Not normally known for eschewing the opportunity to make an easy buck or two, the UK’s IFA community has been strangely reluctant to engage with P2P crowdlending, despite its remarkable rise to prominence.
First of all we were told by a number of influential IFAs that they were simply not allowed to give advice on P2P loans because the industry was not regulated. That turned out to be nonsense and the FCA confirmed that, providing clients were warned of the risks, and that this advice was given in written form and recorded, the advisers would be in the clear if a client decided to proceed with the investment.
Other IFAs declared that, since commission had been replaced as a means of their remuneration by fees as part of the Retail Distribution Review reforms, the time it would take for IFAs to become competent to advise on P2P investments would result in a level of fees that would be likely to swallow up any possible gains.
IFAs have also solemnly pointed out that any losses incurred through bad P2P investments would not be covered by the Financial Services Compensation Scheme (FSCS), unlike bank and building society deposits. This particular mantra has been adopted by some sections of the media to be trotted out as a grave word of warning at every opportunity.
Well, the IFAs have got a problem now. First off, as of last year, the P2P sector has been brought under the regulatory auspices of the FCA.
More recently, the FCA has confirmed that, in certain circumstances, the FCSC will, after all, be extended to cover bad P2P loans up to a maximum of £50,000. The circumstances in question pertain to the investors having been given bad advice and that this has been proven.
We have also heard stories that IFAs feel they are not equipped to offer a professional opinion on the creditworthiness of P2P borrowers and that they cannot, therefore, vouch for the quality of the loans. They are also worried that their Professional Indemnity insurance may not protect them against legal action. They have been advised to consult their providers on an individual basis about this.
Doubtless, some of these concerns are genuine for a great many conscientious IFAs. However, each time the IFA community has come up with a reason not to get involved with P2P, their objections have been addressed or knocked down either by the Government or by the FCA.
The fact that returns on P2P loans can now pass to investors free of Income Tax if wrapped in an IF ISA - £15,240 per head per annum currently, and £20,000 as from the next tax year – makes them, somewhat embarrassingly, even more attractive. If investors can see returns of 5-8% net per annum, compared with 2% maximum from a bank deposit account, they are going to want to participate.
Of course, there are risks and it is undeniably true that P2P has yet to face a serious downturn, but doesn’t that make it even more important that the better IFAs get involved? The Alternative Finance sector, including P2P loans, is not going to go away – indeed, many see this as only the beginning now that it is formally enshrined in legislation.
The market is overflowing with offers of all sorts and the public must feel utterly confused. There has never been a greater need for knowledgeable, well-trained, genuinely independent advisers and if they don’t ‘step up to the plate, the only conclusion has to be that they are not serving the interests of their clients who deserve decent returns on their hard-earned cash, preferably without all the scaremongering.