sure repayments on existing loans would continue to be collected if a site went bust.

But, crucially, peer-to-peer sites aren't covered by the official Financial Services Compensation Scheme , which guarantees your savings up to the value of pounds 85,000 - and there are no plans to change this. Neither should you assume you can immediately access your cash: each operator has different rules, but your money might be locked away for months or longer.

Worryingly, when the FCA reviewed 21 peer-to-peer websites last August, it found that many "downplayed" the risks and used "misleading and potentially unfair" comparisons with bank and building society accounts. The regulator warned that some sites were emphasising a headline rate of return "that is often in double figures, without an explanation of the impact of charges, default rates and taxation". It added: "In some cases it appears the actual returns to customers can be substantially less."

Captions:

Nicola Horlick says launching Money & Co is one of the most exciting things she has done in her career, and that its global system will ensure it is one of the sector's early winners



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Source: Guardian (UK)


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