The changing face of the personal finance sector - Business Works
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The changing face of the personal finance sector

Alex Gowar, Marketing Director, There is little doubt that the UK personal finance sector has witnessed seismic changes over the last decade. The economic downturn has made life harder for UK savers who for years enjoyed high returns from high street savings accounts with little to no risk. As times have changed, so have attitudes and increasingly the public is conscious that, while traditional banks may offer ‘safety’, that is matched to little, no, or even negative real returns. Moreover, in times of inflation, savers are hit even harder. The horrible realisation that their pot is dwindling whilst 'safe' is a shock for many and leading economists evidently don’t foresee a respite any time soon.

Yet savers need not despair, for while times are undoubtedly challenging, there are alternatives. Evolving technology has seen the creation of new and innovative personal finance offerings for those trying to maximise returns on hard-earned savings. At the centre of this financial revolution is peer-to-peer lending.

Peer-to-peer lending exists online with operators providing a marketplace in which consumer borrowers are matched up directly with savers looking for a better deal. RateSetter, one of the leading 'lend-to-save' websites, offers savers the ability to lend for as little as one month at an AER of 4.0%, up to a '5 Year Fixed' term earning 7.6% after fees.

The sector is on a substantial upward curve, particularly over the last year and just last week passed the £250 million mark in facilitating loans in the UK. This is of course small beer in the world of personal finance, but that growth looks well set to continue. Indeed, the Director of Financial Stability at the Bank of England, Andy Haldane, suggested in a recent speech that peer-to-peer finance companies could replace high street banks entirely. Perhaps this might be a bit bullish, but nonetheless, economic commentators and the UK Government are increasingly vocal about the possibilities of peer-to-peer finance.

The natural question for a prospective lender is 'what happens if someone doesn’t repay?' and coverage of the sector tends to contain stark warnings that lenders shoulder the losses of a late or default payment. Operators therefore provide different methods of diversification to reduce lenders’ individual liability, which can create complexity.

RateSetter’s launch in 2010 brought with it unique technology and innovation to sidestep the problem of 'bad debt'. A 'Provision Fund' simplifies the lending proposition by creating a pool of money from borrower fees which compensates lenders should a late payment or default occur. The Provision Fund recently passed £500,000, meaning bad debt levels (currently around 0.27%) would need to increase 11 times before any lender was exposed. Given the stringent loan application system we operate, this is extremely unlikely – every single lender has received every single penny.

So, what’s next for the sector? New regulation to protect savers is inevitably a hot topic and one that we are proactively involved in. The peer-to-peer approach has no natural home in current financial regulation and this will inevitably have to be addressed if the current growth rates continue. In the meantime, RateSetter, along with two other leading peer-to-peer finance providers, has created a trade body aimed at promoting best practise for the sector. The P2P Finance Association has established a set of obligating principles, designed to protect consumers. It is the first such code that exists for peer-to-peer technology and the hope is that it will act as a blue print for the Government as and when they decide to introduce specific rules to govern the sector.

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