Sophie Coles, director of business development at Squirrl, the business-to-business peer funding platform, discusses recent developments in this nascent but growing sector.

Sophie Coles, director of business development at Squirrl, the business-to-business peer funding platform, discusses recent developments in this nascent but growing sector in the UK.

Five years from the run on Northern Rock that sparked the credit crisis, the hunt for inflation-beating returns continues – and while the traditional avenues for investment remain, none are setting the world on fire. Let us examine investors’ current options:

Cash – few current accounts offer above one per cent, and while a savings account or cash ISA may offer around three per cent, they usually come with substantial strings attached.

Government bonds – given their safety, coupons on gilts range between an anaemic two and three per cent. The best you can do here is break even via index-linked gilts, the returns of which rise or fall with inflation.

Corporate bonds – with the return offered linked to the risk of the company involved, potential profits vary widely. If you’re happy buying “junk” corporate bonds, you may enjoy a return nearing 10 per cent. By contrast, blue-chips like Tesco are offering half this amount.

Equities – five years on since Northern Rock applied for emergency funding, the FTSE is still eight per cent weaker. Dividend yields are also struggling, averaging only between three and four per cent.

With rates at historic lows, technology has helped the emergence of a new alternative for frustrated investors – peer funders. Its model is simple – by cutting out the banks, borrowers and lenders get a better deal.

Increasingly sophisticated software is enabling a raft of players to develop – but the common denominator is how the internet is providing an exchange by putting a lender in touch with a borrower while providing the back office to support the system.

A sector in its infancy, but growing fast

While still in its infancy – total loans arranged now stand at £322 million ($519 million) – research by industry monitor P2PMoney found the sector is enjoying annual growth in excess of 60 per cent.

Working independently of the banking sector has been the key driver of growth – but it also means peer funding operates outside of formal government control and regulation. At the same time the government and senior figures within the financial industry have recognised the importance of peer lending – Andy Haldane, a director of the Bank of England, suggested in March that peer lenders could replace high street banks. 

It’s important all potential investors are aware the sector is unregulated and hence that the guarantees bestowed by the Financial Securities Authority and protection from the Financial Services Compensation Scheme don’t apply - we may all distrust the banks but if they go to the wall, the FSCS exists to ensure a soft landing of sorts.

As in all investments, there is risk in putting your hard-earned savings into a business or a member of the public via a peer-lending platform. But unlike other peer lending sites, investors using Squrrl don’t invest directly in individuals or businesses seeking start-up or development capital.

Instead, lenders only lend to well-established companies who operate a lease type business model, whereby the company supplies business critical assets to its customers which are paid for over a period of time. All investors are given access to supporting information, financial statistics and overall risk rating of the portfolio of assets they’re interested in. 

The model on first appearances can seem hugely complex in comparison with other peer lenders, but ultimately it’s a simple loan model but with an array of risk mitigation measures built in to help protect the lender.

It’s this focus on reducing risk that’s caught the eye of financial professionals.

Increasingly mainstream among advisors

In a sign of the sector's growing credibility, Squirrl has become the first peer funder to establish formal links with independent financial advisors. The ground-breaking deal with Matrix allows us to promote and market our products to Matrix’s 700-stong network of independent financial advisors, accountants and legal practices across the country.

This move to financial professionals represents a sea change for all interested parties. First, it allows peer lenders greater exposure to potential investors – a move that will inevitably help fuel the sector’s growth.

From the public’s point of view, they’ll reap the benefit of having any involvement in a peer-funding project analysed and explained by their own financial advisor. It’s this development – the ability to have the pros and cons of a deal outlined and mulled over with a trusted professional in choosing an alternative option as part of an individual’s balanced savings and investment portfolio – that represents a unique and exciting opportunity for the sector. 

To be completely transparent, it’s also important for investors realise that the type of alliance we’ve established with Matrix will become more common as investment in peer lending will become a significant alternative source of income for financial professionals.

Outside the scope of RDR

Next year’s long awaited Retail Distribution Review will change the marketplace with regard to commissions. But as peer lending is unregulated and lies outside of the jurisdiction of the FSA, financial professionals can earn commissions from Squirrl for their work in the sector.

Up until now, the younger generation of IT-literate computer users who are prepared to save online have been the industry’s most enthusiastic investors. They represent our “low hanging fruit” – the part of the population that’s more likely to invest in peer funding projects.

But 80 per cent of Britain’s £6.7 trillion of personal wealth is owned by people aged over 50. We see reaching out to and convincing these people to invest in peer lending as the key to the future. By nature this demographic is more conservative – balancing risk and reward is far more important to someone in their later years than to a younger investor.

Perhaps the best way to attract the attention of this increasingly important sector is Whitehall regulation or at least robust risk mitigation – along with the development of niche models and speciality products suitable to their specific needs.

But with peer funding making its first small – but significant – move into the high street, the first step on this long voyage has begun.