Why the usually mega-opportunistic IFA community has not bought more heavily into the P2P lending market on behalf of its interest-starved clients remains something of a mystery. With returns from bank deposits still pitifully low – and likely to remain so for the foreseeable future – it would be difficult to imagine a more benign backdrop against which to sell something so fresh and exciting.
In a quest for the answer, we undertook some informal research amongst IFAs and were surprised, not only by the answers we received, but by their variety.
One IFA claimed that its clients "have not shown any appetite for P2P", which is perhaps not surprising if the topic is never raised.
Another confessed that there is no incentive to promote P2P investment because, following the Retail Distribution Review, IFAs cannot be remunerated by commission. This IFA went on to explain that the research required to enable IFAs to be sufficiently wised-up to offer good advice on P2P does not make the exercise cost effective since the resultant fee chargeable to the client could potentially cancel out any gain, which surely legislates against IFAs ever offering anything new.
One IFA came out and said: “as it's not a regulated product in the eyes of the FCA, we are not giving, and won’t be able to give, advice on this area of personal finance.”
Another major IFA group, St James's Place Wealth Management, simply forbids its people to give advice on P2P at all.
So, what are the facts? Taking the last point first, a spokesperson for the FCA told us there is nothing to prevent an IFA from advising on P2P products – or indeed on any other unregulated product – provided the client has been made aware of the risks and that this has been fully recorded in the documentation. There is no other barrier.
Another false belief is that there is an upper limit on P2P investment in terms of a percentage of a client’s total portfolio. The FCA says there is no such limit, even on crowdfunding, provided that advice as to risk has been given and, again, is fully documented.
The only exposure for the IFA is if the advice proves to have been inappropriate to the level of risk acceptable to the client. Even if loans turn bad and investors lose all their money, if the risks were made clear to the investor at the outset, the IFA would be in the clear because that is the nature of ‘investment’ as distinct from ‘savings’ (which come under the protection of the Financial Services Compensation Scheme).
So what is holding back the IFA community?
Ignorance may be one factor, commercial return may be another, or maybe it is natural caution when faced with something entirely new and untested by the ravages of time.
One thing is absolutely clear: when returns on P2P investments become tax free under an ISA umbrella, the level of enquiry from the public will peak. The other significant development is the liberalisation of pensions. Under incoming laws, we are moving into an era where retirement planning doesn’t require the purchase of an annuity – this alone could unleash a vast wall of cash looking for a home and add to the millions of pounds that already sit idle as cash deposits in SIPPS. There are huge opportunities for the P2P market to offer greater income - and huge opportunity for IFAs and pension professionals to offer their clients good advice.
Will IFAs take the opportunity? On current evidence, no.