Investors who are new or inexperienced will have the sum that they can deposit in peer-to-peer platforms capped at 10% unless they take financial advice.
New investors will not be able to place more than 10% of their assets in peer-to-peer (P2P) investments unless they have received financial advice, under rules from City watchdog the Financial Conduct Authority that come into force today.
This is to ensure that investors have clear, accurate information about what they are investing in and so that they do not over-expose themselves to risk.
The changes mean that P2P platforms will have to provide extra information, helping investors to make better-informed decisions.
Platforms are also required to assess investors’ knowledge and experience of P2P investments.
The regulator is also introducing new advertising rules, requiring providers to clearly spell out the potential risks involved.
Rhydian Lewis, chief executive of P2P lender RateSetter, says the new regulations are a “watershed moment” for the industry.
He says: “For first-time P2P investors, 10% is a sensible place to start and once you are experienced you can invest more.
“This is exactly what we have seen over the last 10 years, with people dipping their toe in and then growing as they see the value. The limit will become a target, encouraging every investor to think about diversifying some of their money into P2P.
“Stronger regulation with harmonised standards means that people can invest in P2P with greater confidence than ever.”
However, other large P2P platforms, such as Landbay, have announced their exit from the retail investor market altogether.
What is P2P lending?
P2P platforms bring borrowers in need of loans together with investors who want to earn more than in savings accounts at banks.
By using a P2P platform as the middleman, you can lend money to individuals or businesses. As banks are being cut out of the deal, P2P is good for borrowers and lenders. However, not without extra added risks.
The person borrowing money gets a lower interest rate than they would from a traditional lender and the person lending the money is offered a higher interest rate than they would receive from a traditional savings account.
Some of the best-known P2P platforms include Funding Circle, LendingCrowd, Lending Works, RateSetter and Zopa.
You can expect to get returns of between 3% and 7% a year, depending on which account you choose.
Is P2P lending safe?
This year has seen the high-profile collapse of P2P lenders FundingSecure and Lendy, raising questions about the safety of P2P lenders.
While P2P offers savers the potential for better returns, you must remember that the risks are higher. It is not the same as putting your money in a bank and is more like investing.
It is also important to note that P2P platforms are not covered by the Financial Services Compensation Scheme, which protects your money up to £85,000.
This means that if the P2P platform goes bust you will not get your money back.
There is also the chance that some companies or individuals you have lent your money to decide to default.
Some companies do have measures in place to protect you regarding this. Zopa splits your investment into small chunks across multiple loans to help spread the risk, while Ratesetter has a provision fund, so even if the borrower defaults you get paid.
This article was first written by our sister magazine Moneywise.