The Bank of England base rate has been fixed at its historical low of 0.5% since March 2009.
Just last week the Financial Conduct Authority, the body that regulates our financial services industry, announced plans to force traditional banks and building societies to tell savings customers when they reduce rates on accounts. Often, these dinosaur institutions attract new customers through headline-grabbing rates, but then quietly lower the rate without the same fanfare.
The FCA are calling their initiative sunlight data. Never mind the euphemism, how about fining the opportunistic banks?
Shoddy treatment indeed, with some so-called savings accounts earning as little as 0.01%.
Ever since the financial crisis of 2008, savers have been punished by governments and the traditional financial institutions looking to shore up the mess created by benign lending conditions and over-extended borrowers, in a lax regulatory environment.
So it’s no wonder that there’s an ever increasing number of Peer to Peer (“P2P”) platforms, leveraging advances in technology and leaner overhead structures to match borrowers with lenders at much better rates than being offered in the conventional markets.
P2P platforms are proliferating. But if something goes wrong, you do not get protection from the FSCS, in the same way as you would if your old-fashioned High Street bank fails. Yet.
Ratesetter have benefited from their clever early differentiator, the Provision Fund, though. Anticipating lender/investor caution, they established a ring-fenced fund – currently standing at £16.48m – in the event of borrower defaults. To date a total of almost £935m has been lent through their platform, and not a single penny has been lost. That’s no guarantee you might not lose some of your money in the future, but it sure does give a measure of comfort.
My parents, both now in their 80s, are quite financially savvy but also naturally cautious and – understandably – reluctant to invest in the longer term equity market.
A few years ago, they became fed up with the risible return being earned on their life savings from the banks and building societies they had been faithful to for decades. They drip fed some of their hard-earned savings into Ratesetter, and also Zopa. They have become increasingly comfortable with Ratesetter, and have gradually invested more in an effort to eke out a better return.
You can currently achieve 3.3% lending for 1 month through Ratesetter; 4.1% for 1 year; 4.5% for 3 years; and up to 6.1% if you’re willing to lend over 5 years. Pretty attractive rates given the base rate outlook and the curmudgeonly rates offered by banks and building societies, still beefing up their balance sheets and annual bonuses.
ArchOver is another interesting P2P option. It’s a crowdlender, lending investor funds (min. £1,000 individual investment) to established businesses (min. £100,000 borrowing), rather than individuals. Their comfort blanket to investors is multi-layered….any loan is secured by assets (the accounts receivable book of the business, for example); it’s insured; and the credit rating of the borrower must be A+ (ArchOver’s own rating system).
You can currently earn 5.5% to 9% lending through ArchOver, depending on borrowing terms and other usual variable factors.
But with all these interesting newcomers to the P2P party, how can anyone accurately assess their potential rewards relative to the risk in using these Johnny-come-lately platforms? And how do you know who your money is actually being lent to, and what it’s being used for?
Enter my old colleague from The Motley Fool days, Neil Faulkner.
He has set up 4thWay, a comparison and risk-ratings service, allowing you to compare rates being offered by all the main P2P platforms and – more importantly – to see an objective ratings score for each platform.
It’s more complex than I’ve just summarised, but check out the website and you’ll find the full story.
I think you’ll be hearing a lot more about 4thWay, given the emergence of P2P platforms as a viable long-term alternative finance provider for savers and investors fed up with interest rates as low as a snake’s belly.